Global Economic Environment Tests EM Resiliency
As most emerging market (EM) economies continue to recover from the COVID-19 pandemic since our March forecast publication, global macroeconomic headwinds, including geopolitical and financial conditions, have deteriorated further. The optimism of early 2022 has given way to worries of a sharply weakened global economy ahead of us on account of a longer-than-expected Russia-Ukraine conflict, higher energy and commodity prices, economic damage from pandemic lockdowns and restrictions in China, and faster monetary policy normalization in the U.S., Eurozone, and many other major central banks. The focus of the global macroeconomic outlook has become the ability of central banks–most notably the U.S. Federal Reserve–to return to its 2% inflation target while avoiding a sharp downturn.
Despite the challenging global economy, GDP growth held up relatively well across most of the EMs in the first quarter. However, momentum stalled (at best) in the second quarter and weakening growth is on the cards for the next few quarters, especially in the EM-EMEA and LatAm economies.
Solid activity growth in both commodity importers and commodity exporters in the first quarter partly reflects resilient domestic demand on the back of ongoing momentum from the pandemic recovery, and in some cases, the lingering effect of government stimulus measures. Domestic demand has kept economies afloat during this recovery in some countries where external demand has yet to recover to pre-pandemic level (Argentina, Thailand, Saudi Arabia, Chile). In some cases, recovery in exports have outshined that of domestic demand (Brazil, Mexico South Africa, Indonesia) (see chart 1). That said, recovery from COVID-19 has broadly continued in the service sector. Export momentum eased generally in line with global trade slowdown after the bounce-back in 2021. The demand for EM manufactured goods is likely to weaken further as softer global growth becomes a headwind. In addition, consumer demand growth was due to naturally shift from tradable goods to non-tradeable services as the service sector normalizes and strengthens with fading impact from the COVID-19 pandemic.