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Which Emerging Market Economies Would Be Most at Risk from a US Slowdown?

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With the USA posting significantly lower-than-expected real GDP growth in the first quarter, struggling with low productivity and facing a widening trade deficit, the global economy’s chief engine of growth appears to be more fragile than previously thought. A US slowdown, should it occur, would hurt global economic growth and many are concerned about the impact on emerging markets in particular. According to our CAMI Macro Model, the five most affected emerging markets from a US slowdown in 2015 would be Vietnam, Mexico, India, China and Russia.

Potential Impact of a US Slowdown on Emerging Markets: 2015


Source: Euromonitor International CAMI Macro Model

Note: US slowdown refers to a 1 year ahead net effect of 0.5 percentage points from Q1 2015 with a moderate deterioration in credit markets and borrowing conditions and a moderate decline in business and consumer confidence.

Some of this impact is a result of direct trade linkages, as the USA is the largest trade partner of all these economies with the exception of Russia. Mexican exports to the USA accounted for one quarter of Mexican GDP in 2014, and in Vietnam, the figure was 15%. In India although the contribution of US merchandise exports to GDP is lower, a US slowdown would still exert a negative impact as a result of the importance of the USA to India’s Business Process Outsourcing (BPO) industry. The situation is more nuanced in Russia where the impact of a slowdown on the oil and other commodity prices would be the chief determiner of direct pain to the economy.

In addition a weaker US$ would also have ramifications in terms of export competitiveness for these economies and many more. An indirect effect would also be felt as a result of the slowdown impacting the US’ major trading partners, including the EU, which would have flow-on effects on these markets.

World’s Largest Exporters to the USA: 2014


Source: Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics

One of many country risks

Yet with the exception of Mexico and India, a US slowdown is not the primary external country risk to the economic outlook of these emerging markets. Vietnam, which we expect to be the most-affected, actually has more to lose from a China or a Japan slowdown. China is Vietnam’s second –largest export market and also an important source of tourism revenue. China itself is most at risk from a Japan slowdown and Russia from a slowdown in Germany.

Country Risks in Vietnam, China and Russia: 2015


Source: Euromonitor International CAMI Macro Model

Note: The chart illustrates the 1st year impact on Vietnam, Russia and China of a typical growth slowdown in other countries

Home-grown threats

Home-grown risks are also more important – particularly in India with its large domestic market and also China where a decline in investment and a cooling property market, as the government tries to shift to a consumption-led model, are dampening growth. Russia is already struggling in the face of the low oil price, EU sanctions and an overdependence on the oil and gas sector. Finally, in Vietnam growth is constrained by the need for structural reform.

Delay in rising interest rates

The impact of a US slowdown would be further complicated by the bearing it will have on the decision to raise interest rates. A slowdown would reduce the Fed’s impetus to raise interest rates which has a beneficial impact on emerging markets. Although fears of a “taper tantrum” have diminished, portfolio flows to emerging markets are likely to drop when interest rates rise in the USA. So a slowdown could actually provide more breathing space for those economies reliant on external capital.

Muted impact

All-in-all, should it occur, a US slowdown will not pose an insurmountable problem to emerging markets. It would likely exert a small negative impact on growth but is not the over-riding concern for these countries. As ever, strong economic fundamentals and a strong external position in terms of diversified export partners and limited reliance on short-term currency inflows should insulate against any US slowdown. As such, now is clearly the time to double down on structural reform.

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