EMEA Weekly: China Growth Concerns Impact Growth Outlook

So far, 2013 has brought fairly good news for the developed economies of the world. Japan is seeing a fairly sharp recovery after the unprecedented monetary policy regime change, the US economy continues to recover and even the eurozone is now showing signs of beginning to get out of the slope.

This should all be good news for the EMEA economies and there are also some rays of light but, generally, speaking growth remains fairly subdued in Poland, Hungary, the Czech Republic, Turkey and South Africa. However, the fairly sharp slowdown in the Chinese economy and the increased emerging markets jitters that have followed on the back of the Chinese growth concerns are having a negative impact on the growth outlook for the already slow-growing EMEA economies.

In light of these developments, we have updated our macroeconomic forecasts for most of the EMEA economies. Overall, the picture is one of quite weak growth in all the EMEA countries we have forecasts for and, furthermore, we forecast rather lacklustre recoveries across the board.

In particular, we highlight concerns regarding two economies: Poland and Turkey. While both countries recovered swiftly from the shock in 2008-9, both have also seen growth slow significantly over the past 12-18 months. Indeed, Poland is now dangerously close to both negative growth and deflation.

While we forecast an eventual recovery for both economies, the current outlook is fairly muddy and we do not forecast a strong recovery. In both countries, the central banks have reacted to currency weakness by turning more hawkish and both central banks have intervened in the currency market to prop up their currencies. This is effectively monetary tightening, which is likely to weigh further on growth. So, while we are fairly optimistic on global growth, we are concerned that countries such as Poland and Turkey will lag the recovery.

Furthermore, commodity exporters such as Russia, Ukraine and South Africa are also taking a hit from declining commodity prices and if the slowdown in China continues, this is likely to continue to be a major challenge for the region’s commodity exporters, which have already seen growth slow.

One can argue fundamentally that the EMEA countries are now facing the challenge of choosing between weaker currencies and a weak recovery or even a further decline in economic activity. This we believe will be a major policy challenge going forward and we are fearful that concerns over currency weakness will convince EMEA central banks to maintain overly tight monetary conditions. As a result, we believe the recovery in the region is likely to remain weak and fragile.

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