Volatility Returns on Concerns about Chinese Growth Outlook
Emerging market equity prices corrected in January as investors worried about slower growth in China as well as political and economic turbulence in some the frontier economies such as Argentina and the Ukraine. Markets were also unnerved by the unexpectedly large interest rate hike in Turkey, which failed to prop up the currency. As well, the South African rand has seen a significant decline this year, forcing the central bank into another rate increase. The central bank in India also unexpectedly raised the benchmark rate as core consumer inflation remains elevated. The successive interest rate hikes have worsened the fear that consumer spending in emerging economies could moderate further. Weaker than expected labor market data from the U.S., which could hurt export demand for select emerging economies, has added to these concerns. Markets in Latin America as well as the major resource exporters such as Russia and South Africa saw the largest price correction during the month. Indonesia, which had seen an appreciable decline during the second half of last year, recovered in January.
Manufacturing output data from China was unexpectedly weak, raising the question of whether current economic growth forecasts for the country are optimistic. However, most other emerging countries including India, Indonesia, Korea, and Brazil saw modest gains in factory output. Emerging countries in Europe, such as Hungary, Poland and the Czech Republic, also saw strong manufacturing sector gains as regional demand is improving. Chinese GDP growth for the last quarter of 2013 met expectations, while growth in Indonesia, the Philippines, and Taiwan expanded faster than forecast. Helped by higher export gains, economic growth in Korea also met expectations during the last quarter.
Near-Term Outlook
Apprehensions over a further slowdown in Chinese economic growth represent one of the primary reasons for the current market decline. Though Chinese export and factory output data trends have been somewhat volatile in recent months, it was widely expected that improving global demand could help the economy grow at a faster pace. However, more subdued trends from the U.S. labor market have led to concerns about the sustainability of China’s recent export gains. Efforts by the Chinese central bank to restrict growth in the so-called shadow banking system have led to higher borrowing costs and a slowdown in the country’s property market in January. While this is a healthy trend that reduces the risks of overblown property prices and a possible crash in the future, there are fears that a subdued real estate market could make domestic consumers more cautious. Nevertheless, some of the weaker than expected economic data could turn out to be transitory and may turn brighter in the coming months. Consumer sentiment in the U.S. remains largely buoyant while Europe could see moderate improvement in consumer demand if the regional economy continues to recover. If these improvements materialize, current concerns about export growth in China and other emerging countries may turn out to be premature.
Central banks in countries such as India, Indonesia, Turkey, South Africa, and Brazil have been actively trying to defend their currencies and prevent capital outflows by raising interest rates. Recent economic data from India and Indonesia suggest that these countries have seen more positive results from the policy actions when compared to the others. Domestic consumption growth has slowed in Indonesia, which has helped narrow the trade gap during the last quarter, while India has seen healthy export gains in recent months. India has also managed to narrow its current account deficit through aggressive policy measures to restrict imports and attract more capital.
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