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Emerging market growth quickened in the
final quarter of 2010, rebounding from a temporary lull in the third quarter and
accentuating the growth gap between emerging and developed nations, the
HSBC Emerging Markets Index (EMI: pdf) shows. But presenting the key risk to
growth in 2011, input cost inflation quickened to the fastest level since Q2
2008, highlighting the rapid build up of inflationary pressures across the
emerging world first identified in the HSBC EMI for Q1 2010.
The surging inflation reflects higher
commodity prices, the impact of loose monetary policy in the United States and
low stock holdings at suppliers leading to delivery delays and hiked charges.
On Monday, European Central Bank President
Jean-Claude Trichet, speaking on behalf of the world’s central bankers at the
Bank for International Settlements in Basel, Switzerland, said the global
economy has recovered better than expected, boosting inflation pressures in
emerging markets.
“Inflationary threats present some kind
of general feature in the emerging world; it’s something you don’t see
necessarily in advanced economies,” Trichet said after chairing the Global
Economy Meeting. “It’s clear that it is extremely important that we all keep
control of inflation expectations, and that calls for appropriate decisions.”
The fourth quarter EMI rose to 55.7, from
a five quarter low of 54.2 in the preceding quarter, above the long-run series
average of 54.7. Nonetheless, the pace of expansion remained slower than rates
recorded in Q4 2009 and H1 2010.
The uptick in emerging market growth
primarily reflects a rebound in manufacturing activity, as service sector growth
held steady in the final quarter. Rates of expansion were almost identical
across both sectors.
Stephen King, HSBC’s chief economist,
said: "A strong rebound in
emerging markets growth from the temporary lull in the third quarter is a
resumption of the long-term trend, driven primarily by a broad-based rebound in
manufacturing output.
As emerging nations increasingly trade with each other, we
could be on the cusp of another economic ‘golden age’, an emerging market
version of the extended period of rapid growth seen in the developed world in
the 1950s and 1960s, when tariffs fell and international trade blossomed. If
emerging nations can work together to remove the still considerable tariffs
between them, we could witness an explosion of world trade on a truly momentous
scale.
The sting in the tail comes from inflation. Not since the
food and energy scares seen in the early months of 2008 have the cost and price
components of the EMI touched such worrying levels. Whether policymakers in the
emerging world can tame inflation is one of the big issues for investors to
confront in 2011. With most emerging nations reluctant to significantly raise
interest rates and inflate their currencies, attention will turn to the impact
of ‘quantitative tightening’ measures such as Hong Kong and China’s recent
attempts to restrict the supply of credit."
Manufacturing output rose across
Eastern Europe, with the Czech Republic, Poland and Turkey all recording
substantial rates of growth in Q4. Both China and India recorded sharp and
accelerated rates of expansion that were the fastest in three quarters. In
contrast, manufacturing output growth was only marginal in Taiwan and stagnated
in South Korea.
The performance of emerging market
manufacturers improved in line with an uptick in new export order growth. Of the
big-four emerging markets, India recorded by far the strongest increase in new
export business. China recorded modest growth (fastest in three quarters), but
falling exports were indicated in Brazil and Russia.
In the emerging market service sector,
activity growth remained substantial in India, despite easing to a four-quarter
low. China also recorded a slowdown in output growth (eight-quarter low).
Conversely, Russia saw a strong acceleration in growth and despite quickening to
a three-quarter high, Brazilian service sector growth remained modest in Q4.
The key risk to future growth, input cost inflation
quickened to the fastest since Q2 2008, when global commodity prices peaked
before plummeting amid the fallout from the global financial crisis. The input
prices index climbed almost six points from the previous quarter, highlighting
the rapid build up of inflationary pressures across the emerging world.
Manufacturers felt the brunt of higher purchasing costs in Q4, with input cost
inflation hitting a ten-quarter high. Service providers recorded a much slower
rise in average input prices than manufacturers, but the pace of inflation was
still the fastest since Q3 2008.
The Chinese government needs to act quickly to cap rising food prices, says Qu Hongbin, senior economist at HSBC Global Markets. He tells Andreas Hoefert of UBS and CNBC's Martin Soong & Sri Jegarajah that farmer subsidies need to be increased as soon as possible:
The Q4 EMI report includes supplementary
analysis on the trends identified by the index throughout 2010. Overall,
based on the long-term historical correlation between the EMI and GDP, the EMI
points to emerging markets GDP growth of 8% per annum in the final quarter of
2010, down from a 9.6% peak rate in Q1.
Domestic and export demand factors have
played important roles in explaining divergent national economic growth trends
in 2010. The EMI survey data show how domestic demand has helped prop up
emerging market growth rates in 2010 while many developed countries have seen
domestic demand hit by high unemployment, public sector spending cuts and
deleveraging by indebted households.
In a consistent trend throughout 2010, EMI
data illustrate that domestic demand in emerging markets has been boosted
relative to the developed world by stronger labour markets. However, there are
signs that domestic demand in the developed world may soon start to pick up as a
result of improving job market data.
As first identified by the Q4 2009 EMI,
The HSBC report says that drivers of the global economy continue to shift to the
East as emerging markets become increasingly dependent on trading links with
each other, most notably the south-south trade, as analysed by the Q2 2010 EMI.
It is these relationships, repaving the old Silk Road in place of traditional
links with the developed world, which offer the potential for an emerging
markets golden age over the next decade.
The HSBC EMI is calculated using the long-established PMI
data produced by global financial information services company Markit. HSBC was
founded in Hong Kong in 1865 as the Hong Kong and Shanghai Bank and is now a
leading global bank, headquartered in London.
The HSBC Emerging Markets Index (EMI) is a
weighted composite indicator derived from national Purchasing Managers’ Index
(PMI) surveys in the emerging markets of Czech Republic, Hong Kong, Israel,
Mexico, Poland, Singapore, South Africa, South Korea, Taiwan, Turkey, UAE, Saudi
Arabia and the increasingly important BRIC economies of Brazil, Russia, India
and China. These surveys collectively track business conditions in over 5,800
reporting companies.
Last July, Stephen King of HSBC, told CNBC the euro's decline is just a dress rehearsal for the decline of the US dollar and Western prosperity:
