China’s economic recovery focus on domestic drivers risks potential headwind

Inflationary pressures appeared to be easing in the main emerging markets. However, a slowdown in global economic growth and concerns about the shape of.

The post-Covid recovery of China’s economy arguably presents a challenge to the emerging markets outlook. Reflecting the perceived focus on domestic drivers for China’s economic reopening, one index of globally traded commodities saw prices overall subdued during the quarter and well down on last year’s highs.

South Africa’s economy expanded by an annualised 0.4% quarter on quarter in the first three months of 2023 after a revised 1.1% fall in the final quarter of 2022. This meant the country avoided a technical recession, despite widespread problems with power cuts. In May, lower food prices helped annual inflation fall more than forecast to a 13-month low of 6.3% from 6.8% in April.

Brazil’s economy grew by a higher-than-forecast 1.9% quarter on quarter in the first quarter of 2023 after shrinking by -0.1% in the final three months of 2022. The country’s annual inflation fell to 3.9% in May from 4.2% in April on lower transportation and petrol prices. This was the lowest level since October 2020 and below forecasts.

Turkey’s annual inflation fell to 39.6% in May from 43.7% in April, taking it to the lowest level since December 2021. Turkish shares made gains after President Recep Tayyip Erdogan won a run-off election during the quarter.

An easing of food price rises helped India record a reduction in annual inflation to 4.25% in May from 4.7% in April. The figure was below consensus estimates and took inflation to its lowest point since April 2021. In June, the Reserve Bank of India left interest rates unchanged for its second consecutive central bank meeting.

Brooks Macdonald’s view

Our neutral outlook for Emerging Market equities disguises a more cautious outlook to the mix of emerging countries outside of our preferred Asia Pacific (excluding Japan) focus. Given the uncertain global economic outlook, the headwind this has presented for commodity prices might also weigh against those emerging markets which are more resource-export-led. It is notable that China, a consumer of significant shares of global commodity export markets, has appeared to prioritise a domestic, services-led, consumption recovery, rather than lean on the past-model of infrastructure spend to boost its economy. This might challenge the traditional emerging market ‘playbook’ where emerging market export growth might feed off a Chinese-led commodity reflation narrative. We are mindful that second-order impacts following the Covid pandemic in particular, such as so-called ‘near-shoring’ of global supply chains, have undoubtably complicated what might otherwise be a more-normal economic growth profile that emerging economies might hope for.