IIF on Global Economy: No Time to Relax

July 10, 2014
Introduces New EM Coincident Indicator; Turkey, South Africa, Brazil, Indonesia, Russia Seen as Most Vulnerable to Possible Taper Tantrum 2.0

Washington, D.C., July 10, 2014 - The Institute of International Finance today revised down its forecast for global economic growth to 2.6 percent for 2014, but predicts a pick-up in economic activity in the second half of the year, rising to 3.3 percent in 2015.

"Global growth for the first half of 2014 has clearly disappointed, with growth outcomes uneven and many EMs stuck in the doldrums," said Charles Collyns, chief economist for the IIF. "It's perhaps surprising that financial markets are buoyant and risk appetite is strong, but we believe that reflects reassurances of policy support in the core countries rather than rising confidence in the fundamental drivers of growth. Looking forward, we expect to see acceleration in growth for the second half of 2014, but we remain concerned that the global economy could continue to underperform."

The IIF identified the top six risks for the global economy:

  • U.S.:Abrupt steepening in the anticipated path of Fed rate hikes.
  • Emerging Markets:Intensification of country-specific problems in a period of rising global risk aversion could intensify contagion across EMs.
  • China:Housing downturn coupled with efforts to slow excessive credit and wasteful investment and to increase market discipline could lead to financial disruptions and substantial growth slowdown.
  • Euro Area:Slow recovery could allow low inflation to become entrenched, raising real interest rates and complicating debt dynamics.
  • Energy Prices:Oil price spikes due to supply disruptions.
  • Ukraine:Crisis escalation beyond Crimea.

EM Coincident Indicator

The IIF also introduced the EM Coincident Indicator (EMCI), a monthly indicator that gauges emerging market GDP growth. The EMCI continued to soften through June, underlining that there are few signs yet of a general pick-up of growth in emerging markets.

"While there are plenty of global economic leading indicators, there have been fewer attempts made to track economic growth specifically in EMs," said Collyns. "This would not matter if EM growth followed growth in mature economies closely, but this link is weakening given the growing importance of EM domestic demand and south-to-south trade."

The EMCI distills a common trend from 43 variables that are released timely, show high concurrent (or leading) correlation with emerging market GDP and represent a mix of emerging market hard data, emerging market survey data, commodity prices, EM MSCI and sentiment data for the U.S. and Germany-two key EM trading partners.

Taper Tantrum 2.0-Who would be exposed?

The IIF also looked at how unexpected changes in Fed policy could affect emerging market economies.

Overall, the IIF estimates annual portfolio flows to emerging markets would decrease by around $100 billion if markets were to start expecting an increase in the Fed Funds rate by 50 basis points per quarter instead of the current 25 basis points.

The IIF also assessed which countries would be most vulnerable to capital flight across several dimensions, including dependence on external financing, credibility of policy frameworks and broader political uncertainties.

In the end, five countries stand out as being most vulnerable: Turkey, South Africa, Brazil, Indonesia and Russia.

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The Institute of International Finance is the global association for the financial industry, with close to 500 members from 70 countries. Its mission is to support the financial industry in the prudent management of risks; to develop sound industry practices; and to advocate for regulatory, financial and economic policies that are in the broad interests of its members and foster global financial stability and sustainable economic growth. Within its membership IIF counts leading global banks, insurers, pension funds, asset managers and sovereign wealth funds, as well as leading law firms and consultancies. For more information visit www.iif.com.

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