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1、Global ResearchEM Economic PerspectivesEM bythe Numbers: Second derivative turns positive. Whats next?PMIs point to EM growth stabilisation, but still more questions than answersPMI data and its forward-looking subcomponents indicate that the stabilisation in EM growth is gradually gaining traction.
2、 Yet, considerable questions about the magnitude of the recovery remain. Import orders in the US and China remain around their post- GFC lows, the European composite PMI has continued to trend weaker and the global electronics PMI dipped back below 50 in November. Asian new export orders show little
3、 improvement and remain firmly in contraction territory. Even within China, the wide gap between the Caixin and NBS PMIs is notable and may be reflecting divergence between export- and domestic-focused industries amid front-loading of exports. Outside of PMIs other indicators, such as Korean and Tai
4、wanese new export orders and manufacturing shipment/inventory ratios, indicate little more than a bottoming out of the post-2018 slowdown. All in all, the message from forwardlooking indicators remains subdued.Statistical rebound in trade is due; may help positive narrative born elsewhere What is cl
5、earer is that year-over-year measures of EM exports are poised for a flattering, albeit mostly statistical, rebound into Q1 2020. This owes to the very steep drops in sequential export performance in key Asian economies in late 2018-early 2019, such as China, Korea and Taiwan, and weakness in oil pr
6、ices more broadly. Assuming price deflators hold steady, this could easily push (nominal) EM export growth from c.-4% y/y currently towards a healthier-looking 0-5% growth rate in Q1 2020. If a potential Phase 1* deal is robust enough to open doors for a Phase 2, such an improvement, statistical or
7、not, can drive positive sentiment through Q1. However, barring commodity price appreciation ora material re-acceleration in global demand, these favourable base effects would likely die out from Q2 2020.Longer-term, sluggish investment points to downside for EM potential growth Domestic demand has s
8、lowed relatively rapidly in EM in recent quarters. This can be seen most strikingly in gross fixed capital formation growth which, for the first time in at least 15 years, is now running at a similar pace to the developed world. China, India, Indonesia, Malaysia, Korea, Mexico, and Turkey, for insta
9、nce, are all recording GFCF growth below the 20th percentile of their five-year range. If sustained, this slowdown could have material consequences for future productivity growth in EM, and worsen the trade-off between growth and current account stability. Typically, credit growth leads investment g
10、rowth and here, with the main exception of Brazil, the signs are not encouraging. Particularly in EMs two largest economies - China and India - weak monetary policy transmission remains a pressing concern.11 December 2019EconomicsEmerging MarketsBhanu Ba we j aStrategist +44-20-7568 6833Manik Narain
11、Strategist +44-20-7567 3218Arend KapteynEconomist +44-20-7567 0531Rohit AroraStrategist +65-6495 5232Alexey OstapchukStrategist +44-20-7567 0239This report has been prepared by UBS AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 29.InflationWhat the numbers say: Median
12、 EM inflation has steadied around 2.8% in y/y terms and has fallen further to c.2.2% in sequential (both 3m and 6m saar) terms. The sequential change remains below the y/y change in roughly 2/3 of countries, implying further declines in the latter metric. Thailand, Taiwan, and Israel are running out
13、right negative annualised inflation (6m % saar), while Russia and Brazil continue to see clearly disinflationary momentum. That said, EMs two largest economies - China and India -are in the grip of a near-term inflation jolt. What thev meac; EMs two largest economies - China and India - are in the g
14、rip of a near term inflation jolt. Sequential CPI (3m saar) in China has pushed up to 8.6%, the highest levels since late 2010. This has been driven by food inflation annualising 41% and pork inflation annualising 357%, Indias headline inflation is similarly annualising 8.1%, and here too this spike
15、 is driven by food, which is annualising 20%. However, both in China and India these clearly are shocks, with core inflation annualising at 0.6% in China and 2.2% in India. The shocks have been large enough for both policy makers to hold off on aggressive easing, but this should be regarded as a pau
16、se for previous easing to take hold and monetary transmission to improve, while the shock passes. A reversal of modest easing is very unlikely. China PPI, which has a strong correlation with earnings in EM, is in deflation at -1.75% y/y (-3.0% sequentially). outlook: Broadening out the definition of
