Emerging Markets Surpass Growth Expectations

They are expected to grow by an average 3.3% this year, 0.9% higher than May’s forecast and a big improvement over last year’s 1.9% growth.

Emerging markets in 2017 outperformed expectations across the board, with UBS Bank suggesting they would grow by 4.5% this year, the best performance since early 2015 and around twice the growth rate of developed markets.

One of the biggest surprises is the 37 emerging economies tracked by the European Bank for Reconstruction and Development. According to EBRD’s latest forecasts, they will grow by an average 3.3% this year, 0.9% higher than May’s forecast and a big improvement over last year’s 1.9% growth.

Investors were concerned that political worries in countries like Poland, Hungary, Romania and Turkey, to name just four, could impact growth, as could the more advanced economies falling into a “middle income trap.”

Instead, nearly every country in the region—which includes Central and Eastern Europe, Russia and the CIS, Southeastern Europe and countries in the southern and eastern Mediterranean—have seen growth, except for Azerbaijan and Macedonia (the former has been severely impacted by continued low oil prices, while the latter is grappling with political instability).

“This is the first time such a broad upturn has been seen since 2010,” stated UBS, pointing to several countries, notably Romania and Turkey, which are enjoying growth rates comparable to the pre-crisis levels of the mid-2000s. Egypt and Jordan are also seeing a major pickup, thanks to increased activity in tourism and exports.

“The broad-based recovery is a very welcome development,” says EBRD chief economist Sergei Guriev. “It also creates a window of opportunity to carry out reforms that will ensure the sustainability of stronger growth rates over the longer term.”

So, is the future rosy? Except for Morocco, which is expected to see a slowdown next year, the EBRD suggests that growth will continue next year, albeit at a lower level than this year.

There are caveats, though. Russia continues to underperform (GDP is forecast to grow just 1.8% this year after several years of contraction), which could impact its dependent CIS neighbors. Geopolitical tensions, security threats and the rise of populism are other concerns.

Guriev warns that governments need to stay focused. “By strengthening their institutions, integrating into the global economy and investing in sustainable infrastructure, countries should be able to complete their transition to sustainable market economies,” he says.