Aurelia Butler

Humans have an innate desire to sort and categorise the world around them. The economist Antoine van Agtmael is no exception. In 1981 at the World Bank, he coined the phrase “emerging markets” as a more aspirational alternative to the term “third world”. The label has since become synonymous with a hotchpotch of fast-growing nations considered to be riskier investment prospects than “developed markets”. While it may have been a successful rebrand, for economists and investors the catchall term has become unhelpful.Emerging markets, which account for the bulk of the world’s population, are not a homogeneous group. Rather, they consist of dynamic and highly diverse countries at different stages of development — and their composition has changed vastly since the term became popular. For instance, the breakneck growth of China and India — whose contribution to global growth rose about 20 percentage points in the 2000s from the 1980s — makes them particular outliers when compared to fellow EMs.Recent shocks have also underscored the economic diversity across EMs. On the policy front, central banks in emerging Europe and Latin America were particularly aggressive in raising interest rates to get ahead of inflation in the aftermath of the pandemic and the war in Ukraine. Meanwhile, some EMs have prudently built up foreign currency reserves and issued more home currency debt making them less susceptible to crisis dynamics.Volatile commodity markets have also distinguished net energy exporters from importers and those with critical reserves. And tensions between the west and China are having differing economic impacts too, depending on geography and diplomatic relations. Indeed, though trade liberalisation since the 1990s helped most EMs to take off, the next phase of globalisation, which looks to be punctuated by rising protectionism and friend-shoring, is set to have more differentiated impacts.This variation makes the EM moniker increasingly unfit for macroeconomic and investment analysis. The broad-brush label can obscure risks and opportunities. For instance, the rising narrative around EMs’ economic resilience — with fewer than anticipated debt defaults in the aftermath of the pandemic — risks playing down the pockets of vulnerability that still exist. Turkey has a dearth of FX reserves, private sector debt servicing costs in Brazil and China are concerning, and Tunisia and Pakistan are on the brink.Financial markets also still rely on the EM-DM dichotomy or other regional groupings. But investors will want exposure to countries likely to benefit from new trends, including the scramble for critical minerals and “China plus one” supply chain strategies. Indeed, disaggregating EM bonds, equities and alternative assets, such as infrastructure projects, on a country or thematic basis could help investors to unlock higher returns and enable developing countries to obtain more capital. For that, access to reliable country-level data will be important.There have been numerous attempts to popularise other groupings. The Brics nations — Brazil, Russia, India, China and South Africa — are perhaps the most famous. Then there are “emerging and growth leading economies”, or Eagles. Few have proved useful, given large economic differences in terms of trade, growth and financial openness. Definitions also vary. Investment indices focus on market access metrics, while economic bodies prefer macroeconomic thresholds. That is partly why South Korea, for example, is considered an advanced economy by the IMF yet falls under the MSCI index’s emerging markets group.The developing world does not fall neatly into a single category. And, in a global economy hit by multiple crises and geopolitical upheaval, there are even greater upsides for economists and investors that can differentiate between them. Perhaps it is time to retire the EM label altogether. More

