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A tale of two business cycles
Weekly investor research
04 December 2017
Developed economies continue to grow slower than before their 2008/2009 crisis despite hyper-easy monetary policies and very expansionary fiscal policies. By contrast, Emerging Markets (EM) economies are experiencing accelerating growth without the help from Quantitative Easing (QE), ultra-low interest rates and tremendous fiscal stimulus. EM economies are in normal business cycles and experiencing an upswing, which will spread to domestic demand as capital flows back to the asset class. EM central banks will hike rates in order to contain inflation expectations. Hence, the Korean rate hike last week is a harbinger of things to come. In the coming years we expect EM central banks, not their counterparts in developed economies, to lead the global rate hiking cycle. We expect EM central banks to hike sooner, faster and eventually by more than developed market central banks against a backdrop of stronger growth. This is a tale of two business cycles – a normal one in EM and an abnormal one in developed economies – and it bodes well for EM currencies.