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April 21, 2022

Emerging market vulnerabilities, historical inflation rates and other long-term macro data

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Emerging markets equity performance

This week we focus on emerging markets (EM), starting with how they’ve been affected by the Ukraine war. The following chart compares the performance of equity markets in selected countries from before the start of the war to the period since 24 February. Countries that are heavily dependent on commodity imports, such as Egypt, Hungary and China, have suffered the most, while commodity exports such as Chile are reaping the biggest benefits. 

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EM equities and commodities prices

Earnings per share for emerging market equities appear to correlate with the S&P GSCI commodity price index, as this next chart shows. The recent surge in commodities prices has thus given EM equities a boost as well. 

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EM current account deficits and gross external debt

The current global monetary policy tightening cycle will have a large impact on emerging markets, which tend to be less resilient to rising interest rates. Let’s now look at some specific areas of weakness. 

First, EMs are more vulnerable than advanced economies when it comes to persistent current account deficits, as we explained previously. Large current account deficits – where the value of goods imported exceeds the value of exports – can potentially trigger currency crises similar to the Asian crisis of 1997

The chart below displays the cumulative current account deficit – a measure of a country’s increase in foreign debt – for some key markets. With the exception of Russia, large EMs have been racking up sizeable current account deficits since the global financial crisis.

EMs have also seen their gross external debt positions increasing in tandem with persistent current account deficits. For many economies, external debt is now at a much higher level than just a decade ago. As EMs tend to borrow in foreign currency, usually USD, rapidly depreciating domestic currencies would increase their debt burdens – making a currency crisis all the more likely.

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Historical inflation

Surging global inflation is rightly causing concern now but it can be helpful to take a big picture perspective. While current figures are certainly shocking when set against the 2% inflation target adopted by many advanced economies in the 1990s, inflation has been far higher in the 20th century – particularly in the aftermath of the WWI and the oil shocks of the 1970s.

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Global per capita GDP

Turning now to long-term economic output and the US has been the clear leader among all major economies for more than a century. In the last two decade, its GDP per capita surged even further ahead of other countries, particularly as European economies such as Italy and the UK experienced significant income stagnation.

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UK economic output

Looking more closely at the UK’s economic performance, we can see how much real per capita GDP has fallen in recently – even approaching the pre-Industrial Revolution average in the period before 1800. In more recent history, economic output has only been lower during the Great Depression and after World War II. 

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UK money velocity

The Bank of England’s “a millennium of macroeconomic data” database offers a number of interesting historical trends for the UK, including the correlation between policy rates and money velocity – a measurement of the rate at which money is exchanged in an economy. As higher interest rates discourage people from hoarding cash, money changes hands more quickly when rates are rising. 

As the UK battles the highest inflation in decades, financial markets are expecting further rate hikes from the BOE. As our final chart this week shows, this could even lead to a reversal of a decade-long decline in money velocity, which would put additional inflationary pressure on the UK economy.

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