Emerging Markets Face Stumbling Blocks, Slower Recovery

However, the main drivers of expansion remain in place for medium-term growth.
By MainStreet Team ,

By Hal M. Bundrick

NEW YORK (

MainStreet

)--A bus-load of investors have packed their bags and moved a portion of their investments into emerging markets in recent weeks, but the outlook for the sector may be seeing a delayed departure. The modest expectations are due to a weak recovery in trade and a slowing pace of economic reform, according to EY's quarterly

Rapid-growth Markets Forecast

.Concerns have also been multiplied by the recent dip in value of emerging market currencies.

The EY forecast expects growth of 4.6% in 2013, similar to the increase in 2012. However, the report says the main drivers of strong expansion in emerging markets remain intact, with medium-term growth expected to be close to 6% in 2015-16, much more robust than in advanced economies.

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"Despite a period of increasing confidence in the prospects for the global economy, it seems that this era of turbulence and unpredictability is not yet behind us," says Rajiv Memani, Chair of the Emerging Markets Committee at EY. "In the short-term we believe growth prospects for the rapid-growth markets will be subdued however, there is better news for the medium-term where growth will be driven by expanding middle classes and further development of trade flows between RGMs."

Slower than expected growth in China has impacted certain Asian markets, while other emerging markets, including Indonesia and Vietnam, continue to see steady progress.

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"Strong growth prospects and improved risk management have led to increased demand for investment into RGMs over the past decade," says Memani. "At the same time, quantitative easing in the US, UK and Japan has increased the supply of liquidity. These flows have helped to lower interest rates in RGMs and spurred domestic investment. A rising middle class, particularly in Asia, and the further development of trade flows between RGMs such as Turkey and the Middle East as domestic demand expands, will help to underpin medium-term growth in emerging markets."

Chile and Colombia are expected to do well in Latin America, according to the forecast. However, the BRICS and countries in Central and Eastern Europe are likely to see more moderate growth as they continue to be hit hard by the recession across the Eurozone.

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"Perhaps the biggest surprise of the first half of 2013 has been the weaker-than-expected recovery in trade and investment, and its impact across the RGMs," says Rain Newton-Smith, senior economic adviser for EY. "Caution is the watchword. Growth this year will be disappointing, and we think the real uptick will be deferred until 2014."

--Written by Hal M. Bundrick

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