With few economic data releases out over the holiday period we are assessing developments in 2015 and looking forward to the issues that will concern markets this year. This week we look at the developing and emerging economies.
Developing countries have formed more than half of the world economy since the global financial crisis and, with generally higher growth than the advanced economies, this share is continuing to rise.
According to the International Monetary Fund they accounted for 58 per cent of global output in 2015, when measured at purchasing-power parity (PPP). Problems in the largest of these economies these days become global problems.
The overriding concern of markets this year — notwithstanding rising US rates — will be the state of China’s economy. It is the largest in PPP terms, and poised to overtake the US in cash terms in the next few years.
IMF data show that China has been the source of 35 per cent of global growth over the past five years, and is forecast to form 30 per cent of growth until 2020.
However, the suspect quality of some of the official data inhibits proper analysis. Established developed economies are difficult enough to measure. In China new systems of measurement are being developed at a time of extremely rapid change. These problems are possibly exacerbated by political interference.
Consensus Economics, which collates and publishes analysts’ forecasts, has polled members of its China panel that have developed alternative models of the economy. While most forecasts point to 6.5 per cent growth in gross domestic product this year — in line with the official target, following 6.9 per cent in 2015 — estimates from the panel are for much lower growth, of 4.8 per cent this year, following 4.3 per cent in 2015.
If growth is that low there may be profound implications, particularly for the countries that rely on exporting commodities to China.
India is tipped to be the best-performing large economy next year. Estimates point to growth of 7.8 per cent, slightly higher than in 2015, as the economy continues to benefit from lower oil prices. India also still has relatively high interest rates, so could use monetary policy if growth slows.
Another likely star performer is Indonesia, with forecast growth of 4.9 per cent.
The two remaining Brics — Brazil and Russia — fell into severe recessions during 2015, which are likely to continue this year. The Russian recovery will be helped by the continued depreciation of the rouble, down 30 per cent against the dollar since April.
Some developing economies may face a dilemma if higher US interest rates strengthen the dollar further. Weaker currencies could lead to higher inflation and capital flight, but raising interest rates to combat this could inhibit growth that is already weak.
The first significant releases of the year will be the Chinese purchasing managers’ reports from Caixin and Markit, out today, with Chinese GDP for the final quarter of 2015 scheduled for January 20.