Emerging market equity prices corrected during the month on concerns that the steep fall in crude oil prices could hurt the outlook for select countries. Though large energy importing countries such as China and India are likely to gain from lower oil prices, resource exporting countries are expected to see a decline in economic activity during 2015. In addition, it is feared that capital inflows to the oil and commodity exporting emerging countries could fall further as the U.S. Federal Reserve starts hiking interest rates sometime in 2015. Emerging markets in Europe declined the most during the month with Russian equity prices suffering another sharp drop. Greece, where a surprise election has been announced after a political stalemate, also saw a substantial decline. Brazil slipped the most in Latin America, followed by Mexico and Colombia, the two leading oil exporters from the region. Most Asian markets also corrected, with the exception of China, where optimism about stable growth kept investor sentiment bright.
Manufacturing growth moderated in emerging countries during the last month of 2014. Factory activity continued to expand in China, but at a slower pace when compared to November. Output declined in select Asian countries such as Korea and Indonesia, as well as Brazil in South America. On the other hand, manufacturing output grew at a faster pace in India and Mexico. While the services sector in China and India continued to expand in December, Russia and Brazil reported declines. Exports from Korea increased during December, including shipments to Europe and China that had declined in November. Though Taiwan reported a fall in shipments for the month of December, exports for the calendar year 2014 rose to a record high. Central banks in Russia and Brazil hiked their benchmark rates during the month to prevent further currency depreciation and regain investor confidence.
Near-Term Outlook
Stronger growth in the U.S. could lift the outlook for most Asian exporters of manufactured goods and services, though European demand is likely to remain subdued. For Mexico, increased shipments of manufactured goods could partly offset the decline in revenues from oil exports. The U.S. labor market continues to see vigorous gains, though wage growth remains muted. Further job additions and low fuel prices should help sustain consumer confidence during 2015. In addition, domestic consumer demand in countries such as China and India is expected to rebound as low energy prices limits inflation and interest rates come down.
Countries that are worst hit by lower energy and commodity prices have also initiated policies to limit further damage to their economies. The Brazilian government has announced cuts in pension and unemployment benefits, which could improve the fiscal deficit for 2015. Credit rating agencies had warned that without policy measures to improve the fiscal balance, Brazil’s rating could be cut. Brazil’s central bank is also expected to reduce its currency market interventions to rebuild investor confidence. In Russia, which is facing a deep recession if oil prices remain low, the emphasis is more on crisis management. If the sharp interest rate hikes by the Russian central bank fail to stabilize the currency and stem capital outflows, the government is reportedly prepared to impose capital controls.
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