Emerging Economy Growth Excluding China Trails Developed Nations

  • Citigroup cites weak trade, high debt for second-quarter slide
  • Bank cuts 2016 global growth forecast fifth time this year

Economic expansion in most emerging markets lagged behind developed nations for the first time in 14 years in the second quarter as slowing world trade, heavy debt burdens and a pending increase in U.S. interest rates sapped growth, according to Citigroup Inc.

Developing economies, excluding China, expanded 1.8 percent in the three months ended in June, compared with 2 percent for advanced nations, Citigroup said in a research note. The slower growth was a reversal of the trend since 2001 that saw emerging-market growth exceeding developed markets by 2.6 percentage points on average.

While geopolitical strife in regions including eastern Europe and the Middle East and slumping commodity prices have affected some specific countries, the turnaround came amid broader weakness in global trade, a buildup of debt levels and the looming risk of higher borrowing costs, Citigroup economists led by Willem Buiter wrote in the report Wednesday. “In turn, we suspect that EM growth is likely to disappoint across quite a wide range of countries in the next couple of years,” they wrote.

China Growth

China itself, the driver for many emerging nations, is probably in worse shape than the official data suggest in part because the government may have overestimated the growth in the service sector, Citigroup’s economists said. China’s “true” growth rate in the second quarter is probably between 4 percent and 5 percent, rather than the 6.9 percent recorded by the government.

China accounts for 15 percent of the global economy and has contributed to about two fifths of world growth over the last five years, according to Citigroup.
 
Citigroup lowered its forecast for global growth in 2016 to 2.8 percent from the 2.9 percent projection it had last month, marking the fifth consecutive reduction this year. It kept its estimate for this year at 2.6 percent.

“Even after these downgrades, risks to our global forecasts probably lie to the downside,” the economists wrote in the report.

The slump in emerging markets is contributing to a slowing in global inflation rates, which will probably prompt central banks in China, Australia, Japan and Europe to ease monetary policy further and lead to “only very gradual and delayed tightening” by the Federal Reserve, Citigroup said. The Fed will only start to raise U.S. interest rates in March, while the Bank of England is likely to stay on hold until late 2016, according to its forecast.

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