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Emerging market growth eased slightly in the
first quarter of 2011, reflecting slower expansion in both manufacturing and
services as emerging market companies contend with an ever higher cost burden,
the HSBC Emerging Markets Index (EMI) shows.
As forecast by the previous HSBC EMI,
inflation presents the key risk to growth in 2011. Input cost inflation across
the emerging world quickened to its strongest level in almost three years,
reflecting the boost to commodity prices from infrastructure investment, higher
food prices due to demand-supply imbalances and the global impact of monetary
policy in the United States.
The EMI dipped to 55.0 from 55.7, but
remained broadly in line with the long-run series average of 54.9.
The moderation in emerging market growth
reflected slower expansion in both services and manufacturing, with growth in
the former hitting a near two-year low. Manufacturers recorded a faster rate of
expansion than service providers for the second quarter in succession.
Stephen King, HSBC’s chief economist,
said:"We are at a critical
moment when policymakers take a deep breath and hope that their decisions can
tame prices. The latest HSBC Emerging Markets Index reveals that inflation is in
danger of becoming an entrenched problem while the pace of growth, although
perfectly adequate, has lost momentum. Rising inflation and fading growth are
hardly an encouraging combination and the hope must be that the loss of momentum
will eventually temper inflation.
"It now appears that the West’s bid to kick-start the global
economy through experimental monetary stimulus has opened a Pandora’s Box of
economic distortions, creating unexpected policy challenges for emerging
nations. Seeking to avoid currency appreciation from several interest rate
rises, they’re pursuing what HSBC has termed ‘quantitative tightening’ through
measures such as raising banks’ reserve ratios. QT takes us to the outer reaches
of macroeconomic experimentation but if it slows the pace of emerging market
growth, commodity price inflation may eventually be checked.
"This would provide huge benefits to emerging nations, not least
by alleviating the social and political pressures of income inequality that stem
from higher food and energy prices, part of the reason for recent uprisings in
the Middle East and North Africa. Our latest HSBC forecasts are consistent with
the idea that QT will constrain activity. We expect GDP growth in the emerging
world to moderate to 6.3% this year from 7.5% in 2010."
Factories across Eastern Europe remained busy
in the first quarter, with production growth hitting series-record highs in the
Czech Republic and Turkey (the latter for a second successive quarter). Russia
saw manufacturing output rise at the strongest rate in three years, while growth
held steady at a near-record rate in India. Taiwanese and South Korean
manufacturers saw a strong rebound in activity but Singapore saw only a slight
expansion in output, and growth eased markedly in China.
Growth of manufacturing production was
supported by a continued expansion of new export business, which increased at
the fastest rate in three quarters during Q1. However, the rate of expansion was
much weaker than that seen one year earlier. The Czech Republic, India, Poland,
Turkey and Taiwan all recorded steep increases in new export orders, while
growth was solid in Hong Kong, Saudi Arabia and South Korea. In contrast, growth
was only slight in Brazil and China.
Service sector activity grew at a sub-par
rate in Q1, with growth easing to a seven-quarter low. This reflected slower
expansion in China and Russia, with the former registering the weakest increase
in business activity since the start of the series in Q4 2005. Brazil recorded a
moderate expansion, while India again led the pack, with growth the highest in
Emerging market service providers remain
confident about the one-year business outlook, although the degree of optimism
was muted compared with historical data. Positive sentiment in the Indian
service sector was the highest for three years, while Russian business optimism
was broadly in line with the long-run trend. In contrast, Business Expectations
indexes for Brazil and China were around eight index points lower than their
respective long-run trends, continuing the trend seen in the fourth quarter of
The latest HSBC emerging markets index report suggests growth will continue to slow as the developing world battles inflation, Stephen King, HSBC's chief economist told CNBC Thursday. "The economies are still expanding in the emerging world, but at a slightly slower pace than was the case previously, but the really big story here is an increase in inflation, inflationary pressures have risen even before the recent increases in oil prices," he said:
Input cost inflation across the emerging
world quickened to the strongest since Q2 2008. Cost inflation in services
quickened to a two-and-a-half year high in the first quarter, with the rise in
the relevant index among the largest in the series history. Meanwhile,
manufacturing firms recorded the third-fastest rise in the average cost of their
purchases since the start of the series in Q2 2004.
Cost inflation quickened across three of the
big-four emerging markets, with China the only exception after it saw strong
inflation in the previous quarter. India registered a series record increase,
while Brazil and Russia saw nine- and eleven-quarter inflationary highs
respectively. The rate of output price inflation accelerated to the sharpest in
almost three years during Q1 2011, as firms passed on rapidly rising input costs
to clients through increased charges.
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, produced by global
financial information services company Markit, collectively track business
conditions in over 5,800 reporting companies.