Have emerging markets reached a nadir?

2nd March 2016


Ahead of Brazilian GDP growth figures, Schroders’ emerging markets economist, Craig Botham comments on Brazil’s current economic problems and gives his outlook for the rest of the BRIC economies….

There are relatively few changes to our BRIC outlook this quarter, though where we have made changes they are typically negative. Events are playing out in China largely in line with our expectations, and state intervention is helping shield the economy from oil price slumps. A similar story holds for India, though we do see some deflationary impact there from cheaper oil. The more substantial changes come in Russia and particularly Brazil, with economic data and the policy environment deteriorating at a rapid clip in the latter.


We continue to expect a slowdown this year with GDP at 6.3% in 2016 and 6.2% in 2017. We make no change to our inflation numbers given the combination of limited pass-through to the economy from lower oil prices and further depreciation in the yuan. Inflation is forecast at 1.9% in 2016 and 2.1% in 2017. The 50bps cut to the reserve requirement ratio on 29 February will likely be followed by a further 200bps of cuts this year, alongside interest rate cuts.


GDP is expected to fall by 2.8% in 2016. It is too soon to call a turning point, but we do expect positive growth in 2017, and think that at some point this year the worst will be over for Brazil’s economy. Meanwhile, lagged pass-through from currency depreciation will keep inflation elevated for some time. Despite this, the central bank has recently become more dovish and we expect no change in rates this year. We see the potential for easing in 2017.


While India’s Q4 GDP figures confirmed India’s place as the fastest growing major economy, the quality of both growth and data are in question. Based on a composite of higher frequency data we believe growth in GDP to have been closer to 5-6% than the 7.3% reported. Our forecasts haven’t changed though, and we still see growth at 7.5% in 2016 and 7.9% in 2017. Inflation remains low in India, compared to historical averages, as the country continues to benefit from low commodity prices. Our base case is for rates to remain on hold throughout 2016, being cut only in 2017.


Further falls in the oil price means we have had to reduce our growth expectations for Russia to -0.7% in 2016 (from -0.2%). We expect a return to weakly positive growth in 2017, as we think the worst of the oil shock is over and the economy is showing some signs of having “bottomed out”. Our inflation forecast has been raised to 8% in 2016 (from 7.1%) as lower oil prices feed through into a weaker currency and exert upward pressure on inflation. We think there will be space for rate cuts this year.


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