As we enter the second half of the year, an increasing number of institutions have begun to release outlooks for major economies. Overall, while the growth momentum of developed economies remains unchanged, there is a significant divergence between the strong growth in the U.S. and the moderate growth in the U.K., Europe, and Japan.
The U.S. Leads Developed Economies
The initial estimate of 4.1% quarter-on-quarter growth in the second quarter has placed the U.S. economy ahead of other developed nations. Although this figure fell short of the 4.2% growth rate previously expected by various parties, it remains the strongest performance since the third quarter of 2014. In terms of growth contribution, the 1.1% contribution from net exports was in line with expectations, while the 4% in consumer spending far exceeded expectations, partially offsetting the decline in fixed asset investment.
Emerging Economies Underperform
Analysts at National Bank Financial have suggested that emerging market currencies have underperformed year-to-date, as investor confidence appears to be affected by the rise of U.S. protectionism. U.S. protectionism may disrupt WorldWay flows, thereby damaging the growth prospects of emerging economies.
Some emerging economies are better able to withstand current shocks than others. Unlike Turkey and Argentina (whose currencies are among the worst performers this year), several major emerging economies such as Brazil, India, and China are in much better economic shape than they were during the 1997 Asian financial crisis, due to significantly increased foreign exchange reserves and manageable external deficits.
However, because foreign investors tend to paint all emerging markets with the same brush, even economies with strong fundamentals are not guaranteed to be unaffected.
Take the Renminbi as an example; since April, the RMB exchange rate against the U.S. dollar has fallen by more than 8%. This is the worst four-month decline since 1994, when the RMB devaluation was part of broader reforms.
In conclusion, amid trade-related uncertainties, the plight of emerging market currencies is likely to persist, which will boost the trade-weighted U.S. dollar exchange rate, at least in the short term.
