China’s slowdown and America’s recovery squeeze emerging markets

One of the biggest financial stories of the 21st century so far has been the increasing importance of emerging markets.

Now, many are facing the prospect of being caught in the middle of the fallout from China’s current slowdown and America’s ongoing recovery.

America

America has seen GDP pick up and the prospects for continued growth look positive. Unemployment figures are steadily moving down towards a rate of 5%, while the possibility of the Federal Reserve raising interest rates for the first time in almost ten years grows.

The effect on emerging markets and the entrepreneurship that has been fuelling their rise delivers a double blow.

Firstly, capital is being drawn towards American assets that offer higher yields and secondly corporate borrowers could suffer currency related fallout on dollar-denominated bonds they have issued. Brazil, Russia, Mexico and South Korea could all be affected.

China

China’s recent economic woes have been in the headlines as of late, with the stock market falling and the devaluation of currency. The latest figures show an 8% drop in exports for July with a corresponding 5.4% fall in factory-gate prices.

Commodity producers such as Brazil and South Africa are feeling the effects the most, although even Singapore has seen GDP growth slow to below 2%. Taiwan and Korea will have manufacturing related knock-on effects due to expected continuing downward pressure on China's factory-gate prices.

New paradigm

When opposing changes are going on in the two biggest economies in the world, there is bound to be an unpredictable and potentially damaging ride ahead for less established emerging economies.

Although it is still too early to see how it will pan out, there is no doubt that interesting times lay ahead.