Daily Insight The DM-EM conundrum
Group Economics Macro & Financial Markets Research Nick Kounis & Aline Schuiling +31 20 343 5616
11 September 2015 • • •
There has been a striking divergence between developed (DM) and emerging (EM) markets DM demand has not helped EM exports, while EMs have seen tighter financial conditions Eurozone exports have been resilient to EM weakness, helped by US and other EU demand
A striking divergence
Manufacturing PMIs EM versus DM
One of the most striking current features of the global economy
index
is the unusual divergence between the direction of economic
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growth in DM and EM economies. This divergence already
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started in 2014, when advanced economy growth accelerated
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slightly, while emerging market growth slowed. However, this divergence seems to have become more stark this year. For instance, while the manufacturing PMI for DMs has been stable since the start of the year, the EM aggregate has fallen by 2 points, to the lowest level since April 2009.
52 50 48 46 2011
2012 Developed
2013
2014
Emerging
2015 World
Link between DM demand and EM exports Typically there is a strong relationship between domestic
Source: Thomson Reuters Datastream, ABN AMRO Group Economics
demand growth in the DMs and EM export growth. So we had expected the gradual improvement in the domestic economies in the US and the eurozone, to also support EM economies. However, as with the manufacturing PMIs, DM demand and EM exports have gone in different directions in 2014-2015. What explains this divergence? One factor might by weak intra EM exports due to specific weakness in these economies. In addition, weakness in the yen and the euro may have hurt the exports of some Asia economies. Another factor may be a more structural weakness in trade and manufacturing, which means these activities have declined relative to GDP.
Eurozone exports to EU and US accelerate … Will weaker EM growth hit DM exports, pulling these economies down as well? So far eurozone exports have been resilient. Goods exports grew by 7.5% yoy in Q2. Looking at the regional data it turns out that Europe (including the UK and the Eastern European and Scandinavian EU members) and the US contributed by far the most to export growth. In total, these countries contributed almost 6.5 percentage points to yoy growth in Q2. On top of that, Asian countries besides China and Japan contributed around 2pps. In contrast, China
However, there may also be some measurement issues. For instance, eurozone imports from China rose by 8.3% yoy in
and Japan did not contribute, whereas Russia reduced growth by 1.5 pps.
June according to Eurostat. However, Chinese Customs reports that Chinese exports to the EU fell by 3.4% yoy that month and even more since. Our sense is that strong demand in DMs should eventually gain some traction on EM exports.
… implying there is quite some resilience against a slowdown in emerging economies Although there obviously are downside risks to growth in eurozone exports from a slowdown in emerging economies,
Financial channel working the other way On the other hand, financial linkages point in the other direction. Expectations about eventual Fed rate hikes have encouraged capital outflows out of EMs leading to a tightening of financial conditions. There is a risk that this will continue, which could further undermine EM economic growth.
part of this should be cushioned by ongoing strength in exports to Europe and the US. Domestic demand in these countries is growing robustly, while the trade weighted euro has depreciated by around 5% since the start of this year. Although the US export sector is being hampered by the strong dollar, as in the eurozone, domestic fundamentals are improving.