In our 13 January note, we made an observation that the important theme for 2011 will be the effects of rising inflation on growth, and particularly sustained recovery from the recession. For emerging markets, interventions to limit inflation has disrupted growth in some economies, although we believe that growth fundamentals remain strong.
Rising world food and energy prices have had a significant impact on inflation in emerging markets. Inflation pressures have been particularly marked given strong domestic output and demand in these economies, as well as residual demand from fiscal stimulus meant to propel economies from the recession.
As a result, we’ve seen three of the world’s top emerging economies tighten monetary policy. Since the beginning of the year, Brazil, India and China have increased policy rates by 150, 125 and 125 basis points respectively. This aggressive tightening, in an effort to cool down these economies, has had the effect of slowing down production.
Retail production growth in Brazil fell from a growth rate of 9.85% year-on-year in April to 9.19% in May. In China, this rate fell from 11.32% in April to 10.69% year-on-year in June. Although industrial production fell earlier, in April, for India (tightening cycle began earlier), China and Brazil displayed positive numbers in May and June 2011.
However, in all these economies, there are indications that economic conditions are deteriorating. The HSBC Purchasing Managers index fell in June for Brazil to 49.0 from 50.8, while in China, the index fell from 51.6 in May to 50.1 in June, and India from 57.5 to 55.3.
It is clear that monetary tightening, although it has not yet had the desired effects on inflation, with China up 6.4% year-on-year in June (5.5% in May), Brazil 6.71% (from 6.55% in May) and India 9.4% (from 9.06% in May), has had a dampening effect on economic activity.
Emerging from the global recession, all these economies have displayed resilience, with China growing at 9.7% in the first quarter of 2011, while India achieved 7.8% and Brazil 4.17%.
We believe that the fundamentals for growth are still quite robust in these economies, and the slumps as a result of monetary tightening are short term in nature. There is still continued growth in prices for commodities such as Platinum, Copper and Iron Ore, reflecting that demand continues to be robust, albeit amidst speculative effects.
Xhanti Payi
Assistant Economist
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