Emerging markets are not yet sneezing enough for the rest of the world to catch a cold — that is the diagnosis made by economists from Deutsche Bank AG to Nomura International PLC after developing nations’ stocks suffered their worst start to a year in five years, raising concerns that they are turning from the drivers of global growth to a drag.
The optimistic take is that the pain will be limited to a few unbalanced economies — including Turkey and Argentina — with little heft abroad, as developed countries now have domestic sources of growth and support from central banks.
The risk is that slowdowns and sell-offs may deepen in bigger economies, such as China, infecting the financial markets of industrial nations and depriving them of demand for exports and commodities.
“We view the past week as more a warning” about what could happen “should contagion become more entrenched and broad-based across emerging markets,” Nomura chief European economist Jacques Cailloux said from London.
Equity volatility in developing nations jumped the most in two years last week amid a sell-off in their currencies. The threats posed by developing nations are attracting debate, given that these countries now account for almost 40 percent of the world’s GDP, up from 18 percent two decades ago.
They also served as the world economy’s engine when the West was reeling from the financial crisis of 2008, the subsequent recession and European debt woes.
“A broader emerging market crisis today would come with much greater ramifications” for growth worldwide, said Michala Marcussen, global head of economics in London at Societe Generale SA.
Even before last week’s tumult, the IMF estimated that the growth gap between emerging and developed economies is the smallest since 2001, while IHS Inc calculated that the one-time locomotives would contribute the least to worldwide expansion this year since 2010.
The concern is that the rot will last, adding a new challenge to a still-fragile world economy, even though it has changed from the late 1990s — when crises from Asia to Latin America riled international markets — and is stronger after the financial turbulence of six years ago, Berenberg Bank chief economist in London Holger Schmieding said.
Rich countries have escaped contagion before. When Asia was roiled in the 1990s, US growth topped 4 percent in 1997 and 1998, while the eurozone managed more than 2.5 percent expansion for both years. This means stress could be limited to countries with high current account deficits, political unrest or a reliance on commodities.
Brazil, Indonesia, India, Turkey, the Ukraine and South Africa are among nations meeting some or all of these criteria. Argentina also falls into this category and began devaluing its peso on Wednesday last week in a bid to stem a financial crisis.
“By the standards of emerging market crises, we do not expect this to be a particularly bad one,” Schmieding said.
Nomura says that a protracted slump in Argentina, Brazil, Venezuela and Turkey would knock about 0.1 percentage points off eurozone growth, given that the four account for about 3 percent of the region’s exports. Spain may be at greater risk because of its close trade and banking ties with Latin America.
“There’s no particular reason that Europe should be affected by the problems encountered by a small number of countries,” Bank of France Governor Christian Noyer said on Monday.
Yet Marcussen said there are still reasons to worry about the outlook for emerging nations, even though they now boast more flexible currencies, stronger trade positions, larger reserves and more developed markets than in previous decades.
China’s economy is now the world’s second-largest and its share of global GDP has jumped to 14 percent from 4 percent in two decades, she said. That is a problem if China struggles to refocus demand toward domestic sources, especially after a report last week showed that manufacturing may contract for the first time in six months.
The large imbalances and poor policy that drove past crises are still prevalent in Argentina, Venezuela, Chile, Peru, South Africa, the Ukraine, Turkey and Thailand, she added. Add Brazil, Indonesia, India and Russia, which have weak spots, to that list and 13 percent of global GDP is in question, Marcussen said.
The outlook ultimately may pivot on how China fares, said Frederic Neumann, HSBC Holdings PLC co-head of Asian economics research in Hong Kong.
Beijing is implementing its biggest policy shifts since the 1990s and tackling debt-fueled investment in a bid to generate more manageable growth based on local rather than international demand.