HSBC Global Research revised down its global growth forecast to 2.0 percent for 2013 and 2.6 percent for 2014, according to Stephen King, HSBC’s chief economist, and Madhur Jha, HSBC’s global economist, in their third quarter global outlook.
HSBC Concerns in Emerging Markets
The downgrade was due to concerns about the outlook in developing countries, it said. The new figures shaved 0.8 and 0.5 percentage points respectively off its 2013 and 2014 projections. Monetary uncertainty in the United States is bad enough, but due to a slowing Chinese economy, the overall picture is even worse, stressed the HSBC.
“While dominated by the reduction in our forecasts for China, the new numbers also reflect further sizable reductions in our projections for Brazil and India, among others. They are consistent with the idea that, even allowing for the emerging nations‘ obvious long-term growth advantages, there is no easy escape from deteriorating near-term economic fundamentals.”
Average growth in emerging Asia, Latin America and emerging Europe slowed to 4 percent year-on-year in the first quarter of this year, according to data from Capital Economics and Thomson Datastream. In comparison, emerging markets grew by an average of 6.4 percent during the past decade.
Combination of Cheap U.S. Money and Strong Chinese Growth
King and Jha said that EMs had become “unusually dependent” on a combination of cheap U.S. money and strong Chinese growth, so much so that domestic reforms were often delayed.
“Balance of payments positions deteriorated and, in some cases, the split between growth and inflation worsened. For a while, none of this mattered: the hunt for yield engendered by quantitative easing allowed countries to carry on as if nothing had changed. With the removal of U.S. and Chinese support, however, some of these countries find themselves in a vulnerable position,” they said.
HSBC highlighted that trade-dependent commodity producing EMs looked particularly vulnerable, due to sluggish global demand and recent declines in commodity prices.
Focus on Chinese Policy
King and Jha noted that Chinese policy reorientation towards “quality” rather than quantity of growth was likely to be associated with lower short-term growth.
“While this new focus should prepare the foundations for a period of solid economic expansion over the medium-term, it has an obvious short-term cost: supply-side reforms are disruptive and thus likely to be associated with lower near-term growth,” they said.
HSBC now forecasts that China will grow by 7.4 percent in both 2013 and 2014, below the central bank’s target of 7.5 percent growth.