Where Are We in the EM Cycle

A large number of EMs ex China have moved into the stage of the EM cycle where growth remains weak but macro stability continues to improve. We expect a number of these economies to move to the gradual recovery phase in 2017, driving an acceleration in EM growth for the first time in four years.

We expect GDP growth for EMs ex China (EMXC), which account for about 37% of global GDP, to accelerate from 2.7%Y in 2016 to 3.8%Y in 2017: Three factors which have been weighing on the EMXC growth outlook have become less onerous. First, EMXC economies have lifted their real rates post the 2013 taper tantrum episode. Going forward, a Fed which stays on hold over our forecast horizon should become less of a drag for EMXC. Second, commodity exporters have already made a substantial adjustment to an environment of lower commodity prices. Third, domestic sources of misallocation have been curtailed and, as macro stability is being restored, central banks have been able to normalise monetary policy. We expect more interest rate cuts over the forecast horizon, supporting a gradual recovery. We believe that a large number of EMXC economies have moved into the stage of the EM cycle where growth remains weak but macro stability continues to improve: We expect a number of these economies to move to a gradual recovery phase in 2017. The balance of downside risks to the EM outlook has arguably shifted more towards external rather than domestic in nature – with DM and China growth the key external headwinds for EMXC.

Where are the top 10 EMXC economies placed in the EM cycle Source: Morgan Stanley Research

Morgan Stanley forecasts at a glance *Refers to global GDP weighted by long-term market exchange rates instead of PPP weights and is given for comparison. Source: Morgan Stanley Research forecasts