Emerging market recovery: Are we nearly there yet?

11th August 2014

Craig Botham, emerging market economist at Schroders, gives his view on the emerging market export recovery…

The emerging market (EM) export recovery is seemingly always on the horizon, but never arriving. However, there are signs of a modest pick-up in some EM economies. We find evidence that this time around, the export recovery will be more selective than in the past.

The de-coupling of EM exports and DM growth A recovery in developed market (DM) growth has historically seen a revival of EM exports. This time, however, while activity surveys have picked up in DM, EM exports have not followed nearly as closely. However, we do find some exceptions in Europe where the Central and Eastern Europe, Middle East and Africa (CEEMEA) region is posting better export performance than both Asia and Latin America. It is notable that Asia and CEEMEA export more manufactured goods than Latin America, which is more reliant on commodities.

For Latin America, the situation is perhaps the worst. Simply put, it is not exporting the goods that the major economies require. The US is the region’s biggest trade partner and its imports appear to be driven by consumption demand. The country’s need for Latin America’s commodity-related exports is greatly reduced following the shale revolution. The continent will have to look to new industries to re-couple to US growth.

Asia’s prospects look better, despite a weak performance so far. The region’s main trading partner is also the US and there appears to be demand for the manufactured consumer goods that Asia exports. A recovery in US wages should help a revival in US consumer spending which should benefit Asian exporters.

Finally, CEEMEA, which has outperformed the rest of EM, has done so thanks in part to an increase in competitiveness, but also due to its reliance on Europe has a trading partner. Europe seems to draw in imports to feed capital expenditure (capex) requirements and CEEMEA appears to be satisfying this demand with its export of capital goods. With the banking sector’s Asset Quality Review (an assessment of the financial health of various banks in the region, which may have prompted banks to reduce lending) removed as a headwind to European credit, an increasingly accommodative ECB, and the ongoing modest recover in capex spending, we could be well positioned for further growth here too.

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