Should Emerging Markets Worry About the Stock Market Correction?

The current stock market turmoil began on Wall Street over inflation and interest worries and has spread across the world. With equity indices down nearly 10% from their peaks over in a fortnight, many are asking whether the economic expansion is at risk. Policy-makers in emerging markets, where the sensitivity of economies to the evolution of world trade and to sentiment in financial markets is greatest, are among the most worried. Without claiming to know how far equity markets will fall or rise in coming days and weeks, in this note I will argue that the global economy’s fundamentals remain strong at present and that the economic expansion is likely to persist in 2018 and perhaps even strengthen further as the year progresses. I also argue, however, that the stock market jitters underscore two other big risks, both – like the stock market correction – originating in the United States, namely unsustainable fiscal deficits and protectionism. These risks may build over time and significantly darken the economic outlook in 2019 and beyond. Though I believe that the broad-based economic recovery in emerging markets is likely to continue in spite of these headwinds, the aforementioned risks will – as a minimum – be the source of increased volatility and threaten to expose those developing economies that are most vulnerable to a deterioration in the external environment.