An expected short-term rebound in China's slowing economy is unlikely to dispel the gloom that has engulfed emerging markets and abruptly made them the No. 1 worry for the global economy.
With the Federal Reserve on course to begin withdrawing its unprecedented monetary stimulus later this month, a clutch of big developing economies will remain vulnerable to capital outflows unless they act decisively to reduce their financing needs and improve the domestic climate for doing business.
A marked slowdown over the past year in China has added to the unease dogging emerging markets. China generates more than a third of global growth and is the biggest export market for Australia, Japan, Indonesia and South Korea among others.
But Alicia Garcia-Herrero, chief emerging markets economist for Spanish bank BBVA based in Hong Kong, said countries including India, Brazil and Turkey largely had only themselves to blame for the recent fierce sell-off in their currencies.
Because of complacency, they failed when times were good to take the steps needed to rein in their current account deficits.
"China is part of the story because it gave them a more conducive growth environment, but they have their own issues independent of China," she said.
Economists at Goldman Sachs agreed. Better Chinese data would help reduce pressure on different markets, but probably only temporarily, they said in a report.
CHINA LOOKING UP, FOR NOW
China's purchasing managers' indexes (PMIs) for August suggest that capital spending and industrial output gathered steam last month in response to government steps to spur investment and promises to push through reforms.
"Nonetheless, our view remains that the mini-rebound is likely to be temporary," said Jian Chang, an economist for Barclays in Hong Kong. Underlying financial vulnerabilities and overcapacity will weigh on growth in 2014, she said in a note.
Wensheng Peng, with investment bank CICC in Beijing, is among the economists who recently nudged up their 2013 GDP growth forecasts. But Peng too doubts the improvement in aggregate demand that he expects in August's data can be sustained.
Local government infrastructure spending and the property sector are crowding out other investment, he said, and the scope for export growth looks limited given that the United States and Europe have already strengthened more than many had expected.
After Friday's keenly awaited employment report, this week's U.S. data slate risks being an anticlimax.
The highlights are August retail sales and the University of Michigan's consumer sentiment survey for September, which are unlikely to be decisive for Fed policymakers weighing whether to reduce their bond buying from $85 billion a month.
The majority of primary dealers polled by Reuters said they still expected the Fed to start gently tapering its stimulus at its Sept. 17/18 meeting, perhaps by $15 billion a month, despite a slower pace of jobs growth in August.
GRUMPY WITH THE FED
Emerging market leaders complained at last week's G20 summit in Russia that the Fed's plans had been badly communicated and were rocking their economies.
But Manoj Pradhan, a Morgan Stanley economist in London, said the market turbulence showed why countries needed to limit their vulnerability by enacting pro-growth structural reforms.
"While the tapering story is a key trigger of how things could get a lot worse, part of the burden of responsibility has shifted on to the shoulders of emerging markets as well," he said.
In the euro zone, a likely slowdown in industrial output growth for July will serve as a reminder that even though the bloc has emerged from recession, the sunlit uplands remain a distant mirage.
Southern debtor nations face further fiscal austerity, while the euro zone's banking system has yet to heal, according to Darren Williams, an economist in London with AllianceBernstein.
"Getting to the above-trend growth that would start bringing down unemployment rates rapidly and where you would start to see cyclical improvements in budget deficits - that's tough to forecast at the moment," Williams said.
Nevertheless, he said the recent outperformance of developed market PMIs, for the first time in five years, raised the possibility that a durable economic recovery from the financial crisis might finally be at hand.
And that would bode well for emerging economies, too.
"It wouldn't solve all the problems for every emerging market country, but my guess is that it would make life a lot more straightforward because most of the big ones are still quite geared into the global trade cycle," Williams said.
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