Fighting off a historic surge in prices, the ECB has now lifted borrowing costs by a combined 425 basis points since last July, worried that excessive price growth could be perpetuated via wage rises as the jobs market remains exceptionally tight.The ECB’s news conference takes place at 1245 GMT. MARKET REACTION: FOREX: The euro fell and was down marginally on the day at $1.1075 versus $1.1126 just before the statement.BONDS: Euro zone government bond yields fell. Germany’s 10-year Bund yield was down 5 basis points (bps) at 2.40%, having stood at 2.43% just before the ECB rate decision. Italian yields were last down 4 bps at 4.07%.STOCKS: The broad European STOXX 600 index edged up and was last up 1.17% %. An index of European banking stocks was up 1.24%COMMENTS:LEE HARDMAN, SENIOR CURRENCY ANALYST, MUFG, LONDON”The statement is signaling that the ECB is now more comfortable that the policy rate has reached restrictive levels. Previously they said it would be brought to more restrictive levels, now it’s going to be ‘set at sufficiently restrictive levels’. The policy focus going forward will be less about raising rates and more about keeping them at higher levels for longer.For markets that’s another step towards the ECB is saying the end of the hiking cycle is near. That’s triggered the euro sell off.”CLÉMENCE DACHICOURT, PORTFOLIO MANAGER, MORNINGSTAR, PARIS “The ECB’s latest 0.25% increase in interest rates comes as no surprise. However, recent activity surveys suggest the economic slowdown is now affecting both manufacturing and services within the Eurozone. This points towards the ECB nearing the end of its rate hiking cycle, but the persistency in core inflation also tells us rate cuts are not on the agenda for now.”NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, UK”The ECB went with the expected 0.25% rate hike, but of much more interest is whether there will be another one in September. That will clearly be subject to the two inflation data releases between now and then. Whatever they mean for the overall outlook, either way, the ECB will want to retain flexibility. If rates are yet not at the peak, we are not far away, and the conversation may soon move to how long they will stay at the peak.” ARNE PETIMEZAS, SENIOR ANALYST, AFS GROUP, AMSTERDAM”A boring statement that tells us nothing new. The decision for September will remain wide open, even though the ECB has to stick with a hawkish bias, given still high inflation. The interesting part is cutting remuneration on banks’ required reserves to zero (was 3.25%). While the ECB tries to sell the move as designed to protect the singleness of monetary policy, in reality it is purely profit-driven. The ECB is bleeding heavily on its bond portfolio (often bought at negative yields) while paying a relatively high nominal rate of banks’ required and excess reserves. The move will save the ECB 6 billion euros on an annual basis, roughly speaking.”GUY MILLER, CHIEF MARKET STRATEGIST, ZURICH INSURANCE GROUP, ZURICH “It was pretty clear heading in the meeting that a 25 bps hike was a given, so no surprises there. There is a realization for the need for some caution going forward. A lot of the is dreadful, especially from the manufacturing sector. The two big economies, Germany and France, are suffering the most. So, the ECB will acknowledge the fact that the trajectory is a concern. What is important is the bank lending data we got the other day, that showed the demand side plunged. Bond yields are coming down on the news and I think that is a fair reaction. The risk of another 25 bps hike is not off the table because inflation is still way above target and wage growth remains troublesome. The ECB will feel it still needs to talk hawkish other wise markets will price in a cut and financial conditions will ease.” SAMY CHAAR, CHIEF ECONOMIST, LOMBARD ODIER, GENEVA: “I think we are clearly reaching the peak here. I would reach the same conclusion as for the Fed yesterday, they are going to be data dependent, but if you think what we think, the data would allow them to skip, or plateau in September.””Christine Lagarde has one job to do to today (at the press conference) to avoid the easing of financial conditions. Softer actions have to be accompanied by harder communication. Once you’re at peak you have to talk tough, we would expect her to be very concerned about inflation etc, but in the grand scheme of things we are very close to the peak.”MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:”The statement looks similar to what they said in mid-June, that they have more work to do, so they are preparing markets for another move in September. Our view has long been that the deposit rate will rise to 4%. In September they are likely to change the forward guidance.” More

The European Central Bank has raised interest rates back to their record high, warning consumer prices are still rising too fast while keeping its options open for further increases.The ECB’s decision on Thursday to raise its benchmark rate by a quarter-percentage point to 3.75 per cent matches a peak last reached in 2001 when it was trying to boost the value of the newly launched euro.The widely expected move, the ECB’s ninth consecutive rise, came a day after the US Federal Reserve raised rates by the same amount.German government bonds rose and the euro gave up some of its gains against the dollar after markets interpreted the ECB’s post-meeting statement as dovish. The euro surrendered earlier gains, dropping 0.1 per cent against the dollar to $1.107.In government bond markets, the yield on the interest rate-sensitive two-year German note fell 0.08 percentage points to 3.19 per cent, while the yield on benchmark 10-year Bunds dropped 0.05 percentage points to 2.4 per cent. Yields fall as prices rise. The big change in the statement was that the ECB gave itself more wriggle room over further rate rises by ditching last month’s commitment that future decisions would ensure interest rates will be brought to levels that were “sufficiently restrictive”. Instead, the central bank said it would ensure interest rates “will be set at sufficiently restrictive levels for as long as necessary” to bring inflation down to rate-setters’ 2 per cent target. At present, price pressures are almost three times above that level, at 5.5 per cent. The tweak supports economists’ predictions that major central banks are close to ending their rate rises, with inflation falling faster than expected and growth slowing.Eurozone inflation has dropped from a peak of 10.6 per cent last year and a further slowdown is expected when July data is published on Monday.The ECB repeated its warning that inflation was still expected to remain “too high for too long” and committed to follow a “data-dependent approach” to future rate decisions.But it also changed its description of inflation to indicate it was more confident price pressures were on a downward path. Last month it said there were only “tentative signs of softening” in price pressures, but on Thursday it said “while some measures show signs of easing, underlying inflation remains high overall”. More

