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Emerging markets: darkest before dawn

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There are still risks to economic outlook, but also potential positive surprises.

Those hoping 2021 would be the year of normalisation for emerging markets were disappointed. After the COVID-19 shock of 2020, the unprecedented monetary and fiscal easing was supposed to lead to a strong economic recovery. Instead, there is increasing concern about US monetary policy and the strengthening dollar, slower growth in mainland China, fears of stagflation and the pandemic’s Omicron variant.

HSBC’s economists forecast GDP growth of 4.6 per cent across emerging economies this year – ranging from 0.6 per cent in Brazil to 7.2 per cent in India – with 4.4 per cent for 2023.

They see the growth differential between emerging and developed markets narrowing from 1.6 percentage points last year to just 0.9 points in 2022 before widening to 2.2 points next year – roughly the 2015-19 average.

These forecasts imply a modest slowdown in emerging economies in 2022, but we don’t rule out an even sharper deceleration caused by the pandemic, tightening financial conditions or reduced support from mainland China’s growth.

The Omicron variant could lead to fresh restrictions and even lockdowns that might hit mobility and spending. Only 55 per cent of people in emerging economies are fully-vaccinated – well below the 70 per cent-75 per cent that is considered to provide broader immunity. And while lockdowns elsewhere have had a less severe impact than in 2020, financial conditions are less supportive than previously.

Financial conditions in emerging markets, quite loose in early 2021, tightened sharply in the final quarter. That could hit this year’s economic growth with a six- to nine-month lag and fiscal policy is unlikely to lend much support. Indeed, public debt is already high at 64 per cent of GDP and still rising, with budget deficits expected to remain sizeable in many economies.

And the growth support from mainland China seen in previous cycles is likely to be more limited as growth there has slowed amid property worries.

Slowing growth in global liquidity is another risk for emerging markets that is likely to worsen as developed countries tighten monetary policy. The US Federal Reserve is expected to raise rates three times this year. Despite Turkey’s interest-rate cuts, Brazil, Russia, Chile, Czech Republic and Hungary have led emerging-market tightening efforts.

Meanwhile inflation is increasing, especially in Latin America and Central Eastern Europe, the Middle East and Africa. And although Asia remained more immune to price pressures, inflation is picking up there too, fuelling fears of stagflation.

Our inflation forecasts for emerging markets have risen sharply, to 5.2 per cent this year and 4.1 per cent in 2023 with the risk that higher energy, food and electricity prices put upward pressure on wages.

The pandemic switched consumer demand from services to goods, which helped exports from many emerging countries, especially Asia, but also caused bottlenecks in global trade, pushing up rises.

However, if consumption rotates back towards services as economies return to some form of normality, supply-chain pressures should reduce. Indeed, there is evidence they peaked last September, with disruption in Asia apparently easing faster than in other regions.

This would improve the inflation and growth outlook. Consistent with peaking supply-chain strains, there has also been some moderation in input costs for emerging markets that could, with a lag, also help moderate the inflation path.


First published 10th January 2022.

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