Will Emerging Markets Fall in 2012?

BERN – Emerging markets have performed amazingly well over the last seven years. In many cases, they have far outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios, countercyclical fiscal policy, and assessments by ratings agencies and financial markets.

As 2012 begins, however, investors are wondering if emerging markets may be due for a correction, triggered by a new wave of “risk off” behavior. Will China experience a hard landing? Will a decline in commodity prices hit Latin America? Will the European Union’s sovereign-debt woes spread to neighbors such as Turkey?

Indeed, few believe that the rapid economic growth and high trade deficits that Turkey has experienced in recent years can be sustained. Likewise, high GDP growth rates in Brazil and Argentina over the same period could soon reverse, particularly if global commodity prices fall – not a remote prospect if the Chinese economy begins to falter or global real interest rates rise this year. China, in turn, could land hard as its real-estate bubble deflates and the country’s banks are forced to work off the bad loans.

This is not wild doom-and-gloom speculation. The World Bank has just downgraded economic forecasts for developing countries in its 2012 Global Economic Prospects, released this month. For example, Brazil’s annual GDP growth, which came to a halt in the third quarter of 2011, is forecast to reach 3.4% in 2012, less than half the 7.5% rate recorded in 2010. Reflecting a sharp slowdown in the second half of the year in India, South Asia is slowing from a torrid six years, which included 9.1% growth in 2010. Regional growth is projected to decelerate further, to 5.8%, in 2012.