Growth in Emerging Markets Slows, But Soft Landing Possible

Emerging market growth slowed to its weakest level in two years in the second quarter of 2011, reflecting global economic fragility, the exceptional consequences of the Japanese tsunami and amid the lingering impact of recent inflation, the HSBC Emerging Markets Index (EMI) shows.


The HSBC EMI dipped to 54.2, down from 55.0 in the first quarter and edging below the long-run series average of 54.8.


Price pressures eased sharply against a backdrop of continued monetary tightening by central banks across the emerging world in response to menacing inflationary pressures identified by previous HSBC EMIs. The Q2 HSBC EMI signalled the most acute easing of input cost inflation for two-and-a-half years.


The moderation in overall activity growth reflected a weaker increase in manufacturing production, with the pace of expansion easing to the slowest in three quarters. Meanwhile, service providers recorded a slightly faster rise in business activity, albeit one that was the second-slowest since Q2 2009.


“HSBC’s latest EMI confirms that, after a strong rebound in the immediate aftermath of the global financial crisis, the pace of activity in the emerging markets has faded. In many parts of the emerging world, there has been a noticeable reduction in the growth of export orders, consistent with the recent experience of countries in the developed world, suggesting world trade growth peaked in the first quarter of the year, says Stephen King, HSBC’s Chief Economist.


The cornucopia of ‘quantitative tightening’ measures HSBC identified at the last EMI seem to have tamed the significant risk presented to longer-term economic growth by inflation. This seems particularly true of China, where both output growth and inflation fell markedly during the first half of 2011.


King notes that emerging nations remain magnets for global capital and are increasingly investing in each other with the prospect of more and more Asian-funded infrastructure projects in Latin America and parts of Africa. As this new infrastructure comes on stream, so a new network of economic connections across the emerging world will be established, along what HSBC has termed ‘The Southern Silk Road’.


“If a soft landing can be achieved, the stage is set for a sustained period of growth across the emerging world driven by new ‘South-South’ connections. The result of all these changes could easily be a tenfold increase in intra-emerging market trade in the first half of the 21st Century,” says King.


Rates of production growth eased across the majority of manufacturing sectors monitored by the survey, with South Africa and Singapore the two exceptions. In emerging Asia, China saw growth slow to the least marked in nine quarters while output rose at the weakest rates for two quarters in Taiwan and South Korea. Even India recorded a slower rise in manufacturing output, although the rate of growth remained substantial, and by far the healthiest of all emerging markets monitored by the survey. In Europe, particularly marked slowdowns were registered in Turkey and the Czech Republic while Russia saw activity growth moderate to a five-quarter low.


The weaker increase in manufacturing output in part reflected a lessening in new order growth, which in turn was linked to a slowdown in the rate of expansion in new export orders. Of the largest emerging markets, Brazil, China and Russia all recorded reductions in new export orders.


Meanwhile, India reported the slowest pace of growth for one and-a-half years, and rates of expansion eased noticeably in Taiwan and South Korea. Only marginal increases in exports were seen in Turkey and Poland.


Despite easing to a six-quarter low, India again recorded the fastest rate of growth of all emerging market service sectors monitored by the EMI, followed closely by Russia. Rates of expansion held broadly steady in Brazil and Mexico, while output growth accelerated from Q1’s record low in China. Business optimism among emerging market service providers dipped to the fourth-lowest in the series history, with confidence in China sliding to a record low and India dipping below Q1 levels. Conversely, optimism in the one-year business outlook reached a six-quarter peak in Brazil, and hit a six-and-a-half year high among Russian service sector firms.


As quantitative tightening begins to confound rampant price rises, the latest EMI signalled the sharpest easing of input cost inflation for two-and-a-half years to fall more than four points from Q1’s eleven-quarter high. The moderation was centred on the manufacturing sector, where purchase price inflation eased to a three-quarter low. Service providers again recorded a slower rise in average costs than manufacturers. However, with only a modest easing of price pressures in services, latest data indicated a sharp narrowing of the inflation gap between the two sectors.


With input price inflation weaker, emerging market firms raised their output charges at the slowest rate for three quarters in Q2 2011. Similar to the trend for average costs, manufacturers recorded a sharper moderation in output price inflation than their service sector counterparts. All four of the largest emerging markets saw a slower rise in output charges as measured across both manufacturing and services.


The HSBC EMI is calculated using the long-established PMI data produced by global financial information services company Markit. HSBC announced a partnership in 2009 with Markit to sponsor and produce a number of emerging market PMIs.






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