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When the IMF published its latest WEO forecast, it also marked the ninth consecutive time that it revised down its emerging market and developing economies growth forecasts. The continual downward revisions raise the question of whether the slowdown is only cyclical or whether emerging markets are experiencing a structural slowdown after a long boom period in the 2000s. According to the IMF's latest projections, emerging markets and developing countries are now expected to grow by 4% this year - 0.2% lower than expected. This is certainly a world of change compared with the average growth rate in excess of 6% experienced in the boom years of the 2000s.
While overestimation of Chinese growth drove previous years' downward revisions, this time around the revisions are caused by sharply lower growth projections for Brazil and more modest adjustments to other commodity-exporting countries in Africa and the former Soviet Union (excluding Russia). In contrast, and to the surprise of many, the IMF kept its China forecast despite recent events.
It is still too early to say. Undoubtedly, many emerging markets will face further headwind short to medium term; several commodity-producing countries will have to embark on sizeable fiscal adjustments to reduce imbalances, which will weigh on growth. Furthermore, although concerns about a collapse in China have abated, the structural shift in the Chinese economy towards services will continue to curtail commodity import demand. Finally, emerging marketss cannot rely on advanced economies, where the recent data round also clearly signals economic weaknesses.
"The days of looking at emerging markets as an aggregate group are certainly over. Investors need to be much more selective in picking; we are certainly seeing pockets of strength in the emerging markets space, such as Mexico, India, EMEA and other commodity-importing countries with relatively strong external positions", says Danske Bank.
"We think the weak growth prospects will weigh on sentiment towards many emerging markets. The brief rally in many emerging market currencies has ended and we are again seeing a weakening trend in many emerging market currencies", added Danske Bank.
