Emerging Markets on Shakier Ground
Under the weight of intensifying trade tensions, a strengthening US dollar, rising financing costs and less accommodative domestic policy settings, broad emerging markets growth looks poised to slow more noticeably in 2019, to 4.5%. While this remains a decent pace, risks are skewed to the downside amid the escalating trade spat between the US and China and potential missteps in that globally critical relationship. Moreover, the emerging markets recovery in 2017 had a very strong cyclical component, which has since dissipated, refocusing attention on fundamental challenges such as high debt levels and the lack of structural reforms.
Brazil, Russia and India all struggled against headwinds in 2018, which do not appear to be dissipating in 2019. In Brazil, disappointment over the lack of reform triggered a sharp depreciation of the real in 2018, so investors will be closely watching the new government’s reform signals in 2019. Russia’s recovery from its recession in 2015-2016 continues to be shallow and slow, and its long-term economic performance remains challenged by a stark lack of economic diversification and extremely poor demographics. Amid the broader emerging markets turmoil in the second half of 2018, India’s rupee hit record lows against the US dollar, forcing the central bank to shift monetary policy gears in support of the currency.