Potential growth projections for the larger emerging market (EMs) economies have deteriorated due mainly to a gloomier outlook for investment, says Fitch Ratings’ Economics team.
“One over-arching theme from our updated estimates of potential growth is a slowdown in projected investment growth over the next few years. This feeds through to lower labour productivity growth as we see less scope for increases in the capital to labour ratio, or ‘capital deepening'”, said Maxime Darmet, Associate Director in Fitch Ratings’ Economics team. “Prospects for a sharp re-acceleration in wider production efficiencies in emerging markets also still look quite limited.”
Fitch’s updated potential supply-side growth estimates over the next five years for the 10 major EMs covered in the agency’s Global Economic Outlook (GEO) show downward revisions for Turkey, Brazil, Mexico, South Africa and Indonesia and an upward revision for India. China’s potential growth estimate remains unchanged at 5.5%.
Tukey’s potential growth is now estimated at 4.3%, down 0.5pp since our last report. This reflects the sharp external adjustment since last year’s currency crisis, which has been achieved partly through a collapse in the investment-to-GDP ratio. This will result in significantly lower growth in the capital stock (and hence labour productivity) than previously projected.
Brazil’s potential growth has been revised down slightly to 1.7% from 1.8%. Even though we expect trend investment growth to be quite robust over the next few years, on the fading effects of past large negative shocks, the very low starting point for the investment-to-GDP ratio means that the capital stock is unlikely to grow significantly, dampening GDP growth prospects.
Mexico’s potential growth is now estimated at 2.5%. This has been revised down by 0.3pp on the back of less favourable investment prospects – particularly in the energy sector – as the new government puts the implementation of reforms to the sector on hold.
South Africa’s potential growth has been revised down by 0.2pp to 1.7%. Sustained deterioration in business confidence is weighing on investment, and total factor productivity (TFP) – which captures improvements in the efficiency of the production process – continues to decline.
Weaker trend investment growth is also the main reason why China’s projected potential growth is much lower than recent historical growth outturns. A declining investment-to-GDP ratio has been necessary to limit the growth of corporate leverage, but has resulted in slower growth in the capital stock. However, this rebalancing may also have helped productivity at the margin: TFP growth has recently stabilised after falling steadily from 2008.
India is still estimated to have the highest potential GDP growth, at 7%. This has been revised up by 0.3pp, in part reflecting the revised national statistics showing significantly better growth performance in recent years than previously estimated.
Indonesia’s estimated potential growth is 5.3%, revised down by 0.2pp. Growth outturns since 2015 have been remarkably stable at around 5%, reflecting that potential growth has ratcheted down.
TFP growth has not been particularly impressive historically in most large EMs. Moreover, it has weakened substantially over the past 10 years or so in virtually all countries – with the notable exceptions of Indonesia and India. This may reflect waning momentum in structural reform and a decline in manufacturing as a share of GDP since the late 1990s, a sector that has traditionally exhibited higher productivity growth.
