Growth in rapid-growth markets to slow but quick rebound expected

• Majority of RGM economies have scope to loosen policy to boost growth
• Rising commodity prices and US QE3 could create new inflation pressures
• Indonesia, Turkey and Vietnam rising stars among RGMs

London, 25 October 2012 – Although the global economic environment has deteriorated since the start of this year — impacting on the outlook for rapid-growth markets (RGMs) exports and their ability to attract foreign direct investment (FDI) — but this will be a temporary phenomenon, according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF) released today.

Despite the forecast of 25 leading rapid-growth countries being revised down for this year and next, RGMs growth looks set for a quick rebound in 2013. This will be spurred both by infrastructure spending programs, particularly in Asia, and rising demand from their own consumers which will help offset the weak external environment. The majority of RGM economies will also have the scope to loosen policy should they need a further boost. However, downside risks to the forecast remain as rising commodity prices and the US Federal Reserve’s new round of quantitative easing could create new inflationary pressures.

The relative strength of the RGMs remains striking particularly when compared to their developed counterparts. Overall, RGM economies are likely to expand by 4.6% this year and to 5.6% in 2013. RGMF indicates that growth rates will accelerate over the next two years — as long as the Eurozone economy stabilizes, the US recovery gathers pace and the RGMs continue to gradually loosen monetary policy.

Regional variations in terms of economic expansion are evident across the RGMs but the majority, including all of the BRICs, will experience subdued growth this year. The East Asian economies will be impacted by the slowdown in Chinese growth, and Central and Eastern Europe will be hit hard by the ongoing Eurozone crisis. However, robust growth is expected to resume across most countries in 2013.

Alexis Karklins-Marchay, Co-Leader of the Emerging Markets Center at Ernst & Young comments, “The long-term relative attractiveness of rapid-growth markets for business is undiminished. Their growth has slowed a little more than expected this year but a quick recovery is anticipated. As global rebalancing continues, business must adapt nimbly to evolving and emerging opportunities.”

Carl Astorri, Senior Economic Adviser to Ernst & Young’s Rapid Growth Markets Forecast explains, “Strong growth is expected next year however, to stop what has been a fairly mild cyclical slowdown from becoming something worse, the RGMs — with a few exceptions — have scope to ease fiscal policy. However, their scope to ease monetary policy may be limited in coming months by higher food prices. Although this is not currently a major concern, marked further rises would be a risk to RGM growth outlook in the short-term.”

Medium-term growth to come from infrastructure investment
Exports are being displaced by domestic demand as the engine of growth in many of the RGMs. As concerns about overheating recede, governments in some rapid-growth markets are taking steps to rekindle expansion. Alongside more relaxed monetary and fiscal policies, large infrastructure investment programs are looming in China, India, Brazil, Indonesia and Colombia. In some countries, these programs may help increase trade, and make it easier to find new markets for exports to replace slack demand in developed economies. Spending on roads and railways, ports and airports, can facilitate trade and reduce the costs of doing business for companies in both domestic and overseas markets.

Alexis comments, “Increased spending in infrastructure in rapid-growth markets is a welcome development. However, so that this is beneficial for the long-term it is necessary that, as well as government spending on infrastructure, authorities encourage private investment too by making credit available at cheaper rates.”

An increasing focus on meeting fast-growing domestic demand is also expected to sharpen the appetite of emerging multinationals from rapid-growth markets to acquire technology through mergers and acquisitions. The forecast assumes acceleration in M&A activity in Europe by cash-rich national and regional champions, from Asia and elsewhere, keen to acquire knowledge and technologies that will improve their ability to compete with western rivals.

This trend has already been seen in sectors including steel, computing, automotive and cleantech. RGMF expects it to extend to sectors where domestic demand in rapid-growth markets is likely to grow especially quickly, such as pharmaceuticals.

