#1: US economy: strong, but not too strong
A strong US economy is typically good for emerging markets but it is a fine line. Too strong growth forces the central bank to apply the brakes, hiking interest rates and further bidding up the dollar. This hurts emerging markets, especially those that have to service their external debt in US dollars.
As Figure 1 shows the US dollar is looking overvalued, as has been the case for a few years now. Therefore, looking forward to 2019, I hope for a softening of the dollar to offer some relief to emerging markets.
#2: A cooling of global trade tensions
#3: More stimulus in China
China has reacted to US trade policy so far with a series of concrete countermeasures to support its economy that encompass monetary, fiscal and trade levers. We have not been able to fully estimate their full impact but it should be in the region of 2 per cent of GDP (see Figure 3 below).
Admittedly, this is a tactical switch away from President Xi’s long-term goal of re-balancing the economy towards a more consumption-driven growth path.
But the re-balancing is a long road and we think China’s short term pragmatism is to be welcomed by emerging market investors. China will remain the growth engine of emerging markets for years to come so any slowing of its economy had better be gradual than abrupt.
#4: Robust commodity prices
If all of my wishes above are granted – or at least the majority –my fourth should happen automatically. Robust commodity prices are typically good for emerging markets, especially those economies that are net commodity exporters.
As Figure 4 shows, the recovery in Chinese construction activity driven by the recent measures is expected to spur a recovery in industrial metals in coming months.
#5: Emerging markets policy stance
It has been a tumultuous 12 months for many emerging markets, especially Argentina and Turkey as we have covered extensively in this publication. Overall though we believe the authorities’ policy response in both of these markets has been mostly competent and reasonably well handled in extreme conditions of monetary stress.
So as a final wish for 2019 I would ask for similarly sound reactions from EM authorities in the year ahead, wherever they may be required.