Emerging markets are showing strong momentum, bucking the global trend of slowing growth. February saw accelerated expansion across manufacturing and services, bolstered by increasing new business and rising export demand. With cost pressures easing and inflation staying contained, the outlook remains positive. However, looming US tariff changes could shift the landscape, making the upcoming data a crucial indicator of future performance.
Emerging markets outpaced developed economies in February, as reflected in the latest PMI data. The Emerging Market PMI Output Index climbed to 52.4 from 51.9 in January, marking a continuation of steady growth that began in early 2023. Both manufacturing and services recorded their fastest expansion since late last year, signalling strong demand. While the pace of growth remained slightly below the long-term average, the contrast with developed markets, which saw their slowest expansion in 14 months, highlighted the resilience of emerging economies.
The services sector continued to lead, expanding at a solid pace for the third consecutive month, driven by strong domestic and international demand. For the first time in nine months, emerging market services growth outpaced that of developed economies. Meanwhile, manufacturing output rose at its fastest rate since November, supported by rising new business inflows and preemptive orders ahead of potential US tariff changes.
Among the major BRIC economies, India strengthened its position as the fastest-growing market, recording its highest expansion since December. While manufacturing in India slowed, the rapid growth of its services sector more than compensated. China followed closely, posting its fastest rise in activity in three months, with both services and manufacturing contributing to the growth. Brazil rebounded from a January contraction, with a solid increase in output led by manufacturing demand and restocking efforts. Russia saw only a marginal rise in activity, making it the weakest performer among the four.
Looking ahead, forward indicators suggest continued expansion. New business inflows accelerated, with export orders growing at the sharpest rate in ten months. Backlogs of work increased for the fourth consecutive month, prompting firms to expand their workforce at the fastest rate since July. Business confidence also remained strong, with firms optimistic about output over the next 12 months.
However, the positive momentum faces potential disruption from new US tariff measures that took effect in early March. While some businesses may have benefited from front-loaded orders ahead of these changes, the longer-term impact remains uncertain. Future PMI data will provide crucial insights into whether emerging markets can maintain their growth trajectory despite evolving global trade conditions.
Inflation remained stable, offering further optimism. Cost pressures eased to a ten-month low, particularly in the services sector, allowing selling prices to remain largely unchanged. This trend supports the likelihood of further interest rate cuts by emerging market central banks. However, any inflationary spillover from developed markets due to trade disruptions could shift monetary policy strategies in the months ahead.
Emerging markets are demonstrating resilience and growth momentum, distinguishing themselves from the more sluggish developed world. While external risks remain, the current trajectory suggests continued strength, positioning these economies as key drivers of global economic activity.
Fidelity Emerging Markets Limited (LON:FEML) is an investment trust that aims to achieve long-term capital growth from an actively managed portfolio made up primarily of securities and financial instruments providing exposure to emerging markets companies, both listed and unlisted.
