Emerging Markets: Non-China emerging growth set to accelerate in 2018

By Stéphanie de Torquat, Macro Strategist

Looking at a number of metrics beyond (not always helpful) GDP data, the Chinese economy appears to have decelerated recently (see chart IX) – but should be able to sustain low 6% growth in 2018. From a structural standpoint, successfully managing the production-to-consumption transition, recognizing the need for cuts in overcapacity, less inequality and stronger social nets, and addressing environmental issues will be the main challenges. Externally, China’s strategy of openness, epitomized by the “One Belt, One Road” blueprint, is in direct contrast to Trump’s protectionist stance and puts the country on track to rival the US as an economic powerhouse.

While under no pressure to hike rates (see chart X), given stable and low inflation, the People’s Bank of China should keep a slightly hawkish bias in order to curb shadow banking sector risks. On the fiscal front, authorities may well take advantage of the satisfactory economic performance to withdraw some of the stimulus dating back to times of acute hard landing fears. That said, should headwinds arise, policymakers will have both monetary and fiscal leeway to uphold the economy. Longer-term, the main risk for China lies in the exponential rise and high level of total credit to the non-financial sector, now close to 260% of GDP.

Elsewhere in the emerging complex, the “easiest” part of the recovery may be over, with most of the inflation drop – thus central bank easing – probably behind. Still, we are confident that non-China emerging growth can accelerate in 2018, offsetting the modest Chinese slowdown. Many imbalances have been corrected over the past years, and vulnerabilities to external shocks have greatly decreased.

Our macroeconomic preference goes to most of emerging Asia, along with Russia in emerging Europe, and Peru and Chile in Latin America. Conversely, we remain extremely cautious on Turkey and South Africa, where political risks compound weak fundamentals. Colombia could look progressively better if it manages to reduce its twin deficits, in the wake of recent peace accords and higher oil prices. Benign NAFTA (North American Free Trade Agreement) renegotiations would likely lead us to upgrade our view on Mexico, while reform of the pension system would make us more decisively positive on Brazil. In Argentina, the turnaround is clearly unfolding – we just need more evidence of structural reforms actually taking effect before sounding the all-clear. In emerging Europe, Poland and Hungary are doing well, but overheating risks loom, potentially triggering tightening cycles.