Why is the emerging market recovery predicted to be slow and uneven?

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Emerging Market Recovery Faces Slow and Uneven Outlook Due to Economic Shifts and External Factors

The recovery for emerging markets is anticipated to be slow and uneven, characterized by patchy capital inflows. This outlook is largely shaped by the absence of significant stimulus measures seen in previous downturns, particularly from China, and the contrasting economic performance of key developing economies like India. Developing nations outside of China and India are projected to experience a more profound recession than they did following the global financial crisis.

The primary driver behind this deeper recessionary trend is the divergence in economic responses compared to 2009. In the aftermath of the global financial crisis, China implemented a substantial infrastructure stimulus package that significantly boosted global activity and commodity prices. However, China is not replicating this large-scale stimulus in the current period, leading to a less pronounced uplift for the global economy. Consequently, China's economic growth, which reached 9.4 per cent in 2009, is estimated to be a more modest 2.2 per cent this year.

Furthermore, India's economic trajectory has shifted dramatically. While India experienced robust growth of 8.5 per cent in 2009, it is now projected to contract by 11.3 per cent this year. This significant contraction in a major emerging economy, coupled with China's slower growth, has suppressed the prices of basic materials. This decline in commodity prices disproportionately affects regions heavily reliant on such exports, exacerbating their economic challenges.

The flow of capital into emerging markets also presents a picture of unevenness. Non-resident investment has been considerably weaker this year compared to 2009, despite extensive quantitative easing measures. Latin America, in particular, has faced severe economic headwinds, compounded by the pandemic and specific domestic issues in countries like Venezuela and Argentina. Added to these economic factors, external political considerations, such as the upcoming US presidential election and the potential for sanctions, contribute to the uncertainty surrounding capital flows to these markets. Risks are particularly heightened for Russia in the short term, with the prospect of further sanctions remaining a key political consideration.

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Why is the emerging market recovery predicted to be slow and uneven?

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