Inflation to hamper emerging market growth

16th November 2010

Concerns about the outlook for inflation in emerging economies have been reflected in stocks across these markets having just put in their longest losing streak since May, falling for the fifth day in a row, as this Bloomberg report highlights.

The Bloomberg report quotes Chinese Central Bank Governor Zhou Xiaochuan saying the country is under "pressure" from capital inflows, reinforcing market fears China will be embarking on further monetary tightening to cool the fastest inflation rate its economy has seen in two years. China's concerns over inflation are being replicated in other fast growing emerging markets.

V-shaped recovery

In a fascinating analysis of trends in emerging market inflation, Simon Ward, chief economist at Henderson, notes global industrial output – as measured by combined production in the G7 and seven large emerging economies – is now back on its post-2000 trend path, having staged a V-shaped recovery since early 2009.

Ward says the seven top emerging markets or "E7" have accounted for 60% of the rise in combined output, with production now well above trend in these economies. He says this explains recent evidence of "overheating" across these economies (See first chart).

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