Weekly Economic Briefings > Emerging Markets Weekly Economic Briefing

Emerging markets (EMs) have been hit by an unpleasant cocktail of concerns over China's growth prospects, sliding commodity prices and the looming onset of tighter US policy. Downside risks have risen and while global markets have shown early signs of rallying this month, we expect EM currencies to remain under downward pressure in the rest of 2015 and in early 2016. We now expect EMs to grow by 3.8% in 2016, down from our July forecast of 4.4%.The dangers are particularly great for countries that are very reliant on goods trade, commodity exports, run a large current account deficit or depend heavily on external funding. Brazil and Russia are two of the most vulnerable EM economies. Both are already in recession with dismal structural fundamentals. Both rely on commodity export prices that are vulnerable to weakening sentiment about China. In addition, both are exposed to the risk of capital outflows which would push currencies down, tighten financial conditions and delay any return to growth. Turkey also stands out as particularly high risk due both to its reliance on external funding and to high political and geopolitical tensions. Moreover the risk of Brazil or Turkey having to consider an emergency rate hike has risen and this would put EM currencies under renewed pressure. Some EMs have scope to loosen policy (India and Taiwan cut rates last month) but most are limited by one or more of the following factors high inflation, slow policy transmission, weak fundamentals, and uncertainty over Fed tightening. Indeed China and Taiwan are the only EMs where we forecast further monetary easing in Q4 (though India could also move again). In China, further policy easing should secure a soft landing. Policy measures are likely to continue to be focused on shoring up domestic demand and the role of fiscal policy expansion should increase. Downward pressures on growth will persist but infrastructure and especially consumption should continue to provide helpful cushions, particularly for light industry and services.