EM From Doom To Gloom
Quick update today on the latest round of OECD Composite Leading Indicators and an observation on monetary policy trends within emerging markets. The main point is that from a cyclical perspective emerging economies are seeing a new, more accelerated, phase of their economic recovery, with the composite OECD leading indicator for EM reaching the strongest reading since 2012. On a macroeconomic cycle basis, EM economies look set to outperform developed markets.
There's a few drivers in play, and looking at the second chart, a big contributor has been the renewed phase of monetary policy easing. In contrast to developed economies, many EM central banks are still running high single digit benchmark interest rates, and thus they have a long way to go to ZIRP and therefore have much greater ability to bring monetary policy to bear in boosting their economies and managing the macroeconomic cycle. The well documented rebound in global trade, stabilization in commodities (and currencies) has also played a key role. Putting aside the risk of a shock or crisis, EM economies are set to continue their economic outperformance in the medium term.
The GDP weighted composites of the OECD leading economic indicators for EM vs DM show a new phase of the economic recovery is underway for emerging market economies.
Looking at the aggregated view of monetary policy cycles for emerging markets, the current (renewed) monetary easing cycle is likely to add fuel to the current expansion. This is very important from a global economy standpoint as EM economies now comprise the dominant share of world GDP.
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