Pessimism over long-term emerging market growth has been running strong since tapering was first announced, and a recent report from the International Monetary Fund (IMF) downgrading global emerging market (GEM) growth by 0.5% has added to it. Citi head of EM economics David Lubin thinks that the spate of downgrades may be at odds with data, but there are still underlying problems facing EM growth.

Expectations for emerging market growth

“The IMF expects emerging market growth to be 0.5 points lower than it did in July, with particularly sharp downgrades for Russia, India and Mexico,” writes Lubin. He has seen the same trend in Citi forecast revisions but, “the story for Emerging Market is one of relative improvement. In other words, DM has suffered bigger negative surprises than EM. And that relative improvement seems also to be confirmed by recent PMI data.”

Emerging Market  revisions vs surprise

Monetary policy in much of EM is fairly loose; China is back to double-digit industrial production for August and September, and the QE trap that has DM bears so worried is a boon to export-based EM economies, but Lubin still thinks the picture is gloomy. Growth estimates have been downgraded almost across the board, largely because analysts are starting to take demographic risk more into account.

emerging market working age growth 1113

Working-age population expansion

A big part of the Emerging Market growth story has been the expansion of the working-age population. As the size of the working population flattens out, growth will have to come from increased productivity, but in many EM markets there’s not much sign that this is happening. “Given the importance of labor accumulation in supporting GDP growth in EM, a weaker demographic picture at least raises some questions about how confident investors will be able to be about the future of EM growth,” writes Lubin.

Of course, the Emerging Market universe is vast and grouping China, Egypt, Brazil and others into the same category washes out some important distinctions. Population growth continues to be strong in much of Africa, and increasing growth from productivity gains will vary from country to country. What might be more accurate is to say is that the population growth theme is no longer true across EM, and investors looking for attractive investments will need to start analyzing EM economies on a more case-by-case basis.