Consumer and business confidence in rapid-growth markets is impacted when there is increased uncertainty about prospects in the advanced economies.
Possible pitfalls for rapid-growth markets
While the overall outlook for the rapid-growth markets is positive, one thing is certain— their progress will not be smooth. As highlighted already, the rapid-growth markets have to address a number of challenges to fulfill their potential.
Rapid-growth markets are very exposed to a severe downturn in advanced economies for a number of reasons:
- Trade links are still large: As already highlighted, exports to advanced economies still account for one-sixth of rapid-growth market GDP. That means that, for example, a 5% fall in exports to advanced economies would cut GDP growth in rapid-growth markets directly by around 0.75% points.
- Financial linkages are also substantial: Financial markets in rapid-growth markets are obviously closely coupled to those in the advanced economies. The recent collapse in equity markets in advanced economies has been broadly mirrored in most rapid-growth markets. Similarly, concerns about the stability of the financial system and access to credit, which has driven swings in yields on both government and corporate bonds in advanced economies, are also impacting on interest rates for rapid-growth markets.
- Consumer and business confidence is influenced by global events: Consumer and business confidence in rapid-growth markets is impacted when there is increased uncertainty about prospects in the advanced economies. This leads to more cautious behavior by consumers and businesses, who delay spending decisions until prospects are clearer.
This effect is most marked currently in Eastern European rapid-growth markets, where there has been a particularly marked decline in confidence measures in recent months, reflecting the exposure of these economies to the troubles in the Eurozone.
- Oil and commodity price impacts: The effect of a downturn in advanced economies on oil and commodity prices has mixed impacts on rapid-growth markets. For those that are net exporters, it obviously worsens their terms of trade. But for net importers, it can help mitigate the impact of weaker trade and financial flows.
Strikingly, however, the recent concern about a renewed downturn in advanced economies has done relatively little so far to bring down commodity prices. This in turn underlines that demand for most commodities is now driven primarily by rapid-growth markets.