TalkingEconomics: EM forecast update - Chimerican stimulus pushes EM onwards
Downgrades to three of the BRICs are offset overall by an upgrade to China’s growth. More broadly emerging market growth should also benefit from greater US stimulus, assuming we avoid an all-out trade war.
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There are small growth downgrades for the BRICs this time round, except in China where we abandon the hope of meaningful reform for at least another year. We also need to assess the impact of a Trump presidency on the BRIC economies, but for the most part we expect it to be fairly limited.
For now, the assumption that we see more of the Trump infrastructure stimulus and less of the Trump trade war helps propel overall emerging market growth upward, as does our upgrade of Chinese growth, despite slight downgrades elsewhere.
China: sails to the wind - worry about the mast later
It seems to be the case that growth will be placed above all other concerns for next year. Our forecast reflects an assumption that having consolidated power after the National Congress meeting next year, President Xi will focus his attention on building a sustainable economy, lowering the growth target to provide some space for tighter monetary policy. This sees a modest slowdown in 2018. We therefore raise our 2016 GDP forecast to 6.6% and 2017 to 6.5%.
Brazil: a very gradual recovery
Brazil’s vulnerability lies in the reliance of its corporates on dollar borrowing. Given the increase in Treasury yields, many will face more expensive debt when they refinance. We revise down our growth forecast for 2017 to 0.6% to reflect this. However, perhaps a bigger threat comes from the waves of scandal washing over the new government, increasing the difficulty of passing much-needed fiscal reforms.
India: an unexpected and controversial reform
In a move aimed at tackling corruption, the prime minister has announced that 500 and 1000 rupee notes no longer count as legal tender. There will be large disruption for consumers and a macroeconomic impact from the contraction in the cash supply. This prompts a downward revision of our growth forecast for 2016 to 7.3% and for 2017 to 7.7%. We have also lowered our inflation forecast - to 5.0% in 2016 and 4.7% in 2017 - due to the impact on demand, and the recent easing of food price inflation. Combined, this should give the central bank scope for further rate cuts.
Russia: recovery will survive fiscal consolidation
Russia's economy is still contracting but at a slower pace. We make minor downgrades to growth this year and next, but still see growth recovering to its low trend level in 2017/18. Inflation has been slowing, helped by rouble strength for much of the year and weak demand. We have revised down our 2016 and 2017 inflation forecasts to 7.2% and 6.1%, respectively.