Commodity prices and currency rises could weigh on growth
While growth is expected to reaccelerate from 2013 onwards, a continued surge in commodity prices could weigh on growth in many RGMs. Droughts and monsoons have already impacted crops across the globe. Rising food commodity prices can be a particular concern in RGMs and has multiple consequences for businesses operating in these markets. Rising food prices rapidly push through into inflation, creating upward pressure on food prices and demands for higher wages.

Inflation pressures could also potentially come from the US Federal Reserve’s new round of quantitative easing (QE) which would curtail the scope that RGMs have to use further rate cuts to boost their economies. In addition, QE may strengthen the currencies of the RGMs against the US dollar, dampening their export growth. As yet neither the commodity price moves nor the currency moves are a major concern, but further sharp increases would be a risk to RGM growth outlook.

Rising stars

Low growth in developed economies offers business a timely opportunity to develop strategies for rapid-growth markets with exceptional potential. The forecast highlights that Indonesia, Turkey and Vietnam all fit the criteria alongside India and China. All five countries are expected to grow by at least 5% p.a. over the next 25 years. All have large domestic markets, favorable demographic trends and rising household incomes. And all are expected to contribute a much greater share of global GDP over the next 25 years.

Looking ahead

The 25 leading rapid-growth countries covered in the report are not only economically significant now, but will be the growth engine for the global economy going forward. Last year, almost two-thirds of the world’s population lived in one of the 25 RGMs, but only a third of world GDP in nominal terms was produced by these economies. Fast forward 25 years to 2036 and the RGMs will enjoy a bigger share of global GDP than of population. They will have large, young, well-educated populations with fast-rising spending power – nine RGM countries will see their per capita income increase by a multiple of at least five over the next 25 years.

The forecast for GDP over the next 25 years also illustrates the RGMs’ phenomenal growth prospects. Nine of the RGMs are expected to grow by at least 5% p.a. for the next 25 years, in contrast to Japan and Germany, which will both grow by less than 1.5% p.a.

According to the forecast in 25 years time, the BRICs – Brazil, Russia, India and China – will be among the six largest economies in the world. Indonesia will be one of the top 10 and South Africa and Nigeria will have joined the top 20. Turkey, Mexico, South Korea and Saudi Arabia will also have significantly moved up the rankings.

UKRAINE: Growth slowing in 2012, but pick-up expected on stronger exports
With growth below target at just 2% in January–July and elections due in October, the Government has promised more public investment and support to offset the industrial export slowdown. But this will add to an already rising budget deficit and, with the current account gap also rising, adds to risks of depreciation of the Ukraine Hryvnia. We have lowered our 2012 growth forecast to 1.7%.

Slower growth has helped to bring down inflation more than expected, with consumer prices in January–August up 0.9% on the year. Inflation in 2012 will be well below the 7.9% projected in the budget but, with energy prices set to rise in Q4 after the elections, we expect the rate to pick up heading into 2013. Slow growth and rising state spending are also pushing up the fiscal deficit this year, adding to the need for more borrowing.

An IMF deal and an EU association agreement, both of which would boost capital inflows, remain on hold until after the elections, complicated by retention of energy subsidies that are linked to high gas prices still charged by Russia.

Despite the downside risks, reviving exports to the EU may see growth pick up to about 4% in 2013, with over 5% p.a. seen in 2014–16, as the outlook for gas exports improves and a stronger recovery in the EU boosts exports and capital flows.

Alexei Kredisov, Managing Partner for Ernst & Young in Ukraine, Co-Leader of the Emerging Markets Center at Ernst & Young Global: "According to the study, the annual rate of economic growth close to 5%, can be expected not earlier than 2014 – provided the outlook for gas exports improves (the transit gas from Russia to Europe together with Ukraine's own gas production) and a stronger recovery in the EU boosts exports and capital flows.

Ukraine is among the 25 fast-growing economies, which remain in the focus of international investors. High level of risk inherent in our market is offset by the possibility for gaining significant profit".

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 Source: Ernst & Young