A fragile recovery

Eco Emerging // 3 quarter 2021  
Emerging countries have continued to recover since the beginning of the year, although the recovery remains fragile.  
Household confidence indicators are lagging behind those of business sentiment, illustrating the constraints on  
domestic demand: the pandemic risk persists, inflation is accelerating, and governments are facing rising financing  
costs, which reduces their fiscal manoeuvring room. Despite buoyant foreign trade, the horizon is not clear enough  
yet for investment to rebound. Fortunately, the vast majority of central banks have been maintaining a proactive  
stance so far, despite inflationary pressures. But monetary policy is bound to tighten across the board.  
Real GDP growth continued to slow in the 27 main emerging countries Since the beginning of the year, governments have been faced with  
in Q1 2021, although it held strong at 1% q/q, down from 3.5% in Q4 higher financing costs, both domestically and externally. The rebound  
and 7.7% in Q3. For half of these countries, real GDP growth returned in portfolio investment as a share of local currency public debt in  
to or exceeded Q4 2019 levels. In general, exports were still the main H2 2020 helped contain the increase in bond yields that could have  
growth engine, notably in Asia (China, Taiwan and Vietnam). Companies been triggered by swelling deficits. Since the beginning of the year,  
are rebuilding inventory, which is generating pricing pressures on however, portfolio investment has been returning to normal levels  
commodities and raising transport costs. Private domestic demand is (they were cut in half in H1 2021 compared to H2 2020), notably due  
also picking up, but in a more hesitant manner, including in China, to expectations of a tapering of US monetary policy. The big increase in  
even though it is more advanced in the cycle than the other countries. debt ratios in 2020, will magnify the impact of higher bond yields on  
Confidence indicators reflect this lag: for the large majority of countries, the interest burden, reducing by as much the fiscal manoeuvring room  
the Markit indexes for the manufacturing sector have returned to or in case of a relapse into recession.  
surpassed pre-crisis levels, but this is not yet the case for household  
confidence indicators.  
Lastly, it is uncertain that foreign direct investment (FDI) will recover.  
According to the CNUCED, the number of greenfield projects in the  
manufacturing sector – which was already tending to decline in the  
THE RECOVERY CONTINUES, BUT THE RISKS ARE MORE ON 2010s – was slashed in half in 2020. Project financing also declined  
through Q1 2021, and inertia is very strong (following the 2008-  
009 crisis, it took two years for projects to pick up again). These two  
categories of FDI will make a smaller contribution to growth than  
during the previous crisis exit phases, because governments have less  
borrowing capacity and because multinational companies are planning  
to relocate their business.  
There is still a major pandemic risk. New waves of Covid-19 infections  
were reported in Asia and Latin America in Q2 2021. The virus is  
mutating into more contagious variants, and vaccination coverage  
rates are still too low to ensure herd immunity (less than 10% in India  
and Indonesia, and less than 15% in Brazil and Russia, to cite only Yet the rebound in commodity prices could stimulate investment and  
the countries with the largest populations). The authorities in several help raise the growth potential of the countries concerned. This was  
countries have had to reinstate lockdowns, and as a result, economic the case in Latin American countries in the 2000s, when the upward  
activity is expected to slow or even contract in several Asian and Latin phase of the commodity price cycle increased potential growth rates by  
American countries.  
nearly a percentage point. But the current situation is not comparable  
to the 2000s. At that time, China had maximum leverage with a growth  
rate of 10%, nearly double its current rate.  
The upsurge in inflation is now widespread (in May, the median increase  
in the inflation rate was already 1.8 points above the 2020 average). Oil  
and agricultural commodities are the main drivers of inflation, which  
strains household purchasing power, notably for the most vulnerable  
households. In its most recent June outlook, the World Bank, following  
the IMF, reiterated its alarming estimates of the number of people  
who slid into poverty last year (nearly 100 million people live off less  
than USD 1.9 a day, or 164 million using a broader definition that also  
takes into account the deterioration of healthcare and education). Even  
under a recovery scenario, per capita income in 2023 will still be lower  
than in 2019 in at least 40% of the emerging and developing countries.  
In comparison, four years after the 2008-2009 shock, this figure was  
only 15%.  
Completed on 5 July 2021  
François Faure  
The upsurge in inflation also poses a problem for the central banks,  
because it will exceed the inflation targets in more than half of the  
countries that have them. Yet tightening monetary policy at this point  
in the cycle risks disrupting the recovery of domestic demand, and  
investment in particular. Monetary tightening would only make sense  
if it is necessary to anchor inflation expectations. On the whole, the  
central banks are taking care to be proactive.  
The bank  
for a changing  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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