The UK has declined an EU offer for formal collaboration on global issues despite warming relations between the two sides since February’s diplomatic breakthrough on post-Brexit trading arrangements in Northern Ireland.The idea for regular formal meetings — possibly including a bilateral summit with the 27 member states — was floated last month by European Council president Charles Michel, but was rejected by the UK side, according to two people with knowledge of the talks.A senior EU official said the British side had “given the EU the brush-off” when the idea was raised. One UK official confirmed the proposal had been made but swiftly turned down. “We haven’t proposed a dialogue and we won’t be proposing one,” they added, citing domestic political concerns in the ruling Conservative party about being seen to move too close to Brussels.However, a second EU official said the idea remained up for discussion. “It is time to turn the page and look ahead,” they said, saying that there were regular dialogues with other big non-EU countries, including China, Japan and Turkey. “We are doing this with China, why not do it with the UK?” They admitted that the issue was “sensitive” and the 27 member states would have to consent.Since leaving the EU, the UK no longer attends quarterly European Council summit meetings, leaving no regular ministerial EU-UK forum to discuss broader strategic matters, such as defence, international trade and the regulation of emerging technologies.The relationship between both sides is managed via the EU-UK Trade and Cooperation Agreement (TCA), which focuses on trade.The idea for a deeper EU-UK strategic partnership, which had originally been conceived under former prime minister Theresa May, was dropped by her successor Boris Johnson when he came to power in 2019.Relations between London and Brussels have warmed since UK prime minister Rishi Sunak brokered his Windsor framework deal to smooth post-Brexit trade arrangements for Northern Ireland in February.But the European Commission, which polices the TCA, is more sceptical than Michel. It has been clear the deal will not necessarily translate into concessions in other areas of the relationship with London, and has decided that creating a separate UK-EU dialogue is “not in its interest”, according to a senior EU official. The remaining areas of contention between London and Brussels include the terms of the UK’s association to the €95.5bn Horizon science programme, a UK request to delay the imposition of tariffs on some electric vehicles moving between the UK and EU, and more favourable value added tax terms for UK exporters.Sunak has also asked Brussels to team up on the creation of new rules to govern artificial intelligence ahead of an AI summit in London in the autumn. However, commission vice-president Maroš Šefčovič this month said the EU believed the G7 was the best forum for such discussions. A commission official confirmed that the idea of a strategic dialogue had been raised, but underlined that the TCA had a comprehensive governance structure that allowed all policy areas to be discussed bilaterally, including AI. “Discussing issues related to our economic partnership is always welcome. That is why we have a comprehensive governance structure in the TCA,” the commission said. “The EU has committed to using this structure to its full potential.”

The UK government said: “We have no plans for a new dialogue outside of the TCA to discuss UK-EU bilateral trade issues.”It added: “As you’d expect we continue to work with our EU partners on wider global issues and solutions for common global challenges.”Charles Grant, director of the Centre for European Reform think-tank, said it was unrealistic to expect the two sides to agree a new strategic forum so soon after the UK left the bloc but added that it was a worthy long-term goal.“It is only a few months since the Windsor deal was signed and it has not yet been fully implemented. So while trust levels are rising, it is from an extremely low level,” he said. More

Thursday’s hike, the ninth in a row, increases the rate that the ECB pays on banks’ deposits from 3.50% to 3.75%, its highest level since 2000, before euro banknotes and coins had even been put into circulation.But the ECB removed a clear hint at further hikes from its policy statement, meaning a fresh increase at the ECB’s next meeting in September should not be taken for granted.”The Governing Council’s future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels,” the ECB said.In its June statement, the ECB had said rates would “be brought” to sufficiently restrictive levels, implying more rises.Inflation in the euro zone has halved since last October but, at 5.5%, it remains well above the ECB’s 2% target.On the other hand credit creation, demand for loans and economic activity have all slowed sharply, showing the ECB’s steady diet of rate hikes is already taking a toll on the economy.”The developments since the last meeting support the expectation that inflation will drop further over the remainder of the year but will stay above target for an extended period,” the ECB said.The ECB has now increased borrowing costs by a combined 4.25 percentage points in a year, its fastest pace on record. But a peak is now clearly in sight and the debate is set to shift to how long rates will need to be kept at current levels. With Thursday’s decision the rate that banks pay to borrow at the ECB’s weekly auctions was also increased to 4.25% from 4.0% while daily loans will now cost 4.50%, from 4.25% previously. Both facilities have been little used as the banking system is still awash with cash from a decade of monetary stimulus by the ECB.Attention now turns to ECB President Christine Lagarde’s 1245 GMT news conference. More