Macq-ro insights:EM growth struggles &the US Fed

We revisit the ripples from the December 2015 25bp Fed Funds hike, inanticipation of a similar 25bp increase this December. Whilst we expect a shortlivedand muted reaction this time, pages 2-4, the outlook for EM economies in2017 remains a struggle, with an ongoing search for a new engine of growth.

India, with multiple positives including favourable FDI trends and reformprogress, appears a major exception, pages 9-14.

For EM economies as a whole we are forecasting an extended period ofsubdued growth. EM economies have been battered by nine negatives since2011, Fig 9. Whilst some of these are abating, two major ongoing headwindsworry us: falling real property values with the credit down-cycle, and decliningFDI inflows as the elevated global investment-to-GDP ratio adjusts. These areheadwinds for consumption and investment, respectively. These concerns arecaptured in the chart below. Contracting since 1Q 2015, the blue portion is aproxy for the global liquidity cycle. The red portion is FDI, and we expect a 20%shrinkage in total global FDI flows over 2016-17.

Gross capital flows to EM economies are likely to remain under pressure duringthe US Fed’s tightening cycle. Macquarie forecasts the latter to last into 2019.