The emphasis in the global reflation narrative has shifted from growth towards inflation following the pandemic. This has consequences for emerging economies, where rising interest rates are pushing up debt-servicing costs.

The health of the global economy matters most for emerging-market investments. A stronger US recovery should thus be positive for emerging economies, even if it means stronger competition because capital flows to regions with better cyclical prospects.

But whether US growth is good or bad for emerging markets is a question of absolute versus relative. In absolute terms, better US growth further supports emerging countries’ economic activity. But from a relative point of view, it might mean those countries’ assets underperforming.

HSBC’s economists have raised their 2021 forecast of global GDP growth from 4.8 per cent to 5.6 per cent, largely because their US growth expectations have increased from 3.5 per cent to 6.0 per cent thanks to Washington’s substantial fiscal support.

The emerging-markets forecast has also been raised – from 6.1 per cent to 6.6 per cent – with India’s economy growing a remarkable 11 per cent. Forecasts for Russia and Turkey were also revised upward.

However, that reduces emerging economies’ expected growth premium over developed markets to just 1.7 percentage points and the growth gap with the US falls from 2.6 points to only 0.6 points. Excluding mainland China, emerging countries’ GDP is forecast to grow 5.2 per cent in 2021 – less than the US rate.

But much depends on the recovery in consumption. Savings have risen because of lockdowns and travel restrictions but they are low in emerging economies compared with developed markets because of the limited government support to household incomes.

Savings may average around 6.5 per cent of emerging countries’ GDP, though Brazil’s are 13.3 per cent thanks to generous state handouts, and they are high in Poland, Israel, and Chile. However, private savings in Saudi Arabia fell because of higher taxes, spending controls and remittances abroad.

The recovery in services relies on controlling the pandemic but new cases have been high in some major emerging economies, including India, Poland, Turkey and Brazil, while inoculation is lagging, particularly in Asia. The vaccination rate in some economies dependent on tourism suggests that opening up services sectors could be gradual.

But if the bright side of reflation is growth, the dark side is inflation. Emerging-markets inflation touched a record low of 2.3 per cent in January, helped by mainland China’s rate falling from 5.4 per cent into negative territory during 2020. However, in other emerging countries, inflation remains around 5 per cent as commodity prices push up food costs and energy prices rise.

The expected near-term pick-up in headline inflation has changed the monetary policy outlook in emerging markets, with markets pricing in rate rises. Central banks in Brazil, Russia and Turkey have already announced higher-than-expected interest-rate hikes and our economists expect rate rises in Peru, Chile and Colombia plus Central and Eastern European.

Rising public borrowing means servicing Brazil’s debt has already increased from 17.8 per cent of GDP to 24 per cent and Poland’s ratio has increased from 10.6 per cent to 15.3 per cent of GDP. Our calculations suggest that Brazil, South Africa and India will be most impacted by a rise in interest rates while low public debt means Russia, Indonesia and Mexico are least affected.

First published 11 April 2021.

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