Daniel Moss, MDT/Bloomberg
Thanks to a $1.9 trillion stimulus package and accelerating vaccinations, prospects for a heavily caffeinated U.S. recovery are boosting growth projections around the world. For some important emerging markets, however, this economic comeback might be too much of a good thing.
Global gross domestic product will increase 5.6% this year, the Organization for Economic Cooperation and Development recently predicted, more than a percentage point higher than its estimates in December. The forecast for U.S. growth almost doubled to 6.5%, the best performance since 1984. (The average rate this century has been less than 2%.) The U.S. is set to outpace Indonesia, Mexico, Turkey and Brazil, and isn’t far off from China, whose forecast was taken down a touch by the OECD to a still impressive 7.8%.
Yet America’s boom isn’t an unalloyed positive. While the world wants a strong U.S. economy, it shouldn’t come at the risk of overheating. Moreover, a stellar performance in China, too, might dissuade investors from piling into emerging economies. We’re starting to see evidence of such a shift: An almost yearlong rally in developing-market currencies has stalled and dollar-denominated debt declined for a fifth straight week.
With many nations’ borrowing costs at or near record lows, the scope for additional reductions is limited. Interest-rate cuts in Indonesia and the Philippines in recent months may have been their last, at least for the foreseeable future. Even if the Federal Reserve is years away from hiking, investors are now betting that some emerging-market central banks will have to move before then. Market gauges anticipate higher rates in Malaysia, Thailand, South Korea and India in the next one or two years. Levels will probably climb in the very near future in Turkey, Brazil, South Africa and Nigeria.
For those emerging markets likely to hike soon, though, the adjustments need to be considered in full context. Turkey’s rate increases began last year after President Recep Tayyip Erdogan purged his economic team and inflation galloped ahead. It’s an outlier. No country in Asia has rivaled Turkey’s mismanagement, as I’ve written. Meanwhile, Thailand, Malaysia and South Korea all flirt with deflation. Any hike that does come will be mild. So while investors might be concerned that a rapid pickup in global growth will spark price increases, there is little evidence the people actually making decisions share this anxiety. Monetary authorities have spent the past few years preoccupied with too-low inflation. They may welcome a bit more of it.
Pronounced currency depreciation is probably a greater risk than a spurt of inflation. But even here, the moves aren’t likely to be dramatic. While the MSCI Emerging Market Currency Index fell in January and February, the first back-to-back decline since the start of the pandemic, these very slight retreats are hardly alarming and miles away from the 3.5% rout suffered in the throes of the pandemic last March.
For decades, hot money has poured into — and flooded out of — emerging markets. Yet even before the coronavirus, the pace of expansion had slackened considerably. That’s what makes such searing growth in the U.S. all the more enticing: We haven’t seen figures like this since the Cold War.
Such a rebound likely will last for a few years, albeit not at this robust pace. A $21 trillion-economy doesn’t power along at more than 6% indefinitely. Even China’s clip was slowing before the pandemic. Emerging-markets will sparkle once again.
That’s why the world should welcome Uncle Sam’s foot on the gas pedal, and resist mistakes like a premature tightening of monetary policy. Having listened to frequent carping about missing American leadership the past few years, the hand-wringing about too much stimulus rings a bit hollow. This Washington-led boom is unlikely to bring an excess of inflation. If it does, it may be a problem worth having. Daniel Moss, MDT/Bloomberg
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