Major developed economies face a rising threat of recession as monetary policy is tightened to rein in inflation and supply-chain shocks, notably from COVID-19 and Russia’s invasion of Ukraine. While this scenario undoubtedly poses a threat to emerging markets (EM), it is essential to differentiate among individual economies. Some are better placed for growth in H2-2022 as they benefit from long-term reforms introduced during the pandemic years, the liquidity boost from higher oil prices, or China’s expected recovery. We expect the Gulf Cooperation Council (GCC) and Southeast Asia to be the only regions to avoid a growth slowdown this year, boosted by higher oil output and China’s H2 recovery, respectively.
“What we've learned over the last few months with Russia-Ukraine is that military conflict really does wreak havoc on supply chains,” said Eric Robertsen, Global Head of Research and Chief Strategist at Standard Chartered.
It exacerbates a trend that we've seen over the last couple of years, which is that as business cycles become more volatile, growth becomes more volatile in both directions and inflation becomes more volatile in both directions
Developed economies: Risking recession
In the US, the world’s largest economy, the growth outlook is deteriorating. A sharp downturn in the housing1 and construction sectors is already evident, while business and consumer confidence is low2 and manufacturing output is beginning to slip.3 Inflation continues to track above market expectations,4 and the Federal Reserve is determined to bring it back down, even at the cost of growth. We see this pushing the US into recession, albeit a shallow and brief one, towards the end of 2022.
In the euro area, which also stands a high chance of technical recession later in 2022 and into Q1-2023, the crisis in Ukraine has stoked concerns over the security of energy supplies - particularly for Germany - and the prospect of stagflation. However, the challenge is most acute for Central and Eastern European economies, where proximity to Ukraine, aggressive policy tightening, and weaker confidence leave the region vulnerable to a slowdown.
Emerging markets: Worlds of difference
While the probability of recession is rising in developed markets, most EM economies are still some way from that point, particularly those benefiting from commodity exports or the early stages of a post-pandemic boom.
The Gulf states have benefited from windfall oil and gas revenues, especially since Russia’s invasion of Ukraine. GCC economies have focused their policies on long-term diversification.5 The Saudi government, in the midst of the pandemic, tripled its value-added tax (VAT) rate from 5 per cent to 15 per cent, putting public finances on a sounder footing.6 Industrial diversification is also underway – the Kingdom has signed an MOU to build the world’s largest solar plant to produce green aluminium,7 part of a broader effort at ecofriendly industrial diversification in the Gulf states.8
Elsewhere in the region, the UAE – the first MENA country to adopt a plan to achieve net-zero emissions by 20509 – is set is set to introduce a 9 per cent corporate income tax rate from 2023 as it seeks to strengthen its tax base and lessen its reliance on hydrocarbon revenues.10 Oman11 and Bahrain12 are undertaking other fiscal reforms, including higher VAT in Bahrain and a possible income tax in Oman.
Sub-Saharan Africa (SSA) had an upbeat first quarter but maintaining this performance will be challenging. Kenya grew 6.8 per cent in Q1,13 Uganda reopened its schools following the COVID-19 shock, and South Africa’s economy returned to its pre-pandemic size.14 However, faced with rising consumer prices and a tightening global policy environment, the region’s central banks are hiking interest rates. Meanwhile, fiscal space is shrinking in many SSA countries, making fuel and food subsidies difficult.
Benefiting from China’s slipstream
China is a possible source of external support for EM. Just as higher commodity prices have buffered the Gulf states from the turmoil in developed economies, other EM regions may benefit from a turnaround in Asia’s largest economy in H2.
Shanghai, China’s most populous city and a key economic centre, reopened in June after a two-month COVID-19-related lockdown. Public concern over further mobility restrictions is likely to temper consumer spending in H2, but government efforts to revive the economy through infrastructure spending should support growth; much will depend on whether the authorities impose further restrictions. We expect growth of 5.3 per cent in Q3-2022 and 5.9 per cent in Q4, followed by annual growth of 5.8 per cent in 2023.
China’s resilient growth should support economic activity in nearby economies such as Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam (the ASEAN-6) given the extensive trade and investment links between the two regions.15
Easing pressures in 2023
Concerns remain that central banks, intent on controlling inflation, risk pushing economies over the growth ‘tipping point’. Most EM economies – especially those reaping the benefits of a post-pandemic boom or windfall revenues from commodity exports – are not currently at that point. But as inflation spreads from developed markets, conditions are likely to become more challenging.
Economies that cannot capitalise on higher commodity prices or make the investments needed for long-term growth are particularly at risk. In a tighter global policy environment, many frontier-market issuers are already finding it difficult to issue in external markets. While most can probably manage for now, a wave of external debt maturities that require refinancing in 2024 and 2025 could present a challenge. In that context, a reallocation of the IMF’s Special Drawing Rights would do much to ease countries though the turbulence, especially if support could also be extended to middle-income countries.16 This would avert the need for rapid FX reserve drawdowns, and could lessen the risk of a more widespread debt crisis.
Globally, we see reasons for cautious optimism in 2023. In our view, commodity prices have passed their peak, and easing cost pressures should bring down average inflation rates in 2023. Recent energy security issues and lower green premiums are likely to accelerate the adoption of renewables over the medium term. As the world shifts to greener forms of energy, new investments in the climate transition could reap dividends. There are plenty of opportunities out there for those with a long-term view.
This article is based on themes discussed during the Standard Chartered Global Outlook H2-2022 event and the Global Focus report “Near the tipping point”. Access the report here and view the event replay here.
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