24 May 2022
VanEck Blogs | Emerging Markets Debt Daily
“Jagged” Growth = Sharper Disinflation?

A lot of EM inflation surprises are to the upside. Can weaker growth pave the way to disinflation, or is stagflation still the baseline?

Weaker Consumer Confidence, Growth Cliff Risks

High inflation continues to dampen consumer confidence in many parts of emerging markets (EM), reinforcing concerns about a growth cliff later this year after a generally strong Q1. The initial post-pandemic consumption “euphoria” is still driving services, but the widening gap between relatively robust business and weakening consumer confidence surveys – as well as between the current assessment and expectations – is getting harder to ignore. We saw this in Hungary yesterday, and today’s data releases in the Czech Republic showed exactly the same picture. Of course, Central Europe is in a unique position among EM, as EU funds create a sizable external fiscal impulse of sorts (supporting business confidence). As for the rest of EM, this year’s growth profile might indeed end up more “jagged”, potentially leading to sharper market sentiment swings.

EM Inflation, Pace of Rate Hikes

It remains to be seen whether “jagged” growth would pave the way for sharper disinflation in the coming months – the stagflation scenario tells otherwise, and the latest inflation prints in EM are still on the strong side. Brazil had yet another upside surprise this morning (12.2% year-on year), which suggests that there may be room for more than one rate hike in the current cycle. Mexico’s bi-weekly inflation might be showing signs of stabilization (see chart below) and perhaps arguing against a faster pace of hikes (+75bps). However, both core and headline inflation are running well above 7%, and this means “hike, baby, hike” at 50bps per rate-setting meeting for the time being.

EM Asia Catching Up With Peer Central Banks

The recent policy moves show that EM Asia has caught a hawkish “bug” from its peers in EMEA and LATAM. Pakistan delivered a larger than expected 150bps rate hike yesterday – continuing a line of hawkish surprises that started with India, and now also includes Malaysia and the Philippines. Indonesia held its policy rate – and major forecasts (growth, inflation) – on hold today, citing global growth concerns, but it decided to further raise the reserve requirements for banks. Thailand’s rate-setting meeting is coming soon – can the central bank continue to ignore inflation risks? Stay tuned!

Chart at a Glance: Mexico Inflation - A Change of Direction?

Chart at a Glance: Mexico Inflation - A Change of Direction?

Source: Bloomberg LP

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Natalia
Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income