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Monthly Report: structural problems holding back growth of emerging market economies

Monthly Report: structural problems holding back growth of emerging market economies

Gloomy outlook for emerging market economies: macroeconomic momentum in these countries is likely to be muted in the coming years, according to the Bundesbank's latest Monthly Report. GDP growth is already substantially weaker in the emerging market economies. In its current forecast, the International Monetary Fund (IMF) projects growth of just 4¼% for 2015. By comparison, the growth rate stood at an average of 7½% in 2010.

The protracted spell of lacklustre growth predicted for the emerging market economies will also have knock-on effects on the industrial countries, whose exports are likely to follow a flatter underlying path than in the past "for the foreseeable future", write the Bundesbank's economists. They also note that the growth outlook for the emerging market economies is still fraught with considerable downside risks, with some emerging market economies potentially being more vulnerable to crises due, for instance, to their substantially higher debt levels. Also, capital flows into the emerging market economies might wane if US monetary policy returns to normality, crimping the availability of liquidity for investment.

Positive effects of reforms coming to an end

In their analysis, the Bundesbank's economists come to the conclusion that it is mainly structural factors, and less the short-term cyclical effects, which are holding back the emerging market economies' growth. Their article takes a closer look at developments in China, in commodity-exporting emerging market economies such as Brazil, and in eastern Europe.

They argue that growth was weaker in China because local labour productivity had begun to flatten out, noting that the migration of rural agricultural labour to the urban areas was a major driver of the country's productivity growth. Recently, however, these migration flows had tapered off. An even more important factor was that productivity was growing at a slower rate in the individual sectors of the economy. This, in turn, was down to the dwindling positive effects of previous structural reforms, which the economists said included China's accession to the World Trade Organization in 2001 as well as the restructuring and privatisation of state-owned enterprises, which, they noted, had generated "significant efficiency gains" in the ensuing period. In addition, the Bundesbank's economists hold bad investments and easing foreign direct investment flows responsible for the country's feeble growth rate. They see the sharp spike in labour costs, which has made China less attractive as a production location, as one reason for the lower rate of investment from abroad.

Commodities boom is over

The commodity-exporting emerging market economies, meanwhile, had felt the impact of the end of the protracted and exceedingly strong surge in commodity prices, the Bundesbank's economists write, tracing this development back, in part, to the flattening demand from China, which is a major importer of metals and crude oil. Their article notes that growth in commodity-exporting countries was little more than subdued without the tailwinds provided by the commodity markets partly because of the comparatively weak competitiveness of these economies. In Latin America, for instance, the infrastructure was underdeveloped and the fiscal burden high.

In eastern Europe, much like in the commodity-exporting countries, the preceding powerful upswing had been buoyed by favourable external influences. Abundant capital inflows had spurred consumer demand and investment, the Bundesbank's economists note, but this was not without consequence. "In some countries, this brought about enormous current account deficits, a massive increase in private debt and excesses in the real estate markets," they write. The global financial and economic crisis had then triggered a "painful process of adjustment" across many eastern European countries, some of which were still suffering from the after-effects of the crisis and from a recent lack of commitment to the market path.

The Bundesbank's economists conclude from their analysis that a speedy and buoyant catch-up process in the emerging market economies cannot be taken for granted. "The emerging market economies urgently need new reform stimuli to put growth back on a higher trend path," the Monthly Report states.

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