What's Next For Emerging Markets?

Episode Summary

Executive Summary: Goldman Sachs economist Kevin Daly said 2018’s EM slump was driven by slower developed-market growth, tighter financial conditions, higher oil, and trade-war fears. He argued conditions are now improving as rates expectations fall, oil declines, and data stabilizes, especially outside China. He sees a gradual EM recovery, with low inflation and policy easing supporting bonds, while Turkey remains a slow-adjustment outlier and Poland a relative bright spot.

Main Topics: Why emerging markets weakened in 2018 (Priority: 5/5): Daly identified four main headwinds: slower developed-market growth, tighter global financial conditions from higher US rate expectations, rising oil prices, and tariffs/trade-war risk, all of which reduced EM demand and financial flexibility. Improving global financial conditions in 2019 (Priority: 5/5): He argued the macro backdrop has shifted as the Fed and other central banks turn more dovish, US yields fall, equity markets recover, and global financial conditions ease, helping EM assets and growth prospects. Signs of stabilization and recovery in EM growth (Priority: 4/5): Daly said Goldman’s activity indicators already show stabilization, especially in EM ex-China, with tentative improvement in China as well, suggesting the downturn has likely bottomed though recovery will be gradual. Inflation outlook and EM bonds (Priority: 4/5): He expects subdued inflation across EM due to spare capacity and lower oil prices, which should support easier monetary policy and be constructive for EM fixed income. China’s slowdown and policy response (Priority: 4/5): Daly discussed China’s deceleration below 6% annualized activity growth, noting that authorities have begun easing policy and markets have responded positively, with early signs of recovery now appearing. SAMEA region outlook and Turkey’s adjustment (Priority: 5/5): Within Central and Eastern Europe, Middle East and Africa, Turkey suffered a balance-of-payments shock and sharp currency depreciation; Daly sees the worst as past, but recovery will be slow due to balance-sheet repair and banking-sector strains. Long-term convergence and gender inequality (Priority: 3/5): Daly revisited an earlier paper arguing that closing gender employment gaps can materially lift GDP and even raise fertility, illustrating how structural reforms can improve long-term growth and demographics in EM economies.

Key Arguments: EM weakness in 2018 reflected a combination of external-demand softness, tighter US-led financial conditions, higher oil, and trade-war uncertainty. The 2019 backdrop is more supportive because the tightening in financial conditions has reversed and oil prices are lower. EM growth appears to be stabilizing already, particularly outside China, where activity indicators have turned up from late-2018 lows. EM inflation should remain relatively low because of spare capacity and cheaper oil, allowing central banks more room to ease. China’s policy stance is becoming easier after a weak activity reading below 6% annualized, which should support broader EM sentiment. Turkey’s downturn was amplified by pre-existing external imbalances and is likely to recover only slowly because of balance-sheet adjustments. SAMEA economies still have medium-term convergence potential, supported by productivity gains and more favorable demographics than developed markets. Structural reforms around female labor force participation can boost GDP and improve demographic outcomes, especially in EM countries that lag developed markets.

Data Points: EM slowdown drivers: 4 factors - Daly listed the main causes of EM weakness in 2018: slower DM growth, tighter financial conditions, higher oil, and tariffs/trade-war risk. Oil price rise in 2018: up by 30% to October - He said oil prices rose sharply through much of 2018 before later reversing. Oil price decline from peak: around 25% lower - By the time of the interview, oil had fallen from the mid-October peak by roughly a quarter. EM ex-China current activity growth: around 1% annualized increase - Goldman’s current activity indicators showed stabilization and early recovery from September/October lows. China current activity growth: below 6% annualized - Daly said this was very weak for China and historically a level that prompts policy easing. Turkey lira depreciation: 25% to 30% fall - He cited this as part of Turkey’s 2018 shock amid fragile balance-of-payments conditions. Estimated GDP boost from closing male-female employment gaps: US +10%, Euro area +13%, Japan +16% - From Daly’s earlier paper on gender inequality and growth. Paper impact on fertility: female employment tends to increase fertility - He argued that policies supporting women’s work can improve both labor supply and birth rates. Podcast recording date: March 6, 2019 - Stated in the closing disclaimer. Best start to global equities since: 1919 - Daly used this to illustrate the strong easing in financial conditions at the start of 2019.

Pivotal Quotes: "For us, there are four factors that drove the slowdown in EM economies last year." — Kevin Daly: He introduced his framework for explaining EM weakness in 2018. "We think that inflation will be pretty low in these economies." — Kevin Daly: He explained why EM bonds could benefit from subdued inflation and spare capacity. "These are still convergent stories which hold the prospect of much stronger growth on average than DM economies." — Kevin Daly: He summarized his medium-term positive view on emerging markets.

Implications: Listeners should expect a gradual EM rebound rather than a sharp snapback, with bonds helped by low inflation and easier policy. Turkey remains risky, while China policy easing and long-term convergence themes support a constructive medium-term EM view.