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30 Jan. 2018 | Comments (0)

Following a largely successful 2017, emerging markets could very well continue making strong economic progress in 2018. This year, it’s evident the growth of many developing economies will hinge on six main factors.

Growth Across The Global Economy

Global economic growth exceeded expectations in 2017 and is projected to continue at a sustainable rate of three percent or even above in 2018. This projection includes a considerably lower alternative growth estimate than the official data for China. The United States and Europe will likely maintain current growth momentum at least in the first half of 2018, ensuring a better export market for several export-reliant economies. The decline in commodity and energy prices appears to have bottomed out, and we are likely to see a further increase this year, which would support commodity exporters.

US Corporate Tax Cuts & Emerging Markets

The US tax plan will cause its statutory corporate tax rate to drop below that of China, India, Brazil, and Mexico (see chart). This will reduce the cost of repatriating profits of US firm’s foreign subsidiaries, and likely cause some capital outflows from emerging markets. But much depends on each country’s capital controls and invested asset types, as well as its openness to trade, reliance on foreign investment, and exchange rate volatility.

China: Will It Continue Its “Long, Soft Fall?” 

China’s 2017 growth owed significantly to government stimulus. Future policy there will likely emphasize controlling credit to avoid risks rather than fueling growth. And China’s shift from manufacturing-export mode to services-domestic mode will favor consumption, not production.

All of this means slower growth of capital accumulation and output. In 2018, the country will therefore likely return to its “long, soft fall.” The slowdown will somewhat affect emerging markets directly through a decline in China’s contribution to overall growth of the emerging markets, and indirectly by affecting the growth of China’s trade partners. Many Southeast Asian economies may see a decline in their exports to China. The decline in Chinese demand for the imported commodities will also lower commodity prices, which may affect Russia and Brazil.

However, India can offset the impact of a slowing China, albeit partially. Despite recent setbacks, India will likely remain one of the world’s fastest-growing economies—provided it addresses internal problems of policy implementation, infrastructure, and training and education.

Confidence: Will CEOs Remain Positive?

Recent CEO Confidence indicators suggest improving business confidence in the global economy, specifically toward short-term prospects in both emerging and mature markets. There is a strong rebound in CEOs’ assessment of current conditions in China and Brazil and declining but still positive assessment of India. Looking ahead, CEOs are optimistic about the business conditions over the next six months in all the three countries. Altogether, this spells positive movement for emerging markets.

Manufacturing: Will Consumption Push Production?

Trends look good in production, exports, and manufacturing for 2018. Purchasing Manager’s Indexes for manufacturing, which jointly assess production, supplier deliveries, new customer orders, inventories, and employment situation, are in expansionary territory for most emerging markets. The three-month average growth of industrial production improved in Brazil, India and Turkey, moderated somewhat in China, and continued to contract in Mexico in October and further in November 2017. But export growth remained high generally and even improved in China, India, and Mexico. With a sound global economy and healthy domestic consumption, inventories should shrink, pushing up industrial production.

Latin America’s Elections: Will Reform Continue?

In Brazil and Mexico, upcoming elections will add uncertainty—at the least. Brazil will continue its recovery from the recession, but it needs significant structural reforms. In both countries, policymakers and politicians may stress short-term gains in their election campaigns, thus delaying investment decisions. The election of pro-reform candidates would support business confidence and help increase private investment.

This blog was originally featured in Emerging Market Views.

  • About the Author:Abdul Erumban

    Abdul Erumban

    Abdul Erumban is a senior economist at The Conference Board. He is responsible for developing and managing research projects on productivity and long-term economic projections. His research centers o…

    Full Bio | More from Abdul Erumban

     

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