Growth in China expected to pick up - Ernst & Young

An increase in intra-regional trade, easing of monetary and fiscal policy, and higher demand for commodities will lead to an improvement in the economic outlook for the rapid-growth markets (RGMs) in 2013, according to Ernst & Young's quarterly Rapid-Growth Markets Forecast (RGMF) released few days ago.

Despite the forecast of 25 leading rapid-growth countries showing a slight dip last year due to slow global growth, RGM's have now started to regain momentum. The forecast expects growth in the 25 markets to collectively accelerate from 4.7% in 2012 to 5.4% in 2013 and then 6.4% in 2014.

This is in comparison to the lackluster performance of the developed markets, particularly the Eurozone, which is expected to shrink by 0.3% this year.

However, fortunes will vary between geographies, with RGM?s in emerging Asia and Latin America expecting growth to pick up from 7.0% in 2013 to 7.8% in 2014 and 3.8% in 2013 and 4.8% in 2014, respectively. The economic outlook for emerging Europe will remain subdued due to continued weakness in the Eurozone while lower oil prices will continue to hold back growth in the Middle East.

Alexis Karklins-Marchay, Co-Leader of the Emerging Markets Center at Ernst & Young comments: Business and political leaders alike may exhale a sigh of relief. The slowdown of rapid-growth markets during 2012 seems to be merely a stumble from which they are now recovering. They are becoming the locomotives of a global recovery in which developed economies will be the laggards.

Carl Astorri, Senior Economic Adviser to Ernst & Young's Rapid Growth Markets Forecast explains:

"RGMs have proved that they are more resilient than in the past. Despite experiencing slower growth last year, the increase in intra-RGM trade and the easing of monetary and fiscal policy has allowed them to grow once again."

Trade-oriented RGM?s regain faster momentum

All of the RGMs have reduced trade barriers over the last 20 years, opening their economies to trade and the sharing of knowledge. This has continued to have a positive impact on their economies.

In the final quarter of 2012 encouraging signs started to emerge that the more trade-oriented RGMs, particularly those in Asia and Latin America, were picking up pace due to a combination of an improvement in intra-RGM trade and the impact of steps taken earlier in 2012 to ease monetary and fiscal policy.

The forecast shows that during the next 10 years bilateral trade between the emerging Asian economies will continue to increase as demand rises for more sophisticated consumer products from the expanding middle classes.

China has helped emerging Asia

China has soft landed as expected with clear evidence emerging that the slowdown is coming to an end. The forecast predicts that growth will accelerate to 8.3% in 2013 and 9% in 2014. The fall in activity experienced last year was mainly cyclical, due to earlier tightening of domestic policy and weakness in key export markets such as Europe.

"China's recovery is expected to give a boost to the continued super-cycle growth of other Asian RGMs. There are already clear signs that the successful soft landing is beginning to have a positive impact on the other RGM's such as Korea, Indonesia, Thailand and Malaysia; and we expect the Asian RGM?s to see growth rate accelerate from 6.3% in 2012 to 7.8% in 2014 as the recovery broadens," says Gerard Dalbosco, Managing Partner, Markets Asia-Pacific at Ernst & Young.

Dalbosco also explains that expansionary fiscal policies in Thailand, Malaysia and Indonesia have continued to boost investment and support consumer spending, enabling these economies to maintain strong growth. Since last quarter?s forecast, 2013 growth estimates have increased for Malaysia and Thailand by at least 0.5%.

"As China continues to move up the value chain further opportunities will become available for lower cost Asian producers. For example, Indonesia, Thailand and Vietnam are expected to increase their combined share of the world textile market from around 5% currently to more than 10% over the next 25 years," adds Dalbosco.

"As well as boosting Asian markets, the economic growth in China will help to lift African and Latin American economies as the demand for commodities increases. Such benefits are likely to range from increased purchase of cocoa to assuage rising chocolate consumption, to oil and other minerals to power manufacturing and construction," comments Dalbosco.

Growth in Latin America is expected to be driven by Brazil and Argentina. Mexico, which suffered less than other regional markets in 2012, will also benefit from its strong trade links with the US, where import demand is forecast to pick up in 2013.

RGMF predicts that both Ghana and Nigeria will grow by more than 6% in 2013, helped by stronger demand for commodities from emerging Asia. However, due to their strong trading and financial links with the relatively depressed Eurozone, the emerging-European RGMs are likely to lag behind their Latin American and Asian counterparts in 2013. Only a muted acceleration in the growth rate of emerging Europe from 2.3% in 2012 to 2.9% in 2013 is forecast.

Against this backdrop, companies are increasingly using mergers and acquisitions to access, consolidate or extend their ability to benefit from growth in RGM's. But the traffic is not one way. Companies in RGM's stepped up their drive to buy resources, technology and expertise in 2012.

European companies are especially active in buying businesses in emerging markets, evidence that they are seeking opportunities beyond the stalled European economy.

But outbound M&A originating in emerging markets is also major component of transactions.

Karklins-Marchay comments: "Many international companies are sitting on piles of cash. Accelerating growth may prompt more acquisitions in RGM,s, while expanding champions from these markets cast around for opportunities among cash-starved rivals in developed countries."

Looking ahead

Karklins-Marchay concludes: "The outlook for the RGM?s looks very positive. The majority of the markets have proved to be resilient to the recent global slowdown. However, it is important that they focus on political stability, stable and prudent macroeconomic policy, high capital investment and a well balanced trade policy to reflect the changing face of the global economy."