Will US growth shocks hit emerging markets?



By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Headwinds to US growth could be strong, but emerging market trade exposure to the US varies widely, and many emerging markets can benefit from China’s stronger rebound.

US slowdown

The flash estimate for US GDP growth in the first quarter was much weaker than expected, slowing to 1.1% qoq annualized from 1.9% expected. Although the release had no discernible impact on market expectations for next month’s rate hike by the US Federal Reserve (implied probability around 88%), it raised questions about potential implications for emerging markets (EM), especially if weak US growth persists due to tighter credit conditions.

Relocation near Mexico

There are many ways to assess the impact of exogenous shocks on growth – one of them is to look at transmission through commercial channels. The chart below shows the share of exports to the US from major emerging markets as a percentage of their respective GDP. Mexico stands out on this metric, and it remains to be seen whether the offshoring story – which is a great longer-term investing theme – will help protect the economy (and the Mexican peso) in the coming months. come.

Growth in emerging markets and rebound in China

Central European countries and Brazil seem significantly less exposed via trade channels – the former are linked to Europe (which is why we’re keeping an eye on tomorrow’s Q1 flash GDP printout) and the second is a more closed economy than Mexico. Several Asian economies also have significant trade exposure to the United States, but their strongest correlation with China’s rebound should help mitigate the negative impact headwinds to potential growth in the United States. Stay tuned !

Chart at a Glance: Emerging Market Exports to the US – Top 10, Bottom 10

Chart at a Glance: Emerging Market Exports to the US - Top 10, Bottom 10
Source: VanEck research; Bloomberg LP.

Initially published by VanEck on April 27, 2023.

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PMI – Purchasing Managers Index: economic indicators drawn from monthly surveys of private sector enterprises. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – Institute of Supply Management PMI: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; in both manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal consumption expenditure price index: a measure of US inflation, tracking changes in the prices of goods and services purchased by consumers across the economy; MSCI-Morgan Stanley Capital International: a US provider of equities, fixed income, hedge fund stock indices and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using implied volatilities on S&P 500 index options; GBI-EM – JP Morgan Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Emerging Markets Global Bond Index: tracks the total returns of external debt instruments traded in emerging markets.

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