After contracting in 2020 – albeit far less than developed markets – we forecast real GDP growth in emerging markets to rise strongly in 2021, further widening the gap with developed markets. Growth will be led by the Asia ex Japan region (8.5 per cent), followed by EMEA (4.5 per cent) then Latin America (+3.6 per cent).
So why do we now think the timing is right?
This consensus view of weaker US dollar could be derailed in two scenarios: if the global picture gets very bad, or if the US is doing better than the rest of the world.
First: we believe that globally we are through the worst, and emerging markets in particular. Vaccine deployment supports a constructive economic outlook, barring another exogenous black swan event.
The second scenario of the US outpacing global growth under the Biden administration is a possibility. Following the 2020 COVID relief package of $900bn, a second tranche of about US1tn is likely to be adopted in Q1. As a result we upgraded our forecast of US real GDP growth to 5.5 per cent for 2021. But this is still lower than our 6 per cent estimate for global growth.
Strong US growth could push US rates and the stronger dollar higher, which would affect the debt of most vulnerable EM countries. Yet, this risk remains contained since the Fed is committed to maintain rates low for long and EM imbalances are generally low with vulnerabilities in only two countries: Turkey & South Africa.
We expect China's real GDP growth to surge to 9.5 per cent in 2021.
The main risk to our bullish case for emerging markets is continued dollar strength. However other EM tail risks that cannot be discounted are the following:
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