UK businesses should look to mid-size emerging economies for pockets of opportunity

• Colombia, Poland and Vietnam are the mid-size economies that could offer some of the best short-to-medium term prospects for business growth
• UK inflation will rise to close to 3% by 2018, squeezing real earnings growth
• A possible Fed rate rise is exposing high US-denominated debt levels, but emerging economies are now better placed to cope with tighter dollar liquidity

UK businesses that want to increase their international footprint should look to mid-size economies such as Colombia, Poland and Vietnam, according to the latest Global Economy Watch from PwC. Identified as ‘pockets of opportunity’, these three economies offer some of the best medium-to-long term prospects for companies looking to grow in their respective regions

While the UK could be the fastest growing economy in the G7 to 2050, according to PwC’s World in 2050 report, its estimated long-term average annual growth rate of just under 2% is projected to be outpaced by Vietnam at around 5%, Colombia at around 3% and Poland at around 2.5%.

Barret Kupelian, senior economist at PwC, said:

“UK businesses have a lot to gain from engaging with fast growing emerging economies. While converting trust and reputation into revenue in a new market takes time, mid-size economies can be quicker to crack than their larger counterparts.

“In addition to having strong growth potential, the three countries we’ve identified – Colombia, Poland and Vietnam – have all shown themselves to be open to foreign businesses and investors through a range of trade agreements, liberal foreign direct investment (FDI) regimes, tax reforms and government initiatives to reform aspects of their economy.”

Vietnam is seeking to replicate the investment-and export-led growth model that led to the rise of successful Asian Tigers like South Korea and more recently China. It has agreed a new free trade agreement with the EU and its current economic growth is fuelled by domestic and foreign investment in labour-intensive industries.

Poland has a more liberal FDI regime than other large economies such as South Korea, Australia, Canada and the US. It also has relatively low labour costs - the hourly average was €8.60 in 2015, compared to the EU average of around €25 per hour.

Colombia’s government’s ambition to spend $70 billion on infrastructure to 2035 presents a significant opportunity for businesses and investors, as well as tackling the country's connectivity issues. The latest government tax reforms are expected to reduce the tax burden on business in Colombia, with VAT increased to 19% to broaden the tax base away from the corporate sector.

What does rising UK inflation mean for earnings growth?

In the UK, data for the last quarter of 2016 revealed UK employment hit an all-time high of 74.6%, driven by record numbers of working women. Despite this, improvements in the job market aren’t feeding through to earnings growth. Last month inflation rose to 1.8%, the highest rate for two-and-a-half years, but nominal earnings growth slowed at the end of 2016.

Barret Kupelian, senior economist at PwC, said:

“If improvements in the jobs market don’t start to feed through to wages, real earnings growth will be squeezed later this year and into 2018.”

US interest rates and emerging economies

PwC’s Global Economy Watch also discusses the potential impact of a further rise in US interest rates on emerging economies. While some markets may be overly exposed to dollar-denominated debt, most are in a better position to deal with tighter US monetary policy than they were in the 1997 Asian financial crisis.

There are three main reasons for this: first, the Fed has signalled a slow and measured rate rise, giving businesses in emerging markets more time to plan their foreign-debt management strategy. Second, most emerging markets have flexible exchange rate regimes now, which makes them less exposed to balance of payments crises than in 1997. Third, most commodity prices on which some emerging economies are heavily reliant (e.g. Nigeria, Brazil) have risen over the past year, improving external balances in net commodity exporters.

Notes for editors.

For more details, please see this month’s Global Economy Watch at www.pwc.com/GEW.

Ends.

For further information please contact Tilly Parke: [email protected] / +44 20 7804 8761