Strong dollar, low commodity prices and slower-growing China pose threats to some large emerging markets, warn PwC economists.
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Once again the global economy faces a dangerous cocktail of risks including slowing growth in China, a strong dollar, and low commodity prices.
But this time, the emerging market economies look the most vulnerable, while advanced economies are still struggling to escape the low economic growth environment almost a decade on from the global financial crisis, say PwC economists.
The data indicates that economic growth has slowed in six of the seven largest emerging markets (the ‘E7’) compared to previous trend growth rates. Only India grew faster in 2015 than its medium-term average rate. Brazil and Russia are contracting.
So what has driven this deterioration in their economic outlook?
China’s economy is slowing and commodity price projections are falling:
After growing at above 8% from 2000 to 2011, the Chinese economy slowed down to just under 7% growth last year and PwC economists expect this to decline further to around 6% in 2017.
The main, direct effect of China’s slowdown in growth is being felt through trade. Brazil and Indonesia remain the most exposed to China here. For example, the direct impact of a 10% decrease in Indonesia’s goods exports to China would be to lower its GDP by around 0.2 percentage points.
The slowdown in China is also having an indirect impact on other emerging economies through lower commodity prices as Chinese demand falls. Russia, Indonesia, Brazil and, to a lesser extent, Mexico are all net primary commodity exporters and as such have suffered from this effect.
Brazil has joined Turkey in being classed as "highly vulnerable" as far as its foreign debt position is concerned
China’s external debt continues to remain relatively insulated from the effects of a strong dollar because foreign-currency denominated debt makes up a small proportion of its overall economy, although some individual Chinese enterprises are more exposed here.
Indonesia, Mexico, Russia and India which are four of the world’s seven largest emerging economies, fall somewhere in the middle and so present a mixed picture in terms of their exposure to the dollar –though the first three of these have other exposures here relating to commodity prices and/or reliance on exports to China as noted above.
India seems more secure and currently looks to be the strongest of the large emerging economies. ■