14 June 2017

Some Emerging Markets Begin to Recover

The past few years have been very difficult for many of the world’s emerging markets as the high economic growth rates from previous years came to a crashing halt for what had been important high-growth markets for the global economy.  On one hand, emerging markets in Asia have continued to record relatively strong rates of growth in recent years, albeit at levels below those from previous years.  However, it is outside of Asia where emerging markets have had the most trouble of late.  This has been due to a number of factors.  First, significantly lower commodity prices had a major impact on many emerging markets as a lack of economic diversification came back to haunt such countries in recent years.  Second, political unrest and economic mismanagement have negatively impacted many key emerging markets, as has relatively weak demand levels in key export markets.  After a few difficult years, growth is starting to return in many of these emerging markets, raising expectations that the worst is over for these economies.  However, it is unlikely that the high rates of economic growth that these countries achieved earlier in this decade will return anytime soon, while other important emerging markets are forecast to continue to struggle to grow for some time to come.

Without question, the past few years have been among the most difficult in recent memory for emerging markets, at least those not located in Asia.  Even in Asia, growth has slowed sharply, as the 11.2% GDP growth for Asian emerging markets in 2007 has fallen to just more than half of that level ten years later.  Of course, the situation outside of Asia has been much worse.  For example, despite the Middle East’s and North Africa’s rapidly rising populations, this region’s average rate of economic growth over the past four years has been less than 3%, well below earlier levels, and barely above the region’s rate of population growth.  Likewise, emerging markets in Central and East Europe have had an up-and-down experience since the global financial crisis, with the region averaging growth rates of little more than 3% since the crisis.  Two emerging regions have struggled even more in recent years.  First, Sub-Saharan Africa went from being the world’s second-fastest-growing region as late as 2014 to one that recorded economic growth of just 1.4% last year, the lowest rate of growth for Sub-Saharan Africa since the early 1990s.  Finally, Latin America’s economy recorded very low levels of growth between 2013 and 2015, and the region as a whole fell into a recession in 2016, making it the worst-performing region in the world.

Fortunately, some of these emerging markets that have struggled mightily in recent years are beginning to show some signs of a recovery, raising hopes that they can once again become a solid pillar of growth for businesses and investors.  Much of this growth is concentrated around central and southeastern Europe, a region that is benefitting from its improved economic competitiveness and the higher level of export demand in key markets elsewhere in Europe.  This has allowed countries such as Turkey and Romania to enjoy some of the highest rates of economic growth outside of Asia in the first part of this year.  Elsewhere, the slight increase in the price of oil and other natural resources over the first half of this year has eased some of the pressures on economies in the Middle East and Africa, although they remain far from a full-scale recovery.  In fact, it is clear that it will be the direction of export demand growth in large markets in North America, Asia and Europe that will determine the health of these emerging markets in the coming years.  Furthermore, these countries could realize even more economic gains should their domestic markets grow at an accelerated pace, something that their improved performance in recent months makes more likely.

While many emerging markets have turned the corner, and are once again recording higher levels of economic growth in 2017, a number of other important emerging markets are continuing to struggle.  Most of these struggling emerging markets are those that are most dependent upon commodity exports, particularly energy and food.  Many of these sluggish emerging markets are found in Latin America and Sub-Saharan Africa, which are regions that continue to suffer from high levels of corruption and economic mismanagement, while dealing with low commodity prices and weak internal demand.  Moreover, even as these economies gradually recover, it is highly unlikely that they will be able to record anywhere near the levels of growth that they did earlier in this decade.  In fact, without economic diversification and stronger domestic demand, these emerging markets will lag further behind their counterparts in Asia and Europe.  Unfortunately, the outlook for such diversification is poor, and this will keep these emerging markets’ domestic demand levels well below their potential.  As a result, while some emerging markets will continue to enjoy higher rates of growth over the course of the next year or two, others will remain mired in a slump for the foreseeable future.