Rising costs and gloomier prospects cast shadow over emerging market outlook

Emerging market economic growth was sustained at a solid pace in June, despite easing from the one-year high seen in May. The expansion was led by manufacturing as service sector growth slowed. Further improvements into the second half of 2024 were also hinted by forward-looking order book indicators, albeit with the likelihood of a slower growth pace. Moreover, optimism cooled midway through 2024, hitting a four-year low. Both manufacturers and service providers were less upbeat in the latest survey period amid concerns over the economic outlook and rising costs.

Input price inflation climbed to a ten-month high, driven by a faster increase in manufacturing sector costs. That said, easing inflation in the service sector meant, measured overall, output prices rose at a rate largely unchanged on May.

Emerging market expansion ease with slower services activity growth

The PMI surveys compiled globally by S&P Global found the emerging markets to have collectively expanded at a solid pace at the end of the first half of 2024, despite the pace of growth being the slowest in the year-to-date. The GDP-weighted Emerging Market PMI Output Index fell to 53.3 in June, down from 54.3 in May. This nevertheless extended the sequence of growth to one-and-a-half years. Alongside the expansions in developed markets, the sustained emerging market upturn signals worldwide economic growth of an annualized rate of 3.0% in June, according to PMI indications.

Emerging markets saw the expansion in output being driven by the manufacturing sector. Manufacturing production rose at the fastest pace since November 2020, with three of the four largest emerging market economies - Brazil, India, Mainland China- all registering faster expansions in manufacturing output. In particular, goods production in Mainland China unfolded at the quickest pace in two years, with firms in the consumer segment recording especially sharp growth in June.

On the other hand, emerging market service activity grew at a slower pace in June, the softest in seven months. Slower expansions were seen in Mainland China and Brazil, though India bucked the trend to indicate the fastest rise in services activity for three months

Overall, among the four major emerging market economies, India once again consequently recorded the fastest rate of expansion across both manufacturing and services combined. Furthermore, the rate of expansion accelerated from May for India, while Brazil also saw faster overall output growth. Mainland China's output growth eased in June, though this was attributed mainly to slower services activity growth. Finally, Russia's business activity slipped into contraction for the first time since January 2023 on a slowdown in the service sector.

Emerging markets' new business growth slows alongside fall in confidence

In line with the global trend, emerging markets new orders rose at a more moderated pace in June. This was amidst slower inflows of new work in both the manufacturing and service sectors in June. Export orders have likewise increased at slower rates, though remaining in growth territory, contrasting the global trend which saw trade conditions deteriorate marginally.

Additionally, business confidence fell among emerging market firms, with the Future Output Index posting the lowest reading in four years. Concerns over the outlook, coupled with jitters over rising costs and the impact on margins, were listed as reasons for the less upbeat outlook among both manufacturers and service providers in June.

That said, forward-looking indicators, including the New Orders Index and the Backlogs of Work Index, the latter at an over two-year high, all point to the expectations that growth will sustain in the near-term, even if the pace of growth may likewise ease from the solid pace seen in the first half.

Cost pressures further intensify for emerging market businesses

On prices, average input costs continued to rise for emerging market firms. This stemmed primarily from an accelerated increase in manufacturing sector input prices, which increased at the fastest pace in nearly two years. In contrast, services input price inflation remained elevated, but had eased slightly from May.

While the increase in average input prices, across manufacturing and services, did not result in higher output price inflation in June, this is notably only because softer service sector inflation managed to offset the quicker increase in the goods producing sector. The sustained rise in manufacturing sector prices is therefore an area of concern and will be worth watching, with the threat to global inflation given developed markets' dependency on emerging nations for goods production.

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Jingyi Pan, Economics Associate Director, S&P Global Market Intelligence

jingyi.pan@spglobal.com

Purchasing Managers' Index™ (PMI^®) data are compiled by S&P Global for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.