The pace of economic expansion in emerging markets (EM) probably decelerated in June, on the heels weakened industrial productivity coupled with subdued global demand and heightened volatility amid on-going trade friction between United States and China.
According to the Washington-based Institute of International Finance (IIF), growth forecast for EMs is projected at 3.5 percent in June, 30 basis points lower compared to 3.8 percent in May.
The global finance body believed that trade actions and tensions have weighed on global current account imbalances, as trade has been diverted to countries with lower or no tariff.
Manufacturing sentiment, which has been worsening in recent times, becoming more broad-based globally. The world economy tumbled in first half of the year, with trade and investment flows between countries falling more than expected.
Meanwhile, despite the effect of trade spat between world’s two biggest economies on EM market, the dovish stance of major central banks spurred foreign investors’ appetite to attractive carry trade in EMs assets.
Total net foreign portfolio (FPI) inflows to EMs nearly tripled to $193.9 billion in the first half of 2019, from a low of $65.1 billion in the preceding half year with 77 percent directed towards debt.
With accommodative stance across developed markets, the global finance body expects portfolio flows to jump 11 percent to $344 billion over 2019.
Industrial activities in world’s second largest economy, China weakened once again in the month of June.
Manufacturing Purchasing Managers’ Index (PMI), which measures the performance of a country’s industrial sector, fell to 49.4 points in June from 50.2 points in the previous month, missing market expectations of 50 percent.
Little wonder, Beijing contracted 6.2 percent in second quarter, its first downturn in almost three decades, increasing the prospect of further policy easing by People’s Bank of China in coming months.
Manufacturing activities in Africa’s biggest economy, Nigeria, tracked by PMI, slowed to 57.4 points in June, compared to 57.8 points in the previous month as decrepit infrastructure, sluggish economic growth, tough operating condition and high cost of credit thwart producers’ performance.
The Monetary Policy Committee of the Central Bank of Nigeria at its latest meeting retained benchmark interest rate at 13.5 percent on the ground that key macroeconomic indicators are trending as expected and because of the lag effects of policy actions on output.
In South Africa, industrial activities picked up marginally as PMI rose from 49.3 points in May to 49.7 points in June but still below the 50 point mark indicating worsening business conditions.
The South African economy, which is the second biggest in Africa, contracted 3.2 percent in first quarter, its worse performance in nine years, on massive slowdown in power and mining sectors. However, in a bid to rein in inflation and spur growth, the South African Reserve Bank cut policy rate by 25 basis points to 6.5 percent at its last meeting.
Subdued global demand has also affected other EMs. Manufacturing activity in Taiwan contracted for a second consecutive month in June. Singapore’s PMI also fell for the second straight month after contracting 0.3 points to 49.6 points in June.
Brazil’s manufacturing sector ended the second quarter on a stronger footing, avoiding slipping into contraction territory in June and breaking a three-month run of slowing growth.
Across regions, growth in EM Europe and Africa is expected to slow 1.3 percent points (pcts), while Latin America and EM Asia are to expand 0.18pcts and 5.6pcts respectively.
Despite the headwinds, IIF says it remain optimistic on growth. “This benign growth view is constructive for risk assets, but emerging markets have not benefited as much as have been expected.”
Israel Odubola
