How Is EM Growth Doing?

15 September 2022

Read Time 2 MIN

China’s growth forecast revisions look worse than most EM peers. But decisions about the policy direction might have to wait until October’s party congress.

Hiking into Recession

Emerging market (EM) growth headwinds are real, and so are concerns about a sharp growth slowdown in the coming months and 2023 – despite the easing global supply chain disruptions. Aggressive frontloading of policy rate hikes in the past months is one reason, especially in Europe, Middle East, and Africa (EMEA) and Latin America (LATAM). And this explains why downside risks to growth are mentioned more frequently in EM central banks’ communications. The weakening global growth backdrop is another major concern – the perception that key global central banks are “hiking into recession” is a big discussion topic: note that the market expectations for the US Federal Reserve’s September rate hike remained elevated this morning, despite mixed retail sales numbers.

EM Growth Risks

The near–term growth risks are not distributed evenly (EM is not a monolith), but regional growth forecasts for this year are no longer falling after earlier downgrades (see chart below). Often this is due to upside surprises in major regional economies. A good example is today’s better than expected economic activity proxy in Brazil – it beat consensus by a wide margin, accelerating to 3.87% year–on–year in July. Turkey’s 2022 real GDP forecast was raised to 4.1% – albeit the underlying policies (such as cheaper credit in the run–up to the elections) might create problems and widen macroeconomic imbalances later on.

China Slowdown and Policy Response

One economy that is clearly bucking this tentative improvement trend is China. Its 2022 growth revisions continue to move south (see chart below). The release of monthly domestic activity indicators this evening (industrial production, investments, and retail sales) could be considered a litmus test for the latest attempts to prop up growth. The predominant view is that authorities might want to wait until the 20th Party Congress in October before disbursing additional stimulus (or making revisions in the zero–COVID approach) – today’s decision to keep the medium–term lending facility rate on hold points in that direction. However, reports about small deposit rate cuts in major state–owned banks suggest that domestic rates are likely to continue grinding lower – not a good sign for the renminbi, which moved closer to 7.0/U.S. Dollar, despite the recent changes in the FX reserve requirements and stronger than expected daily fixes. Stay tuned!

Chart at a Glance: EM 2022 Growth Revisions – Spot the Odd One Out

Chart at a Glance: EM 2022 Growth Revisions - Spot the Odd One Out

Source: VanEck Research; Bloomberg LP.

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