Loose monetary policy and quantitative easing intended to stimulate growth in developed markets, has prompted exchange rate swings that in turn could affect export competitiveness in rapid-growth markets (RGMs), according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF).
Shifting valuations could have an impact on trade which is becoming increasingly important to the prosperity of nations. However, the early months of 2013 have seen RGMs start to recover after last year’s downturn with growth expected to accelerate from 4.7% in 2012 to 6% in 2014 reflecting a more stable backdrop.
Yet the fortunes for RGMs even within the same region are mixed.
In Asia while recovery in Korea has been patchy, Chinese growth is set to accelerate from 8.2% this year to 8.5% in 2014.
“There is relief all around as the global economic outlook appears to have improved compared to this time last year," says Alexis Karklins-Marchay, Ernst & Young’s Co-Leader of the Emerging Markets Center. "And as the world emerges from the financial crisis, it is more globalised than ever. International trade will drive world growth over the coming decade, and RGMs are set to play an ever more influential role.”
Carl Astorri, Ernst & Young’s Senior Economic Adviser to Rapid Growth Markets Forecast explains that although the RGMs have come through the worst of the crisis relatively unscathed concerns still remain.
"Accommodative policies introduced to accelerate growth in developed markets and to sustain it in rapid-growth markets may now need to be reigned in to prevent the RGMs competitiveness being damaged,” adds Astorri.
Among the BRIC economies, Russia’s exchange rate has moved roughly in line with the Euro, while China’s and India’s have responded to domestic factors (including intervention) rather than just appreciating in value as the Yen and Dollar fell.
Brazil, however, has been suffering from an uncompetitive currency for some years and has seen another bout of appreciation, prompting renewed accusations of currency wars.
Even with interest rates at a record low in Brazil, rates are still higher than in the majority of RGMs, attracting international investors seeking higher returns.
Asian RGMs are likely to be affected more by the recent weakness in the Yen, particularly if they have close trading links with Japan or if they compete with Japanese companies in export markets.
The Yen’s weakness has damaged competitiveness in several countries, particularly in South Korea and China.Intra-RGM trade spurring growth
Despite current concerns around competitiveness RGMs across the globe have learned to trade their way to growth.
Sluggish developed-world growth, and the growing weight of RGMs in the global economy, is spurring them to trade with each other. Today, exports from RGMs exceed 10% of world GDP – more than twice their share a decade ago. In another 20 years, their share will approach 20% – double that of advanced economies.
The advanced economies will also look increasingly to RGMs for growth. Eurozone exports to RGMs were worth US$895b in 2011, up from US$230b in 2000. And in 20 years time, they will have overtaken intra-Eurozone trade.
The machinery and transport equipment sector (which includes consumer electronics and durable goods, as well as industrial goods) will make the largest sector contribution to trade over the next 10 years.
Information and communications technology (ICT) equipment will account for most of the growth. This reflects both the anticipated in demand for consumption and investment goods from the RGMs, and the potential to fragment supply chain.
It is not only trade in goods that will grow rapidly over the next 10 years. By 2020 Europe will be exporting more services to emerging Asia than to North America. And exports of services from the US to Latin America will also expand quickly, reflecting strong growth and increasing economic diversification in Latin America.
“Banking, insurance and other financial services sectors in RGMs will grow as the economies mature and the middle classes expand, offering new opportunities for trade. Demand for more sophisticated financial services is already growing rapidly as wealth levels rise,” comments Karklins-Marchay.
Lower trade barriers to boost growth
Lower trade barriers will boost exports and, ultimately, growth particularly in Southeast Asia. The proliferation of regional trade agreements will enable the free movement of capital, services and people.
“Many governments in RGMs are negotiating away decades of trade barriers and market distortions in pursuit of larger markets, lower prices and entrepreneurial opportunity. At the same time, they are putting in place the infrastructure to help goods cross borders and reach, or arrive from, far-flung continents," says Karklins-Marchay.
Karklins-Marchay notes that it is the rising importance of RGM economies and their increasing commitment to trade, which will shape profound changes in patterns of world production and demand.
Meanwhile, Indonesia, Malaysia, Thailand and Vietnam continue to benefit from a mixture of resilient domestic demand and rising across Southeast Asia.
Asian commodity demand is benefiting Africa, especially oil producers Nigeria and Ghana. However, domestic activity in South Africa has weakened.
“The RGMs have had a good start to the year and this is expected to continue as downside risks to growth recede. RGM countries must now focus on making the most of the new trading opportunities that arise and will be best placed to secure strong and sustainable growth for the future,” says Karklins-Marchay.