BNP Paribas experts now analyse the possible contagion effect of the deceleration in Emerging Markets (EM) on developed markets (DM). To begin with, they note that the linkages between these two groups of countries appear limited when they focus on trade and bank lending channels.
In the US for instance, goods exports to EM countries account for less than 5% of GDP while bank exposure to EM is of a similar magnitude. It therefore appears unlikely that traditional macro linkages will be enough for EM growth shocks to push DM economies into recession.
Furthermore, BNP Paribas economists consider that lower oil prices provides a boost to DM consumers at a time when the US and European economies are mainly driven by domestic factors. As proof of this, they highlight that despite the already weak performance from EM countries over the past months, recent indicators have proved resilient in these economies.
Market conditions have to be very bad to push DM into recession
Beyond standard macro linkages, shocks to investor confidence can cause financial conditions to tighten which in turn result in a drag on growth. What concerns BNP Paribas analysts here most are negative wealth effects from falling equity valuations, as well as tightening credit conditions from widening risk spreads.
In their view, market conditions have to get much worse on this front before DM is pushed into a slump. Moreover, they see the risk of a global bond market sell-off as very limited, taking into account the intensifying of disinflationary tensions, the global savings glut and the excess of central bank liquidity. As such, they conclude that risks weighing on the fiscal side and in most DM countries on mortgage markets are subdued at this stage.
The ‘confidence fairy’ is real…market shocks can be self-fulfilling
For BNP Paribas, a real danger is that fears about the economy can become self-fulfilling if the negative confidence shock puts the breaks on investment and consumption.
It is true that the impact of the 1997 Asian Crisis on DM was fairly muted. But in the 1990s, EM economies had a much smaller weight of world GDP than at present. As a result, BNP Paribas says it will be key to monitor the extent of the market correction and its impact on confidence in the real economy over the coming months.
