Emerging Markets' Growth: Is it Sustainable?

A study measures how much emerging markets grew during the first quarter.

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Riding a wave of job creation and robust demand for exports, emerging markets are continuing to grow at a considerable clip, according to a recent report by HSBC. The report, which contains a new reading from the bank’s emerging markets index, also offers encouraging predictions about the sustainability of expansion in the developing world.

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The index takes into account surveys conducted in 14 emerging markets. For the first quarter of 2010, the index clocks in at 57.4, up from 56.3 for the last quarter of 2009. Any reading of above 50 suggests growth.

“For North America and Europe, years of austerity lie ahead, as nations attempt to regain control over fragile fiscal positions. A combination of tax increases and spending cuts will weigh heavily on economic recovery and place downward pressure on Western inflation,” HSBC says in the report. “Emerging nations mostly do not face the same constraints.”

The report also points to a shift in emerging markets’ trading patterns. “Increasingly, the evidence suggests that the success of the emerging nations in international trade is mutually-reinforcing,” it says. “For the vast majority of emerging nations, trade with the developed world has become less important in recent years but trade with other emerging nations has become a lot more important. China, Brazil and India, for example, increasingly trade with one another. The idea that world trade has to be U.S.- or Europe-led appears to be increasingly anachronistic.”

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Overall, the increase that the index saw during the first quarter stems from this new pattern for exports, as well as from job growth and improvement in both the manufacturing and services sectors.

“The conclusion that we get from this index is first that the expansion of emerging markets is continuing and accelerating,” says Pablo Goldberg, a managing director at HSBC. “We’re seeing that there are indications that the recovery in economic activity is likely to be sustained.”

Importantly, HSBC has found that the growth in emerging markets is occurring broadly, with most sectors and almost all countries (Russia is a notable exception) reaping the benefits. This could improve investors’ sentiment toward these often-volatile countries. “Going forward, investors are going to see emerging markets through a different lens,” Goldberg says.