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23 August 2012

EY: Slowdown in rapid-growth markets to be short-lived

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  • RGM households with income of more than USD 30 thousand to more than double by 2020 overtaking US and Eurozone
  • GDP of the Czech Republic is forecast to decline by 1.4 per cent in 2012 according to Ernst & Young

Economic expansion in the 25 leading rapid-growth markets (RGMs) including the Czech Republic has started to slow sharply since the beginning of this year but this will only be a temporary blip according to Ernst & Young’s quarterly Rapid-Growth Markets Forecast (RGMF). RGMs, particularly in Asia, have the necessary tools available to ease both fiscal and monetary policy allowing growth to resume towards the end of the year. Even with a slowdown in growth, RGMs are likely to weather the Eurozone crisis and will remain the engines of global growth. GDP is forecast to expand by 4.9% this year in stark contrast to the 0.6% contraction, at best, that is expected in the Eurozone. Output in the RGMs is expected to continue to pick up by 6% in 2013 and 6.5% in 2014.

Magdalena Soucek, Country Managing Partner of Ernst & Young in the Czech Republic, explains, “Although slower expansion in the rapid-growth markets is likely this year it will only be a blip and we will see a return to significant growth. The RGMs are well placed to weather the major risks facing the global economy at the present time, given that they have the space to relax fiscal and monetary policy. This has already happened in some RGMs including in all of the BRICs. It is likely that there will be further easing of monetary policy in the months ahead, particularly if the global economy deteriorates further.”

Czech Republic

Two main factors will continue to constrain growth in the Czech Republic in the next quarters. First, external demand is likely to remain very weak. Although Germany – the Czechs’ main trading partner – continued to grow in early 2012, the Eurozone was stagnant and exports to the region will suffer. On the domestic side, this will hamper investment growth – expected to average -2.5% in 2012 – and lead to a rise in unemployment. Second, fiscal austerity will be a drag on household consumption. In particular, the VAT hike in January has brought inflation to 3.7% in Q1, leading to a significant erosion of real wages.

The export-oriented Czech economy expanded 1.7% in 2011. However, GDP has been on a downward trend in H2 2011 and fell sharply in the first three months of 2012, by 1% quarter-on-quarter – the largest decline since Q2 2009. Magdalena Soucek comments, “As a result, we now expect the contraction for 2012 as a whole to be 1.4% down. In the medium term, we expect GDP growth to rise to an average of around 3% in 2013-17, driven by a gradual pick up of both external and domestic demand. However, the Czech economy will fall below its potential if the Eurozone crisis continues and fiscal constraints remain tight.”

Growing consumer markets to protect RGMs

As well as having the option of easing fiscal and monetary policy to accelerate growth, RGMs are also fortunate enough to have a growing middle class with increasingly higher incomes and an appetite to spend. RGMF forecasts that the number of households in RGMs enjoying higher incomes will grow sharply over the next ten years. The number of RGM households receiving an income of over USD 30,000 will more than double by 2020, overtaking the US and the Eurozone.

Looking ahead

Magdalena Soucek concludes, “Despite the slowdown in growth experienced by the RGMs at the beginning of this year they will begin to bounce back towards the end of this year and in 2013. The ability to relax policy to boost growth, a growing middle class to aid consumer spending and a strong rise in FDI flows will ensure continued growth well into the future.”

Source: Ernst & Young, Czech Republic

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