Emerging markets losing steam

The knock-on effects of the lost momentum in world trade have hit manufacturing in emerging markets, slowing growth across all sectors, according to the HSBC Emerging Markets Index (EMI).

The EMI slid to 51.9, down from 54.2 in the second quarter, the fourth-lowest reading in the series history. Sluggish developed market demand led to reduced output from almost all emerging markets surveyed.

World trade growth peaked in the first quarter, according to Stephen King, chief economist, HSBC.

“Companies in the emerging world have reacted by clearing their order backlogs at a faster rate than before, helping to support activity near-term,” he said. “But in the absence of any quick rebound in trade momentum, the weakness revealed in this latest EMI is likely to show up in future employment losses.”

Already, jobs growth in the emerging world appears to have stagnated, he added. While emerging nations do not face the same level of deleveraging as the developed world, they nevertheless suffer their fair share of contagion in an increasingly risk-averse environment.

Despite clear evidence of economic de-coupling in the long run, there is not much evidence of financial market de-coupling on a day-to-day basis, said King.

“Abating inflationary pressures creates a little more room for policy flexibility but it would be wrong to conclude that emerging nations are about to launch stimulus on a scale similar to that seen in 2008/09,” he said. “It therefore seems increasingly likely that emerging nations will not be able fully to offset the endemic weakness in the developed world, implying that the pace of global economic growth will remain well below 3% in both 2011 and 2012, a disappointing performance relative to past history, notwithstanding the sound underlying economic fundamentals on offer in many parts of the emerging world.”

One of the worst affected areas of economy has been manufacturing production, particularly in Brazil, China, Singapore, South Africa, South Korea and Taiwan.

In contrast, Eastern European manufacturers generally fared better than emerging Asia firms during Q3, but all saw production growth moderate over the quarter. Russia recorded only a marginal increase in factory output, while rates of expansion slowed to recent lows in the Czech Republic and Poland.

Growth in Indian manufacturing, consistent with other Asian economies slowed to a two-and-a-half year low. Turkey and Israel were the only emerging market manufacturing sectors to register a faster uptick in output levels.

As foreign order levels drop across the majority of markets, emerging market manufacturers reported lower volumes of new export business for the first time in nine quarters. Among the BRIC nations, Brazil and India recorded the biggest decline in new export orders, while China registered only a marginal reduction.

The big-four also experienced a decline in service sector activity growth in Q3 2011, a nine-quarter low. Emerging market service providers expressed the significant loss of optimism about the prospects for activity over the next year, while business confidence dipped to a series-record low in China. Russian service sector firms were the least optimistic in ten quarters.

The findings of the latest EMI survey are further evidence that persistent policy tightening across the emerging world has contributed to weakening inflation pressures. The rate of input cost inflation eased to a four-quarter low across EMI markets—Brazil (two-year low), China (slowest in four quarters) and Russia (weakest in one-and-a-half years).