Global economic growth of is projected at 3.1 per cent this year, with economies in Asia, Sub-Saharan Africa, the Middle East and Latin America contributing more than half of this growth, a report said.

The US and the euro area are expected to add only about 0.8 percentage points to the growth, according to Standard Chartered’s Q3 Global Focus.

Although emerging markets are outperforming developed economies, the two are linked, the report said.

The US and the euro area are the world’s largest economies, and their performance impacts the rest of the world. “We have to be aware of the risks emanating from these two economies, and their potential impact on emerging markets,” the report said.

Currently, the outcome of Greece’s potential default is unclear. A resolution looks likely, with a Greek exit from the euro area avoided. However, euro-area growth, even if it recovers to around 1.5 per cent this year, is still too low for a region emerging from a prolonged recession. This weak growth is a problem for the global economy. Europe’s large current account surplus means current account deficits elsewhere in the world, which will weaken growth dynamics in other economies.

Emerging economies have responded to this challenging environment by cutting interest rates; 29 countries cut rates in H1, a textbook response to an exogenous shock. This was made possible by low US interest rates and the drop in oil prices, which kept inflation subdued.

According to Standard Chartered, it will be difficult for emerging economies to continue to reduce interest rates as the Fed begins to hike. A Fed hike, following years of close-to-zero interest rates and three rounds of quantitative easing, will be a significant development.

Currencies are the ‘shock absorbers’ in emerging economies. If the Fed begins to hike, volatility in currency markets is likely to increase, although this is not necessarily a bad thing. Most Asian countries now have flexible exchange rates, which adjust constantly, protecting the domestic economy against exogenous shocks. A weak currency becomes a problem when a country has high levels of foreign-currency-denominated debt with short-term maturities.

“We do not see this as a major risk for Asian countries, although Turkey is more vulnerable,” the report said.

“The impact of Fed hikes on the rest of the world is receiving a lot of attention and rightly so. But the market seems to be ignoring the risks of Fed hikes to the US economy itself. The IMF has warned that hiking prematurely could lead to a reversal of interest rates later on,” said Marios Maratheftis, chief economist at Standard Chartered.

“The market is right to be concerned about the impact of Fed hikes on the rest of the world. But it is wrong to ignore the risks to the US economy itself.

“This is yet another year when consensus views on the US have been revised lower and existential threats to the euro area are strong. Slower growth in emerging markets is a result of the true problem facing the world economy – inadequate demand in Europe and the US. Yet many in the markets remain focused on the perception rather than the reality,” he added. – TradeArabia News Service