Emerging Markets Show Strength Despite Chinese Weakness

It’s important to avoid the failed assumption that emerging markets are underperforming and will continue to do poorly because China’s economy is slowing. To be clear, the global economic slowdown is being driven by developed markets and China, not emerging markets ex-China. It’s no surprise China is acting like a developed market because it faces similar demographic issues.

According to the IMF’s latest projections from January, world GDP growth will slow from 3.8% in 2018 to 3.5% in 2019. Advanced economies are leading the slowdown as their growth is expected to fall from 2.3% to 2%. America’s growth is expected to fall from 2.9% to 2.5%, but it’s still expected to be one of the fastest growing developed economies. On the other hand, emerging market and developing economies are expected to see 4.5% growth in 2019 which is only down 0.1% from the previous year. That growth is occurring even with the Chinese deceleration from 6.6% to 6.2%.

These projections are in tune with the chart below which shows the recently improving emerging markets’ leading activity index in relation to that of developed markets. The chart implies the dollar should start to underperform emerging market currencies.

To be clear, the IMF’s forecasts are in tune with the current results because its forecasts are usually a reflection of the present, not the future. They provide a great summary of what is happening now, which is why we look at them. The recent January PMI readings continue this theme of developed market weakness, with America outperforming on a relative basis. The flash PMIs weren’t good as Japan’s was 50 which was a 29 month low, the Eurozone’s was 51.4 which was a 50 month low, Germany’s was 49.9 which was a 50 month low, France’s was 47.9, and America’s improved to 54.9. This weak German PMI is consistent with the decline in German 2019 GDP growth estimates from 2% in June 2018 to 1.2% now. Most of that decline has occurred since last fall.

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