Emerging market growth will continue to outpace developed markets says Legal & General
In today's Fundamentals briefing, LGIM emerging market economist Erik Lueth examined the drivers of the current slowdown in emerging market growth and assessed whether slower growth is here to stay.
"After a decade where emerging markets were seen as the engines of global growth, they are currently undergoing a growth slowdown that has taken many forecasters by surprise and prompted many to wonder if this signals a change in the fortunes of these economies" said Erik.
The slowdown stands out for a number of reasons. It is synchronized across three-quarters of emerging markets (EM), but is not associated with a crisis. It is also long lasting; synchronized slowdowns usually last one to two years, but this one is in its fifth year. Furthermore, it is happening against a recovery in developed markets, something observed only once before during the Asian crisis.
"The drop in commodity prices has undoubtedly played a part in the EM slowdown. China in particular accounts for a significant part of the world's metal demand and as it attempts to rebalance its economy away from investment and construction, its appetite has waned. However, we don't feel that the recent slowdown can be solely attributed to China's diminishing demand" said Erik.
Our analysis suggests that much of the EM growth slowdown seems to be driven by structural, more persistent factors such as a slowdown in human capital growth and the labour force. Even for manufacturing exporters, lacklustre US and European growth only explain half of the slowdown and so may be less of a boost on the upturn.
"On the bright side, global monetary conditions don't seem to have an obvious impact on growth, limiting the downside impact of potential US tightening. It's worth bearing in mind that even under these less favourable conditions, EM growth should continue to exceed developed market growth by a healthy margin, with our average growth rate projected to stay well above 3% through the middle of this century" concluded Erik.
NOTES TO EDITORS
LEGAL & GENERAL INVESTMENT MANAGEMENT:
Legal & General Investment Management (LGIM) is one of Europe's largest institutional asset managers and a major global investor. LGIM manages £708.5 billion in total assets for more than 3,000 clients*. Throughout the past 40 years we have built our business through understanding what matters most to our clients and transforming this insight into valuable, accessible investment products and solutions. We provide investment expertise across a full spectrum of asset classes including equities, fixed income, commercial property and cash. Our capabilities range from index-tracking and active strategies to liquidity management and liability-based risk management solutions.
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