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    EM – Beware of Base Effect Illusion

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    May 05, 2021

    A very low base effect can generate “oversized” data releases in EM in the next couple of months. India’s central bank surprised with additional measures to support growth.

    The pandemic started to hit the global economy just over a year ago, and this means that we are going to get a lot of distorted data releases in the next month or two (or three) due to what is called the base effect. In plain language, if something (like growth or prices) dropped a lot 12 months ago, we might end up with extremely high annual growth rates now. So, it is important to look around for alternative info before jumping to conclusions. We have two base effect examples today. Thailand’s headline inflation soared from -0.08% to 3.41% year-on-year in April, but annual core inflation accelerated only to 0.3%. Brazil’s annual industrial production soared to 10.5% in March, but sequential growth was actually much weaker than expected (-2.4% month-on-month) due to the COVID resurgence.

    India’s central bank pulled yet another rabbit out of its hat, announcing a surprising USD4.7B extension of its bond purchase program and other measures to prop up growth. Before India was hit by the current COVID wave, the IMF expected it to be the fastest-growing economy among major Emerging Markets (EM) in 2021 (12.5%). The consensus had already started to trim its growth forecast for this year – something to keep an eye on, given India’s large share in EM GDP.  

    Emerging markets are still facing a lot of headwinds – COVID waves, lagging vaccinations – but some countries are getting a constant stream of support in the form of overseas remittances. We still see/hear concerns that the remittances might dry out because of the pandemic, but the latest releases show exactly the opposite (see chart below). The year-to-date growth looks even better than the 2020 numbers, and this means stronger marginal support for domestic consumption and external balances.

    Charts at a Glance: EM Remittances – What A Wonderful World


    Source: VanEck Research, Bloomberg LP

  • PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; 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’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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  • Authored by

    Natalia Gurushina
    Chief Economist, Emerging Markets Fixed Income Strategy

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