1. How robust and sustainable will the post-pandemic economic recovery be?
We are already seeing economic activity recover as economies re-open from pandemic-induced shutdowns. The decline and rebound in financial markets have been both sharp and swift, allowing for hope that economic recovery will follow the same path. It is likely too soon to tell just how robust and sustainable the recovery will be at this point, as damage to some parts of the economy will be lasting or even permanent. Moreover, the risks of a second wave of COVID-19 in the fall could imperil recovery trajectories and stimulus efforts.
The size and breadth of monetary and fiscal stimulus implemented in the wake of the crisis, globally, is unprecedented. The IMF forecasts shown in Figure 1 suggest sharp economic recovery in 2021, setting real GDP growth firmly back in positive territory. While this is good news, we still do not have much visibility into the sustainability of growth beyond that point. It is also important to keep in mind that not all emerging markets are the same, and that high economic growth doesn't always translate into great equity performance. A strong rebound in economic activity will naturally turn the spotlight toward economically sensitive companies. Further, the extent to which interest rates increase will begin to diminish one of the favorable catalysts behind the strong performance of growth stocks.
2. Will EM policymakers be able to tighten monetary policy and tackle large fiscal deficits when economic conditions improve?
Not all emerging markets are alike, and not all emerging market policymakers responded to the economic crisis in the same way, with the same policy tools, or to the same degree. They all did, however, respond in the same direction by providing fiscal stimulus, lowering official rates, and freeing up liquidity in banking systems. The difference for emerging markets in this crisis, compared to past crises, is that EM policymakers were able to lower rates along with policymakers in advanced economies. In some cases, EM central bankers were able to use policy tools such as quantitative easing (QE) that were once only accessible to advanced economies. EM policymakers also announced fiscal stimulus packages of varying sizes and shapes.
Because recent EM policy responses contrast with those that were afforded to EM in the past (e.g., higher rates, tighter fiscal policy to thwart capital outflow and currency weakness), we expect to see EM economic growth recover more quickly, but at the cost of higher fiscal deficits and potentially higher inflation. In some countries, this may lead to sharp upward adjustments in interest rates. Countries with strong institutions and credible policymakers should be best suited to normalize policy when conditions improve.
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Exp. Date: 09/30/2021