The greenback's rally and surge in the benchmark 10-yr US Treasury note yield have led to a selloff in Argentina and Turkey
Global economy to expand 3.4% this year, says BMI Research
The global economy is expected to grow 3.4 per cent this year and taper to 3.2 per cent next year, with the US powering ahead, but a stronger dollar and American monetary policy tightening present risks to some emerging markets, according to a report from BMI Research.
“It is becoming clearer as 2018 progresses that there are a series of key divergences emerging in economic trajectories,” said the report.
“One of those is between the US and the rest of the developed world, and the other is between emerging markets with strong macro fundamentals and those EMs that are vulnerable to changing global financial conditions.”
The United States is growing faster than other developed markets, particularly Japan and the eurozone.
US gross domestic product is projected to accelerate to 2.7 per cent this year from 2.3 per cent last year, while eurozone growth will decelerate to 2 per cent this year from 2.4 per cent last year, and Japan’s economy is forecast to decline to 1.2 per cent from 1.7 per cent.
BMI is more bearish than the International Monetary Fund, which maintained in April its forecast of global growth of 3.9 per cent for 2018 and next year, but warned of economic repercussions of trade wars between the US and China.
In emerging markets, a stronger dollar sparked by expansionary fiscal policy is wreaking havoc, and the surge in the benchmark 10-year US Treasury note yield broke through the 3 per cent level to a seven-year high. The greenback has surged more than 5 per cent since mid-April, its biggest rally since late 2015.
“The combination of a stronger dollar and higher Treasury yields has put pressure on emerging markets, highlighted by large sell-offs in the Argentine peso, Brazilian real, and Turkish lira, as well as a major deterioration in hard-currency bond spreads,” said the BMI report.
“We continue to believe that while the more vulnerable emerging markets will continue to suffer in this environment, there is little evidence of indiscriminate contagion among investors across the EM space. As such, we have made no major forecast changes to our EM forecasts, and continue to expect broad-based acceleration among EMs this year.”
Higher interest rates in the US also threaten emerging markets’ growth as their currencies, bonds and stocks have plunged in April and this month.
Hardest-hit countries such as Argentina, Turkey, Russia, Brazil and Indonesia have suffered more than others because of their weak economies and high levels of political risk, BMI said.
“Should this severe ﬁnancial market weakness persist, it would start to impact the growth and inflation outlooks in these economies,” the report said. “Nonetheless, we expect that EM central bank monetary tightening will prevent a broad-based, destabilising depreciation in EM foreign exchange.”
The dollar rally has coincided also with a surge in oil prices, which touched $80 a barrel last week. BMI has upgraded its forecast of Brent crude average for this year to $73 a barrel, up from its previous estimate of $67 a barrel and $77 in 2019up from the previous estimate of $75 a barrel.