EM Growth – The Big Freeze?

15 November 2022

Read Time 2 MIN

China pre-empted softer than expected domestic activity with additional policy support. What policy options are open to the rest of EM?

China Slowdown

The growth cliff narrative refuses to go away, and this includes independent global growth drivers, such as China. China’s domestic activity indicators were softer than expected in October – all of them: consumption/retail sales, industrial production, and investments. Property investments and residential property sales contracted further (a lot). The fact that authorities decided to ease some COVID restrictions and introduce additional measures to support the housing sector suggests that negative activity signals were visible well before the official numbers were released. With this in mind, we are leaving today’s backward-looking data behind and shift our attention to the new measures’ impact on the real economy (which might already be visible in the next batch of the activity surveys at the end of the month).

EM Growth Cliff and Rate Cuts

We do get an occasional upside growth surprise here or there – Poland’s Q3 GDP growth was stronger than expected at 3.5% year-on-year. This notwithstanding, domestic activity is clearly moderating on the back of higher inflation (erosion of real disposable income), higher rates, and the impact of the Russia/Ukraine war. The expected shallow recession in Poland’s main trading partner, the Eurozone, is not helping either. The deteriorating external backdrop will be hurting regional peers - Hungary and the Czech Republic - even more, because they are more open economies. Note that both countries posted weaker than expected Q3 GDP numbers (a technical recession in Hungary). The extent of the 2023 growth downgrades in Central Europe is quite astonishing (see chart below), which is why national banks will try to avoid additional rate hikes – despite very high inflation - and start cutting rates at the earliest opportunity.

LATAM Growth Outlook

LATAM’s 2023 growth cliff might be quite sharp as well, with Chile falling into recession, and the Colombian economy expected to slow to 1.9% from 7.3% this year. Colombia’s Q3 GDP print will be released later today, and it will give us a better idea about the speed of slowdown. Colombia’s inflation was still accelerating in October, but the deteriorating growth outlook – together with the slower pace of hikes in the U.S. – cooled the market expectations for additional rate hikes, with the policy rate now expected to peak at 12.4% (vs 13%+ just a couple of weeks ago). Stay tuned!

Chart at a Glance: Central Europe 2023 Growth Downgrades – The End In Sight?

Chart at a Glance: Central Europe 2023 Growth Downgrades - The End In Sight?

Source: Bloomberg LP.

ECGDPL 23 Index: Bloomberg consensus forecasts for real GDP growth in 2023 for Poland, Hungary and Czech Republic.


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