Warning about vaccines and growth
BYes Natalia Gurushina, Chief Economist, Emerging Markets Bond Strategy
A massive drop in Malaysia’s business indicators is a reminder that the pace of vaccinations and vaccine efficacy may have material implications for near-term growth prospects in emerging markets.
We start today’s blog with a edifying tale. It happens From malaysia, and that shows the impact of very low vaccination rates on domestic activity. It’s been a while since we’ve seen activity gauges (Purchasing Manager Indices, or PMIs) dip below 40.0 (see chart below) – but that’s what may happen when the government must rely on blockages and restrictions on movement to deal with outbreaks of the virus. Malaysia may be an extreme case, but there are several other countries where the pace of vaccinations (or the effectiveness of vaccines) weighs on activity, including India and Russia (manufacturing PMIs have returned to the zone contraction in June).
In contrast, activity gauges in central Europe are hitting new highs as much higher vaccination rates pave the way for reopening. This should reassure the central banks of Hungary and the Czech Republic that starting the bullish cycles in June was the right decision. Poland’s manufacturing PMI hit 59.4 in June, which should keep local hawks going, despite central bank governor Adam Glapinski’s ultra-dovish state of mind.
So, as you can see, the the vaccination landscape in emerging markets (EM) is very uneven. We remain optimistic in the longer term, as MEs are catching up and vaccinate at a daily rate faster than developing markets (DM). However, getting closer to collective immunity takes time. Meanwhile, the fact that Emerging country remittances are on the rise and provide an essential “safety net” for a number of countries. Mexico recorded another above-consensus influx in May ($ 4.515 billion), and some estimates suggest that remittances may reach 4% of GDP this year.
Chart Snapshot: Malaysia’s Manufacturing PMI Dipped to Early COVID Levels in June
Source: Bloomberg LP
Originally published by VanEck, 7/1/21
PMI Index – Purchasing Managers: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion and a reading below 50 indicates contraction; ISM – PMI Supply Management Institute: ISM publishes an index based on more than 400 surveys of purchasing and supply managers; both in manufacturing and non-manufacturing industries; CPI Consumer Price Index: an index of the change in prices paid by typical consumers for retail goods and other items; PPI – Producer price index: a family of indices that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Price index of personal consumption expenditure: a measure of US inflation, which tracks changes in the prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: a US provider of equity, fixed income, hedge fund market index and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows market expectations for 30-day volatility. It is constructed using the volatilities implied on the options of the S&P 500 Index .; GBI-EM – JP Morgan’s Government Bond Index – Emerging markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by emerging market governments; EMBI – JP Morgan Emerging Markets Bond Index: JP Morgan index of sovereign bonds denominated in dollars issued by a selection of emerging countries; EMBIG – JP Morgan Global Emerging Markets Bond Index: tracks the total returns of external debt instruments traded in emerging markets.
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