Falls in emerging markets manufacturing growth

Emerging markets remain a good news story despite a sharp fall in the HSBC Emerging Markets Index (EMI), according to analysts.

The index has fallen to 55.8 in the second quarter of 2010 from 57.4 in the first quarter, as fragile developed markets affect emerging market exports.

The index showed that manufacturing growth in the emerging markets slowed sharply from a record pace set in the first quarter. However, analysts stated that this reflected a moderation in the rate of growth of new orders, which is likely to soften further as demand remains low in developed nations.

“We are in a new phase of global economic development,” said HSBC chief economist, Stephen King, who added that emerging market economic activity had hit a bump in the road. However, he said the good news was that emerging markets had escaped the legacy of excessive debts that had placed economic constraints on developed markets.

The index found that services in the emerging markets expanded at a faster rate than manufacturing for the first time since the onset of the global financial crisis, which suggests that growth has become better balanced. HSBC said that it also indicated that domestic demand was holding up well despite poorer manufacturing performance.

The index revealed that overall growth in both output and new orders weakened in China and Brazil, but gathered pace in India and Russia. Exports across emerging markets grew at the slowest pace since the third quarter of 2009, with China recording an especially steep downturn — while Russia and Eastern Europe were the exceptions to the rule.

“The fall in the latest HSBC EMI clearly signals that economic expansion in emerging markets is moderating and for Australia’s biggest trading partner, China, growth has certainly normalised,” said HSBC’s co-head of Asian economics research, Frederic Neumann. “So while we are seeing a softer outlook for China, its economy is still expected to grow at 10 per cent this year, sustained by domestic demand.”

This, combined with persistently elevated commodity prices, should ensure the Australian economy also continues to grow at a healthy clip.

“Indeed, the HSBC EMI reveals several encouraging signs in emerging markets: a pickup in service sector activity, suggesting that domestic demand in the emerging world is holding up, and fading inflation concerns.”

Neumann said Australia remains well positioned to benefit from close links to its emerging market neighbours.