Cautionary Tale about Vaccines and Growth

By Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy

A massive drop in Malaysia’s activity gauges is a reminder that the pace of vaccinations and vaccines’ efficacy can have material implications for the near-term growth outlook in EM.

We begin today’s blog with a cautionary tale. It comes from Malaysia, and it shows the impact of very low vaccination rates on domestic activity. It’s been a while since we saw activity gauges (Purchasing Managers Indices, or PMIs) plunging below 40.0 (see chart below) – but this is what can happen when the government has to rely on lockdowns and movement restrictions to deal with the virus’s flareups. Malaysia might be an extreme case, but there are several other countries where the pace of vaccinations (or the efficacy of vaccines) is weighing on activity, including India and Russia (manufacturing PMIs returned to contraction zone in June).

By contrast, activity gauges in Central Europe are hitting new highs, since much higher vaccination rates are paving the way for re-opening. This should reassure central banks in Hungary and the Czech Republic that starting hiking cycles in June was the right decision. Poland’s manufacturing PMI reached 59.4 in June, and this should keep local hawks going, despite the central bank governor Adam Glapinski’s ultra-dovish mindset.

So, as you can see, the vaccination landscape in emerging markets (EM) is very uneven. We remain optimistic longer-term, as EMs are catching up and vaccinating at a faster daily rate than developing markets (DM). Still, getting close to herd immunity takes time. Meanwhile, the fact that EM overseas remittances are on a roll provides a much-needed “safety net” for a number of countries. Mexico recorded yet another above-consensus inflow in May (USD4.515B), and some estimates suggest that remittances can reach 4% of GDP this year.

Charts at a Glance: Malaysia Manufacturing PMI Plunged to Early-COVID Levels in June

Charts at a Glance: Malaysia Manufacturing PMI Plunged to Early-COVID Levels in June

Source: Bloomberg LP

Originally published by VanEck, 7/1/21

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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