Emerging markets are driving the global spending slowdown
Sluggish domestic demand growth in EMs has curbed imports
It may be too late to ask whether this year’s trade and manufacturing weakness will spill over into consumer spending in emerging markets next year. It already has.
The widely-held view among investors that the consumer remained resilient this year amid a sharp slowdown in global trade and investment does not stack up on a global level. According to economists at UBS, global consumption has already slowed, with EMs accounting for the vast majority of the deceleration.
Further policy support across EMs will be needed in 2020 to prop up flagging domestic demand.
World consumer spending and headline GDP growth are on track to record their slowest growth in a decade in 2019. But where the GDP slowdown is fairly broad-based, more than four-fifths of the spending deceleration since the start of last year is down to EM countries.
Sino-US trade tensions notwithstanding, the majority of the EM slowdown is coming from India. The world’s third-largest economy contributed an estimated 40 per cent of the entire deceleration in global consumption this year. This is more than the US and China combined.
“Only a quarter [of the global consumption deceleration] is due to China,” UBS said. “And China’s contribution is on a par with Turkey, a much smaller economy.”
During the first half of the current fiscal year (starting in April) consumer spending growth in India slowed to less than half the pace recorded in 2018. New lending has dried up following a crisis in the country’s shadow banking sector, bringing an end to the earlier spending boom. Weak employment prospects are further adding to the gloom.
As economists at Citi point out, India’s current growth slowdown is the longest ever period of growth deceleration on record. And at 4.5 per cent year-on-year the latest GDP data are at a six-year low.
Hong Kong also stands out among smaller EM economies that are adding to the global spending slowdown. Political unrest and trade tensions have tipped the economy into recession, with tourism down sharply and businesses and trade severely disrupted. Retail sales dropped 24 per cent year-on-year in October - the worst decline on record, marking nine consecutive months of shrinking sales.
Adam Slater at Oxford Economics highlights the earlier run-up in consumer debt in EM and in particular in Asia, as another factor behind slowing EM consumption growth.
“The impact [of the earlier debt buildup] is slowly building,” he said, leaving both structural and cyclical headwinds to consumption growth.
Demand weakness in EM is also evident in slowing imports.
Global trade volumes have collapsed since the US stepped up its protectionist rhetoric against China in early 2018. And similar to consumption, the weakness is more pronounced in EMs than in advanced economies.
EM imports have contracted for most of this year, with recent declines of between 3 per cent and 4 per cent from last year. Advanced economy import growth, by contrast, remained positive.
Given trade tensions coupled with a slowing domestic economy, the decline in Chinese imports is not surprising. But Asian imports excluding China have contracted at a similar rate, of around 4 per cent to 5 per cent, according to the CPB World Trade Monitor. Some of the weakness is attributed to high trade linkages across Asia but flagging domestic demand is contributing too.
CPB data do not split out India but the country’s national accounts data show that imports declined almost 7 per cent year-on-year in the third quarter, a huge fall from an expansion of nearly 23 per cent in the third quarter of 2018. As a result, net trade contributed positively to headline GDP in India for the first time in more than five years.
Weakness is also evident in Latin America. The IMF projects a double-digit decline in Argentina’s imports this year as the crisis-hit economy suffers a second consecutive year of contraction. Brazil and Mexico are also suffering with meagre economic growth this year and decelerating imports. Oxford Economics projects import growth at just 1 per cent this year in Brazil, compared with 7 per cent in 2018.
Subdued domestic demand in EMs points to the need for more policy support ahead.
Fiscal easing is gaining momentum in Asia. India announced a surprise corporate tax cut in September, while Thailand, Indonesia and the Philippines have all announced extra spending for next year. China, meanwhile, has continued with fiscal measures.
Further stimulus in EM will also come through ever looser monetary policy. EM central banks already cut rates sharply this year, with the GDP-weighted EM policy rate down by around 100 basis points from its 2018 peak of just over 5 per cent, according to Suttle Economics.
Nearly all other EM central banks have also reduced rates this year. Turkey’s 1,200bp in cuts since July was the largest easing in EMs, while India’s 135bp in rate cuts was also significant. Brazil continued its easing cycle this month, as did Russia. For 2020, Bloomberg consensus forecasts show cuts across emerging Asia.
Even without fiscal or monetary easing to prop up domestic demand in EMs, advanced economy consumer spending may fare worse than EMs next year.
Japan’s October VAT increase led to a 14.4 per cent monthly decline in retail sales - a deeper collapse than after the last VAT rise in 2014, which tipped the economy into recession - and in the eurozone, economic growth is expected to remain subdued with limited scope for further easing in monetary policy and fiscal support on the sidelines.