Craig Botham, Schroders’ Emerging Markets economist, comments that emerging market performance is set to improve in aggregate, though not yet to Olympian standards.
Overall, we expect stronger growth going into 2017, despite a deceleration in China. Much of this comes from a recovery from recession in Russia and Brazil, though India also continues its steady march upwards.
China: pace to flag after too strong a start
China did better than we had forecast in the first half of the year, supported by successful stimulus efforts. However, this looks unsustainable to us, and a deceleration already appears to be underway.
However, we do not believe a hard landing is on the immediate horizon. In the near term, the state has sufficient resources to contain any flare-ups in the economy or financial system, where risks abound. We would be less sanguine over the next three years. We continue to forecast GDP growth of 6.4% in 2016 and 6.2% in 2017.
Brazil: leaving the starting blocks
High frequency data suggests a recovery of sorts in Brazil, though it will still be a few quarters before we see positive growth. We expect growth of -3.5% in 2016 to improve to 0.9% in 2017. We have revised our inflation forecast upward on the stubbornness of inflation this year, and we have both pushed out and reduced the rate cutting cycle, with 75bps of cuts this year at most.
Russia: still fighting to compete
The outlook for Russian growth remains one of gradual recovery, recent oil price weakness notwithstanding. We expect positive year-on-year growth by Q4, and a positive overall growth performance in 2017, though still muted at 1.5%. If the oil price firms, we think there is still scope for 50-100bps of interest rate cuts this year.
India: another hurdle finally cleared
After a decade of waiting, India has finally passed a bill clearing the way for the implementation of a unified Goods and Services Tax (GST). The GST should remove a wide range of distortions and inefficiencies, benefiting investment, growth, and tax revenues in the medium to long run.
On monetary policy, we think a change in policy stance is likely in Q3 as the current central bank governor is stepping down, and his replacement is likely to be more dovish. We modestly revise up our inflation expectations to reflect this probability and now expect inflation of 5.6% in 2016 and 5.9% in 2017.