by Derek Baldwin, CFA

Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Fourth Quarter of 2015. The excerpt is posted here for the benefit of our blog subscribers.

Emerging markets woes were a major theme in 2015, with Greece and China dominating headlines at various points during the year. While fears of a Greek meltdown and contagion have subsided for the moment, China’s slowing economy remains an area of intense focus.

With China’s transformation to a more service-oriented and consumption-driven economy, economists agree a long-term slowdown in growth is to be expected. However, cyclical slowdowns in industrial output and a contraction in exports are making matters worse. The International Monetary Fund (IMF) expects China’s GDP growth rate to slow to 6.8% in 2015, and 6.3% in 2016, while various private observers estimate China’s growth at less than half these levels. Official Chinese government figures are viewed with skepticism, making it difficult to confidently assess the state of its economy. Still, China has further room for policy easing, which could come in the form of further interest rate cuts and other structural reforms.

What is clear about China’s slowdown is its negative impact on commodity prices. Prices of basic materials such as copper, iron and other industrial commodities have plummeted, and while oil’s decline is largely attributed to excess supply, a China-related slowdown in demand is adding to the pain. Lower commodity prices hurt commodity export-driven economies like Brazil the most. Compounding Brazil’s problems, the country is struggling through major corruption scandals, which distract policy makers from potential measures that could boost the economy.

US Dollar Marches UpwardFinally, an appreciating US dollar has taken a toll on emerging markets. Many commodity prices tend to fall when the dollar rises, hurting commodity exporters’ earnings. In addition, foreign countries and companies that have borrowed US dollars find repayment more challenging as the local currency loses value against the greenback.

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