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HSBC Emerging Markets Index

7 July 2010

Emerging markets economic growth softens, says HSBC index

Key points

  • HSBC Emerging Markets Index slips to 55.8 in Q2 2010.
  • Fragile developed markets hit emerging markets exports.
  • Drop in manufacturing output growth balanced by expansion in services.
  • Services employment growth at two-and-a-half year high.
  • Inflationary pressures ease.

Summary

Manufacturing growth in the emerging markets slowed sharply from a record pace set in Q1 of this year, the latest HSBC Emerging Markets Index (EMI) shows.

Although output remains above the long-term average, it is below the average seen before the financial crisis. This easing reflects a moderation in the rate of growth of new orders, especially for manufacturing exports. And with developed nations showing few signs of domestic demand and about to enter a period of fiscal retrenchment, world trade is likely to soften further.

In the second quarter of 2010, the HSBC EMI dropped to 55.8, down from 57.4 in the first quarter of the year. However, it remains significantly higher than in Q4 2008 when the index hit a trough of 43.4.

Stephen King, HSBC’s Chief Economist, said: “We are in a new phase of global economic development. Export gains for companies in the emerging world have failed to sustain the momentum seen in earlier quarters. The stellar recovery in economic activity across most of the emerging markets seen since the first half of 2009 finally hit a bump in the road. The good news is that emerging markets, having escaped the legacy of excessive debts, should not face the same kinds of financial constraints which will keep the lid on economic activity in the developed world in the years ahead.”

Services expanded at a faster rate than manufacturing for the first time since the onset of the financial crisis, suggesting that growth has become better balanced and indicating that domestic demand in the emerging world is holding up well even in the light of a faltering manufacturing performance.

Overall growth in both output and new orders weakened in China and Brazil but gathered pace in India and Russia. Indeed, China, for several quarters the main driver of emerging markets growth, has lost some of its shine. Exports across emerging markets grew at the slowest pace since Q3 last year, with China recording an especially steep downturn. Russia and Eastern Europe were the exceptions to the rule.

"The HSBC EMI data, while more moderate, continues to show the resilience of emerging market economies. Meanwhile, the deterioration in export indicators and China data may reflect slower growth in the U.S. economy,” added Pablo Goldberg, Head of Latin America Fixed Income Strategy at HSBC.

Companies in emerging markets took on additional staff in Q2 at the fastest rate since the end of 2007, in order to boost capacity and meet growing demand for goods and services. And in a further sign of the balancing of economic growth, headcounts rose at a faster rate in services than manufacturing, the former seeing the sharpest rise in payrolls for two-and-a-half years. Regionally, employment increased at slower rates in China and Brazil but improved in India and, particularly, in Russia.

The headline inflation numbers suggest fears of a substantial pick-up within the emerging world may now begin to fade. However, rates of inflation for both input and output prices were still faster than those seen in H2 2009 as a whole. Input price inflation remained considerable in manufacturing, reflecting both supply shortages and higher global commodity prices. Input costs increased the most in Russia, followed by India.

The HSBC EMI is calculated using the longestablished PMI data produced by global financial information services company Markit. HSBC announced last year a partnership with Markit to sponsor and produce a number of emerging market PMIs.

The HSBC EMI will be released quarterly and is available via: www.hsbc.com/emergingmarketsindex

The next HSBC EMI will be released on 7 October 2010.

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