The Manufacturing Purchasing Manager Index (PMI) in emerging markets was 50.9 in October. This is above the threshold of 50, which means that economic activity is expanding rather than contracting, thereby confirming the recent economic upturn in the region (see the chart below).
Emerging markets are moving ahead…
China’s manufacturing PMI rose further to 51.2, a two-year high, thanks to the government’s stimulus measures. This should help solidify domestic economic activity, at least in the short term. Services, the linchpin of the Chinese economic transition, remain firm at 52.4. Yet this trend could lose steam in the coming months: with economic activity levelling off, Beijing may turn its attention away from supporting growth in order to focus on other issues, including overvalued assets such as property. Reining in budgetary stimulus and applying restrictions in the main cities in an attempt to cool overheated property markets will naturally act as a brake on China’s economy (see the Macro Highlights from 24 October).
Coming in at 54.4, India continues to outpace its emerging-market peers in terms of both GDP growth (7.1% in Q2) and the progress of its reform efforts. This latter point is evident in the country’s implementation of a unified VAT system. The various sub-indicators of the Manufacturing PMIs show the domestic economic environment remains firm. This should translate into a rise in GDP, which we forecast to reach 7.5% in Q3.
Yet wide regional disparities exist within the emerging-market bloc, and we expect this situation to continue. Economies with the weakest fundamentals are seeing their economic activity contract despite an improvement in their growth trends. This is apparent in Brazil, South Africa and Turkey (see the chart below).
…despite regional disparities
This week, another central bank surprised investors with the dovish tone of its message. The Swedish central bank – the Riksbank – announced that its benchmark interest rate, currently at -0.50%, would not go higher before 2018 and was increasingly likely to fall further before then. It also noted that it may decide in December to continue its SEK 245 billion government bond purchase programme, which was expected to come to a close at the end of this year. Just like the Swiss National Bank (SNB), the Riksbank warns that its monetary policy could become even more accommodative and that its policy rate could go lower (see Macro Highlights from 31 October).
We believe that these messages are intended to avert further upward pressure on the Swiss franc and the Swedish krona versus the euro in anticipation of the ECB’s 8 December meeting, at which it could announce an extension to its quantitative easing policy. If these currencies were to gain ground, the risk of deflation would rise.
We are nevertheless maintaining our forecast that the SNB and the Riksbank, which will meet on 15 and 21 December, respectively, will not change their benchmark rates (-0.75% for the SNB, -0.50% for the Riksbank).
However, to limit upward pressure on their currencies, the SNB is likely to remain active on the currency markets, while the Riksbank may decide to carry on with its quantitative easing programme until June 2017.