Reasons Why The Worst of the Crisis is Behind Us in the Emerging Markets

Emerging markets are increasingly affected by the recession in advanced economies through trade and financial market channels. Before the crisis, it was thought that emerging markets would be able to decouple and weather the storm. Clearly, this proved to be too optimistic especially considering the size of the current recession. With contracting world trade, slowing domestic demand, and sharply reduced access to external financing, emerging market growth is expected to decline sharply to 1.5% in 2009, from 6.1% in 2008, which would be the weakest growth rate since the 1990s.

There are many recent signs that some emerging markets are forging a limited version of decoupling from the still very weak developed economies. Massive fiscal stimulus, especially in China, is paying quick dividends. Moreover, since many emerging markets have strong financial sectors, these economies may be responding more readily to traditional stimulus measures.

According to the IMF, recent data on retail sales and consumer and business confidence in some advanced and emerging economies suggest that the rate of decline of private consumption, exports, and industrial production may be easing. Fiscal stimulus coming on stream and continuing monetary policy support should contribute to a moderation in the contraction of economic activity.

While global economy has been dragged down this year and hence global GDP is set for its worst year in the post-war era in 2009, it may be the case that EM may emerge out of this crisis faster than develop countries.

For 2009, Latin America, according to the IMF is expected to contract by 1.5% following growth of about 4.5% in 2008. The slowdown is projected across the board, being more pronounced for the region’s commodity exporters and for economies with the strongest manufacturing ties to global industrial production chains. Clearly growth will rebound in 2010 to more than 1.5%. The absence of systemic banking problems is a key reason to explain the fact that Latin American economies will resume growth faster than developed ones.