As the world economy is increasingly characterised by greater complexity, volatility and interdependency, another megatrend is reshaping the world – the increased importance of emerging markets in terms of policy, economy and demographics.
A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialise, warns a World Economic Outlook published in July this year by the International Monetary Fund (IMF). Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations.
Several shocks have hit a world economy already weakened by the pandemic, including higher-than-expected inflation worldwide – especially in the United States and major European economies – triggering tighter financial conditions and a worse-than-anticipated slowdown in China due to COVID-19 outbreaks and lockdowns.
Meanwhile, the long-term impact of Brexit for both the EU and the UK remains uncertain, although businesses across Europe have already experienced a drop in trade in goods and services over the past two years, mainly due to the pandemic. Now, the Russian invasion of Ukraine is a further destabilising factor just as the effects of the pandemic are beginning to recede.
Given the uncertain outlook across the developed world, investors are increasingly looking to developing countries for opportunities. But these markets face several common challenges, including uneven regional development; inequality and low social cohesion; poor infrastructure and education; and weak public governance. This results in high formal and informal costs of doing business.
The most recent Emerging Markets Monitor, published by Oxford Economics in September, warns that headwinds to growth across emerging markets (EMs) are intensifying, forcing the economic advisory firm to downgrade its forecast for EM growth. It warns that emerging economies are being buffeted to varying extents by the mix of high commodity prices, trade disruption from Russia’s war on Ukraine, inflation and COVID-19 policies.
“The outlook for the next year or so is pretty sluggish across most EMs given the likely mild recessions in the Advanced Economies, the continued problems in China, the global battle to bring down inflation, a very strong US$ and difficult political situations in many EMs,” explains Simon Knapp, Lead Economist at Oxford Economics.
However, Knapp says some pockets of relative strength are expected, predominantly in EM Asia. Oxford Economics predicts that Vietnam may grow by around 6% next year and Indonesia by 4.7%. Both have a high trend growth rate of 5% or more, with still some scope to ‘catch up’ after their economies were held back by the pandemic. Forecasted Chinese growth of 5.1% next year assumes a change in COVID-19 policy and as such is subject to a high level of uncertainty.
Beyond 2023, much of EM Asia will see quite robust growth rates. For example, after a difficult 2023, Indian GDP growth should move back to above 7% in 2024, while among the other EMs we also expect Polish GDP growth to return to a healthy pace in 2024, above 4%, compared to zero in 2023. Growth should also pick up in Latin America in 2024, albeit at 2-3% it’s likely to be a broadly similar pace to that expected in the UK, US and Eurozone then, Knapp explains.
Within EM Asia, one of the key ongoing developments will be multinationals gradually lowering their dependence on Chinese manufacturing operations and expanding their production facilities in other countries in the region. “This could provide opportunities for parts of the UK professional services industries (consultants, logistics, etc) and specialist manufacturers,” Knapp says.
And across the large EMs, countries will doubtless ramp up their energy transition initiatives, which could provide opportunities for UK firms specialising in this area, Knapp adds.
“Trade in services has the potential to become much more important across emerging markets, as the digital economy grows in significance and regulatory and other barriers to services trade ease,” says Suren Thiru, ICAEW’s Director, Economies. “Targeting emerging economies offers access to markets benefiting from higher economic growth. It presents a massive market of potential consumers who are typically getting richer and where there are growing middle classes, for example in Asia. It provides real opportunities for UK exporters.”
However, trade with emerging markets is not without its challenges, Thiru warns. “Concerns over the local regulatory and tax regime can be key barriers to exporting to such countries. Specific concerns around tariffs, exchange rate volatility and accessing the finance needed to export are also often cited by UK firms.”
The UK has schemes to encourage trade and development of tech sectors in emerging markets, giving UK tech businesses the chance to supply goods and services into those economies.
However, capitalising on this opportunity isn’t something that can be left to chance and a sustained government focus on support to help UK business expand into emerging market economies is needed, Thiru urges.
“The growth and innovation opportunities that exporting to such economies can bring means that it should be a key focus. The government’s export strategy is a positive step, but ministers must help businesses to harness the opportunities that come with exporting, including providing practical export support.”