This resilience is testimony to the fact that emerging markets are in better health. But it would also be a mistake for countries to lower their guard: the real test is yet to come
Save time by listening to our audio articles as you multitaskBy comparison, this time seems curiously calm. Although the Fed is raising rates at its most furious pace since the Volcker era, much of the market drama has centred on rich countries rather than emerging ones. It is the central bank in Britain, not Brazil, that is scrambling to avert a, triggered by the government’s reckless budget. In part this resilience is testimony to the fact that emerging markets are in better health today.
Why have emerging markets got off relatively lightly? Part of the answer lies in the reason for the dollar’s strength. Rather than being fuelled by an aversion to risk and a flight towards safe American assets, much of it reflects differences in economic fundamentals and anticipated interest rates. And the fundamentals forhave vastly improved, with decent growth, bigger reserves and deeper local capital markets that can help absorb shocks.
Rather than letting inflation spiral, central banks in emerging markets were also quick off the mark, raising rates well before their peers in the rich world. Annual inflation averaged 10% across emerging countries in the second quarter of this year, barely higher than in energy-crisis-stricken Europe and overheating America.
Emerging economies have also so far intervened in currency markets only modestly. Their aim has been to prevent depreciation and to reduce the inflationary effects of a stronger dollar. Those outside China have spent around $200bn this year, reckons JPMorgan Chase. That is a small fraction of their total reserve pile of nearly $4trn.
The trouble is that much of the adjustment is yet to come. The Fed is intent on raising rates until it sees “compelling evidence” that inflation is moving down; investors expect them to rise by roughly one and a half percentage points by the spring. The economic pain from higher rates has yet to hit home. In forecasts published on October 11th thepredicted that a third of the world economy would experience recession this year or next, with growth in America, Europe and China stalling.services.
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