28 July 2021
VanEck Blogs | Emerging Markets Debt Daily
Growth, Rebalancing and Persistence

The vaccination gap between EM and DM is the main reason why the IMF lowered its 2021 growth forecast for EM. The IMF also expressed concerns that inflation risks can prove more persistent.

The U.S. Federal Reserve’s (Fed’s) policy verdict is the focus of the day, especially as regards any taper considerations and the outlook for the economy. Past experience shows that a taper announcement can produce a knee-jerk reaction among emerging markets (EM) assets, but EM tend to perform quite well once the Fed starts hiking, as long as higher rates reflect stronger growth. For what it’s worth, there is a lot of optimism about U.S. prospects outside the Fed. The consensus growth forecast for 2021 is still unchanged at 6.6%, and the IMF just raised its 2021 U.S. growth forecast by 0.6% to 7% and the 2022 forecast by whopping 1.4% to 4.9%. 

The IMF’s numbers come from the newly updated World Economic Outlook, which has some interesting takeaways besides the U.S. growth. The key words are “rebalancing” and “persistence”. “Rebalancing” refers to growth upgrades and downgrades in EM vs. developed markets (DM). The main “fault line” is access to vaccinations. EM vaccinations are picking up, but the rate is still much lower than in DM (see chart below), which is why the IMF lowered the 2021 EM GDP by 0.4% (to still respectable 6.3%), while raising the projection for DM. The region with the deepest forecast cut is EM Asia. 

“Persistence” refers to inflation risks. The key concern for the IMF is the evolution of inflation expectations against the backdrop of the “unchartered” recovery that comes after the “unprecedented” recession. The IMF’s main focus is on fiscal support (which is still significant) and large household savings - both of which can affect inflation expectations and push them higher. We are curious whether the Fed’s verdict will be the same. Stay tuned!

Charts at a Glance: Vaccinations - Big Gap Between EM and DM

Charts at a Glance: Vaccinations - Big Gap Between EM and DM

Source: International Monetary Fund

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Natalia
Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy