Emerging Economies to Defy Financial Meltdown, According to Oxford Economics Report

Developed nations across the world might have been into recession, but emerging market economies, including India, will continue to grow though with clear signs of a slowdown, says a report.

According to the report by global economic research firm Oxford Economics, "The BRIC economies would continue to grow, but there would be a clear downturn. China is now forecast to grow by about 7 per cent in 2009, its lowest since 1990, and India is seen slowing to about 5 per cent."

Growth rate of 5-7 per cent looks significant amid the present scenario when the world GDP is expected to remain very weak in 2010, posting growth of just 0-1 per cent after the decline of 0.4 per cent in 2009, Oxford Economics said.

However, significant decline in major economies across the world, would have an adverse impact on the emerging markets, with even China and India suffering further slowdown as the world trade failed to recover, the report said, adding that "all of the major developed economies would post growth of little better than zero in 2010".

"Despite the aggressive monetary and fiscal easing, the U.S., the Eurozone, Japan and the U.K. are all now seen contracting by around 2 per cent in 2009," the report said.

These declines would certainly add to the threat of deflation, quite possibly prompting an even more aggressive monetary and fiscal policy response, Oxford Economics said and added that this in turn would add significantly to the chances of a period of higher inflation from 2011-12.

However, inflation is considered to be the traditional escape route from excessive debt and would guard against a repeat of the 1930's depression, the report added.

The slowdown in emerging market economies is largely because trade finance has dried up, capital inflows are dwindling and rolling over short-term debt has becomes more difficult.

The emerging countries, already being hit hardest because of slower world trade, are those that have been heavily dependent on exports for growth, such as South Korea, Taiwan and Hungary. The BRIC economies should be less affected given their stronger growth in domestic demand, but even China and India have relaxed policy quite aggressively in order to support their flagging economies.

Besides, the strong U.S. dollar has reversed corporate hedging strategies at the same time as investors are dumping emerging market assets. This has led to much higher emerging market spreads and, in an increasing number of cases, the need for emergency IMF funding, the report said.

The global financial situation remains fragile and there are still risks as stock markets remain volatile and house prices are still in decline in many countries, so the slide into recession will continue, Oxford Economics said.

As the major developed economies are all expected to contract next year and aggregate growth in the emerging markets slowing, the world GDP is seen shrinking 0.4 per cent in 2009, the first drop since the Second World War, the report said.

Meanwhile, the slowdown in world economies and lower commodity prices would result in a rapid decline in inflation.

As oil price is down around 70 per cent from their peak in July last year, inflation in the major economies would continue to fall steeply this year, reinforcing the prospect of further interest rate cuts in the U.K., the Eurozone and in many emerging markets, the report said.

"In the short term, the threat of deflation is now a serious one," it said.