The massive portfolio outflows recorded in emerging markets (EMs) last month on the heels of renewed trade spat between world’s two biggest economies, coupled with weaker industrial output of countries in the space has significantly weighed down on growth of EMs.
According to the Washington-based International Institute of Finance, growth forecast for EMs is projected at 3.8 percent in May, compared with 3.6 percent in the previous month. EMs grew 0.2 percentage points in May, lower than 0.4 percentage points and 0.3 percentage points in March and April respectively.
The renewed U.S-China trade war has intensified the woes of emerging markets. The global finance body noted that investors’ appetite for EM stocks and bonds has lost momentum, adding that the increased volatility in the market combined with the trade conflict has painted a challenging horizon for EMs.
The poor growth outlook is also underpinned by financial and business conditions, which seem to have escalated with the resumption of trade tensions between U.S and China. Intensified trade spat resulted in a trade tantrum, which saw large capital outflows last month, particularly from China.
Equities outflows accelerated to $14.6 billion, its highest level in 6 years since June 2013 Taper Tantrum, when outflows escalated to $22 billion.
Of the $14.6 billion, 49 percent or $7.2 billion were pulled out of China. Portfolio flows plunged 115 percent to negative $5.7 billion in May, compared with inflows of $33 billion and $38 billion in March and April.
The massive capital outflow, despite dovish monetary policy stance in United States and Europe, holds lessons from the 2018 sell-off that global capital markets are reluctant to finance credit-dependent growth.
“We think activity in China will continue to slow as headwinds from US tariffs and weakening domestic consumption outweigh stimulus measures” said analysts at IIF.
Another major headwind to growth in EM is the slowdown in industrial output of EMs on the heels of contraction in China’s purchasing managers’ index (PMI).
Growth in the global economy has tumbled year-long with trade and investment flows between countries falling faster than expected. China’s PMI, an indicator of economic health of a country’s manufacturing sector slowed more than expected in May, implying that growth in the space remain under pressure.
The global finance body noted that investors have shifted attention away from sustainability of China’s growth recovery to how fast the economy is slowing, posing a downside risk to economic activity.
PMIs in other countries in the EM space align in the same downward direction as that of China. Singapore’s PMI slumped in May, indicating a contraction in manufacturing as trade tensions and global slowdown weigh on its economy.
Taiwan’s manufacturing sector trended downwards, further contracting in new orders and export sales. Brazil’s PMI hit a decade low to 51.5 points in May. Turkey’s growth slowed to 45.4 points.
South Africa’s PMI fell by one index point to 49.3 points in May, falling below the 50 points mark, indicating deteoriated economic and business conditions. Africa’s most developed economy contracted 3.2 percent in 2019’s first quarter on slowdown in power and mining sectors. Nigeria’s PMI increased slightly by 0.2 index points to 58.9 points in May, highest in the last four months. EM Asia and Latin America are expected to fuel the slowdown in EMs.
Israel Odubola