17、 EM to also include Argentina, average EM inflation this year islikely to come in at 5.0%. By comparison, we expect inflation to moderate to 3.2-3.3% in 2020-21, with the difference between EM and DM inflation falling to just 1.7-1.8pp, as opposed to a 3.4pp gap forecast for 2019. The bulk of the de
18、cline in EM inflation is likely to come from that of Argentina, but amongst the larger economies, the 3.6pp expected decline in Chinese CPI inflation is notable. Inflation in India should also slow in 2020 (-80bp y/y), while that in South Korea is projected to pick up by 1.5pp, although from a low b
19、ase. In China, headline inflation is seen converging towards the core inflation at just over 1.5% .Figure 3: EM headline and core inflation (% y/y)Figure 2: CPI inflation by regionSource: Haver, UBSSource: Haver, UBSFigure 4: EM headline and core inflation (sequential*)Figure 6: Headline CPI EM vs D
20、M (MSCI-weighted)Source: Haver, UBSSource: Haver, UBS.* Represents a 6-month trimmed mean saar.Figure 7: PPI inflation in EM countriesSource: Haver, UBSSource: Haver, UBS *AII series areGBI-weighted.Industrial ProductionWhat the numbers say : EM industrial production is tracking at 2.6% (3mma YoY),
21、which is close to the post-crisis lows (0th percentile since 2009) and roughly the 12th lowest percentile measured over the last two decades. If we strip out China, which is in a trend decline and at the all-time lows, EM IP is still only running at about % or the 16th lowest percentile. Weakness is
22、 widespread: IP in LatAm is contracting (-0.6%), Asia ex-China is flat(O%) and EMEA has bounced back to about 2% from earlier year lows. Production weakness is not an EM phenomenon: DM IP is contracting as well (-1% 3mma YoY) and in the 14th lowest percentile. Nor is it solely a US-China trade dispu
23、te phenomenon: excluding those two large economies, EM IP has slowed by 400bp from the recent peak of the cycle early 2018 and DM IP has slowed by 500bp. What fhev mea/7： We decomposed the contributors to the global IP cycle in our Global Outlook and showed that up to 50% of the global slowdown sinc
24、e the peak of the cycle could be related to the auto cycle (worst contraction in 25 years), 30% to the US shale cycle and the rest attributable to all other factors. But that decomposition is to a large extent capturing developments in the largest economies. We would describe the proximate cause of
25、the EM slowdown in IP as related to a perfect storm* of tariff disruption (there is a cliff effect in the global IP and trade volume data that coincides with the imposition of large US/China tariffs), the tech cycle rolling over (largely a price cycle but has hit Asia disproportionately) and the afo
26、rementioned auto cycle. Nominal global trade growth has fallen by 20pp from the peak and historically this has a 0.8-0.9 correlation with IP growth. Drilling down into the country level, we can see that Brazil has held up reasonably well (closed economy and delayed recovery) but that otherwise all t
27、he gains from the 2016- 2017 upswing have been reversed. Looking at more recent YTD changes in IP growth shows large bounces in Turkey and Kazakhstan, but incremental weakness in most of Asia (occupying the bottom six places out of the 22 countries shown in the bar chart overleaf). Given the volatil
28、ity of IP we are somewhat wary of looking at 3m3m changes for inflection points. outlook: Where trade goes so goes industrial production. So a lot depends on the degree of incrementaldisruption from the US-China trade dispute. However, we expect a natural bottoming out process in the tech and auto c
29、ycles that should be supportive, and global trade deflators have bottomed. Provided commodity prices track futures and the USD does not further appreciate, this should start to push nominal trade growth back into positive territory (trade deflators accounted for two thirds of the nominal global trad
30、e weakness). There are some encouraging signs of a bottom forming in global orders/inventory ratios but its a bit too soon for the all-clear, particularly if existing tariffs are not rolled back. Our global now-cast suggests Asia growth momentum currently is showing most signs of a bounce, albeit of
31、f very subdued levels.Figure 1: EM IP cumulative change since Sept 2016Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19Source: Haver, UBSFigure 2: Industrial production: EM ex-China vs DM ex-US (3mma YoY)Source: Haver, UBSFigure 3: EM IP by region (3mma YoY)Apr-15 Nov-15 Jun-16 Jan-17 Aug-17 Mar-18
32、Oct-18 May-19Source: Haver, UBSFigure 4: EM export volume vs IP growth (3mma YoY)6.5%5.5%4.5%3.5%2.5%1.5%0.5%-0.5%Source: Haver, UBSFigure 5: Industrial production (3mma YoY)Source: Haver, UBSFigure 6: YTD change in industrial production growth (pp)Source: Haver, UBSMoney and Credit growthWhat the c
