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Retail sales in emerging markets

March 2019

Are weak retail sales a bad omen for EM?

Growth in EM retail sales has slumped in the last six months. Should investors be concerned?

Retail sales growth has dropped in EM from 6 to 4 per cent over the last six months, as illustrated in the chart below (Fig.1).

Let's look at what's behind this sudden fall.

Fig.1 - Sharp fall in EM retail sales over the last six months
DM & EM retail sales (volume, %Y/Y, 3mma)

Source: Pictet Asset Management, CEIC, Datastream. Developed Markets (DM) data to November 2018; Emerging Markets (EM) data to December 2018.

China, Turkey and Argentina weigh

Year on year car sales growth, a major component of retail sales, plummeted to -5.4 per cent in November 2018, the lowest figure in ten years (see Fig.2 below). 

However, stripping out China, Turkey and Argentina, EM car sales were up an impressive 9.7 per cent over the same period, showing the impact of these three economies on the overall number.

Fig.2 - EM car sales: light at the end of the tunnel? 
EM car sales (volume, %Y/Y, 3mma)
Emerging Markets car sales

Source: Pictet Asset Management, BIS, CEIC, Datastream, 31.12.2018.

We are not overly concerned about the slowdown in these three economies for the following reasons:

  1. In China, the government has cut tax on household income and VAT (from 16 to 13 per cent on manufactured goods and 10 to 9 per cent on some services)1. Together with the monetary stimulus, this is supporting consumption. Chinese retail sales excluding cars have started expanding again, bouncing 10.4 per cent y/y in January2.
  2. In Argentina and Turkey, the near-50 per cent fall in car sales came from a steep increase in policy rates as governments in both markets lost control of inflation. These are largely isolated events and do not pose a risk to the broader EM universe.

In fact, car sales growth has already picked up, and this lifted sales growth outside of those three economies to 11 per cent in December 2018.

Aside from those three countries, where is EM domestic demand headed?

Private consumption is closely tied to the labour market, where signs are positive overall in EM. As can be seen in Fig.3A below, the unemployment rate in EM remains low.
Strong EM labour market and real wages set to bounce as inflation recedes
Fig.3A(lhs) – EM private consumption & unemployment rate (1Y change) / Fig.3B(rhs) – EM private consumption & real wages

Source: Pictet Asset Management, BIS, CEIC, Datastream. Private consumption data to August 2018; EM real wages data to November 2018; EM unemployment rate data to December 2018.

The only point of concern is the weak real wages growth, which dropped from 6.8 to 3.3 per cent between June 2012 and November 2018 (Fig.3B).

High levels of inflation on the back of currency falls caused the squeeze in wages. But the inflation trend has started to reverse, suggesting this was a temporary shock and allowing real wages to grow again. This should in turn improve household spending.

This is further supported by our proprietary EM private consumption function, which is predicting a pickup in EM private consumption over the medium term (Fig.4).

Pictet AM proprietary indicator pointing to a pickup in EM private consumption of the medium term
Fig.4 - EM private consumption (medium-term function)
Emerging markets private consumption

Source: Pictet Asset Management, CEIC, Datastream. *Medium-term indicator: F(Consumer confidence, unemployment rate, real wages). EM private consumption data to August 2018; Medium-term function data to December 2020.

In conclusion, we remain confident in the resilience of EM economies despite faltering retail sales. Led by car sales, this slowdown is largely contained to three countries: Argentina, Turkey and especially China. Argentina and Turkey do not pose a systemic risk to EM and we do not expect a hard landing in China, particularly if trade negotiations with the United States come to a successful resolution. We are confident the improvement in EM private consumption observed since December 2018 will continue.