EM - A Stagflation Curveball
03 April 2023
Read Time 2 MIN
Oil Production Cuts
The second quarter began with a curveball – a surprising announcement by OPEC+ (Organization of the Petroleum Exporting Countries) about production output cuts starting in May. Energy importers felt an immediate impact, and global rates initially moved higher, because the OPEC+ move has led to renewed inflation concerns. The OPEC+ supply cuts are taking place against the backdrop of the still uncertain global growth outlook, resurrecting a ghost of stagflation and adding to policy challenges faced by major central banks.
Global Growth Headwinds
The latest activity gauges in independent global growth drivers pointed to more growth headwinds. The ISM (Institute for Supply Management) manufacturing survey in the U.S. looked ugly across the board – much weaker than expected (see chart below) and with a worrying drop in new orders. The manufacturing PMIs (Purchasing Managers Indices) in the Eurozone and the U.K. remained stuck in contraction zone. China’s surprisingly weak Caixin manufacturing PMI (50.0 – see chart below)) came on the heels of the more impressive official manufacturing and services PMI surveys, signaling that the pace of recovery in different sectors should not be taken for granted, and that smaller privately-owned companies (with a higher export component) might require additional support. Activity gauges in the rest of emerging markets (EM) were also split. Some Asian economies look strong (India, Indonesia, the Philippines, and Thailand). But others (South Korea and Malaysia) stayed “under water”. They were joined by Central European economies, South Africa, and Brazil, where the manufacturing PMI moved deeper into contraction zone (47.0).
EM Disinflation and Oil Prices
The OPEC+ production cut decision is likely to keep various central banks in EM on the cautious side, despite peaking inflation and growth headwinds. The market ignored a nice downside surprise in Indonesian inflation this morning (headline CPI dropping below 5% year-on-year, and core below 3%), and it remains to be seen whether further disinflation in South Korea and the Philippines (out later today and tomorrow) will move the “easing” dial. But EM is not a monolith, and idiosyncratic drivers should not be ignored – even on days like today. For example, Brazil’s new fiscal framework is just as important for the central bank as other inflation drivers – and a credible progress on the fiscal front can help to compensate for potential upside risks associated with higher energy prices. Stay tuned!
Chart at a Glance: Global Growth Drivers Checkup*
Source: Bloomberg LP
*MPMICNMA Index: Caixin China manufacturing index
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