33、umbers say: EM credit growth continues to bleed lower (8.2% YoY as of October down from 9% at the start of the year), largely mirroring the weakness in global demand and the decline of investment. Credit growth in EM is now in the 5th lowest percentile over the last 20 years, compared to the 39th pe
34、rcentile for DM, but a good part of that is coming from China and India (respectively in the 4th and 5th lowest percentile)the simple average for the rest of EM is roughly at the 28th percentile. By region, EMEA has ticked up a bit in recent months and is now back to early 2019 credit growth levels
35、(7% YoY). LatAm credit growth is holding at 8.5% YoY and Asia ex China continues to edge lower (now at 7% YoY compared to 10.1% in January). What 加ey mea/?; Reduced external demand means less need for production capacity and so less need for investment and borrowing. The EM credit cycle turned up (w
36、ith a slight lag) when global demand recovered in 2016/2017 and almost instantaneously turned down when global growth slowed sharply about 12 months ago. However, the pace of the slowdown in credit is less than one might have expected based on the cutbacks in investment. There are also pockets of im
37、provement: Turkey has swung from negative to positive credit growth as borrowing rates have come down sharply (an 8% GDP swing in its credit impulse over the last six months), and Brazil, Colombia, Vietnam, Hungary and Kazakhstan are also showing a pick-up in credit growth. Against that, there are s
38、harp slowdowns in the Philippines, Indonesia, India (the NBFI squeeze) and Ukraine. Credit growth in China, we believe, will top out at around 11% (adjusted TSF), a few tenths above current levelsimplying roughly half of the credit stimulus in this cycle compared to the prior slowdowns, and likely n
39、ot a source of upward momentum in EM credit growth. 12-month outlook: The prospects for EM credit will depend on whether global demand recovers, which in turn requires trade-related uncertainty to dissipate. EM investment (YoY) has already been cut back from just under 6% at the peak of the cycle (l
40、ate 2017/early 2018) and is now running at just 214%, and borrowing needs have been scaled back accordingly. If we are right on the recovery taking hold in H2 2020 and global trade growth moving back into positive territory, we should see credit growth pick up around then, as well as capacity scaled
41、 back up. But the next six- eight months we would expect EM credit growth to remain range-bound.Figure 1: EM credit growth (%, y/y)Source: Haver, UBSFigure 2: DM vs EM ex China credit impulse (% of GDP)Source: Haver, UBSFigure 3: Contributions to global credit growth (market GDP-weighted)Figure 4: C
42、redit growth to the private sector (%, y/y)Figure 5: Contributions to global credit growth (market GDP-weighted)% YoY%丫。丫EM ex China DM Global (incl. China)93 95 97 99 01 03 05 07 09 11 13 15 17 19Source: Haver, UBSFigure 6: Credit growth (%, y/y)Source: Haver, UBSFigure 7: YTD change in credit grow
43、th (pp)10Kaz Hun Bra Col SA Vie Tur Mex Kor Pol Tai Isr Rus China Sin Thai Cze Indo Mal India PhiUkrSource: Haver, UBSTradeWhat the numbers sai: Global trade volumes reached a cyclical peak in October 2018, just a few months after the US-China trade conflict escalated in intensity. This slowdown was
44、 initially driven by China, with the US and then Europe following suit in early 2019. As of September, the y/y growth rate of global trade volumes, at-0.9% (3mma), has been negative for five consecutive months - its weakest spell in the post-GFC period. In nominal terms, however, the contraction in
45、global trade values (-5% y/y, 3mma) remains considerably milder than the double-digit contraction seen in 2015, given the much steeper declines in oil and industrial metal prices at that time. We find that Mexico, Vietnam, Taiwan and Japan have gained the greatest share in US imports at Chinas expen
46、se over the past year. Within Chinese imports, goods from Australia and Brazil have held up relatively well, while imports from Korea and Japan have, together, fallen faster than those from the US. What fhep mea/7： Global trade volumes have grown at a much slower pace than global industrial producti
47、on post the GFC- a sea change from the strong trend in favour of globalisation during 2001-2008. But even by these more muted post-GFC standards, the last two years of global trade performance have been particularly weak. This is likely a reflection of not just the uncertainties created by the US-Ch
48、ina trade war, but also structural shifts, such as a greater weight of Tech, IPP and services in the US and Chinese spending. Global trade data, particularly in nominal terms, correlates closely with EM FX and earnings, and so it informs our thinking on future currency and stock market performance. 12month outlook: With the US and Chin