After a solid first quarter that surprised on the upside, we expect slower GDP growth in EMEA emerging-market economies in the coming quarters arising from stronger headwinds from a prolonged Russia-Ukraine conflict, accelerated tightening of monetary policy by the U.S. Federal Reserve and other major central banks, and weaker global growth prospects. Surging food and energy prices have fueled inflation, with weaker exchange rates adding to higher prices. The hit to consumer purchasing power, tighter financing conditions, and fading effects of a recovery from the pandemic-related downturn will weigh on domestic demand throughout the rest of the year. Trade outside of commodities is set to weaken further, on the back of softer global growth and the ongoing shift in global spending from goods to services.

The sensitivity to these developments varies across EMEA emerging markets. The Russia-Ukraine conflict is taking an increasing toll on emerging Europe, and high frequency and leading indicators point to slowing growth momentum in Poland and Turkey. At the same time, energy exporters in the Middle East and North Africa (MENA) are enjoying windfall revenues (which more than offset higher food import bills), but slower global growth and tighter financing conditions will moderate these gains. Meanwhile, five MENA countries--Egypt, Jordan, Lebanon, Morocco, and Tunisia--are among the hardest hit by economic spillovers from the conflict because their economies depend greatly on imports of food or energy (or both), and they source a large part of their cereal supply from Russia and Ukraine.

Reflecting these developments, we have raised our 2022 GDP growth forecasts for most key economies in emerging-market EMEA (Europe, the Middle East, and Africa), but lowered our growth expectations for 2023 by a similar magnitude. Saudi Arabia is an exception, and we have raised our growth projections for that country for both 2022 and 2023 (see tables 1 and 2).

Table 1

Table 2

GDP Growth Held Up Well In The First Quarter, But Signs Of Deceleration Are Visible

First-quarter GDP readings were solid and stronger than we anticipated in all major EMEA emerging-market economies that we cover. Poland's GDP quarterly growth accelerated to 2.5%, from an upwardly revised 1.8% in the fourth quarter. Turkey's quarterly growth slowed to 1.2%, from 1.5% in the fourth quarter, but came out stronger than suggested by weak figures at the start of the year. South Africa's economy expanded by a quarterly 1.9%, and combined with an upward growth revision in the fourth quarter of 2021, this has raised real GDP above pre-COVID-19 levels. Saudi Arabian GDP was up 9.6% on the year, the highest in a decade, driven by booming oil output.

Domestic demand in the first quarter showed a certain resilience to a set of negative shocks, including rising energy and food prices and a hit to confidence from the Russia-Ukraine conflict. The ongoing momentum from the reopening helped to support domestic demand, while fiscal stimulus (Poland) or credit stimulus on the back of sharply negative interest rates (Turkey) also contributed. That said, household spending increased only modestly in Poland and declined in Turkey on the previous quarter, while a positive surprise on the domestic front in these economies mostly related to investment and inventories. Meanwhile, exports contracted in Poland and Turkey quarter on quarter. By contrast, commodity-exporting countries in the region (Saudi Arabia and South Africa) enjoyed a strong export performance.

After the solid first quarter, high frequency and leading indicators have been pointing to slowing growth momentum in most economies. In Poland, S&P Global's manufacturing PMI (purchasing managers' index) fell below 50 for the first time since 2020, while in Turkey the index remained below the neutral level for the third month in a row (see chart 1). South Africa's data paint a mixed picture. April data show a contraction in mining and manufacturing, but the PMI recovered some of the lost ground and is well in expansionary territory.

Chart 1

Trade Outside Commodities Is Set To Weaken Further

The global growth slowdown and the ongoing switching of global spending from goods to services will weaken demand for manufactured goods, particularly affecting economies in Central and Eastern Europe (CEE) and Turkey. We marked down our global GDP forecasts in an interim report in May, lowering our U.S. GDP growth forecast by 80 basis points (bps) to 2.4%, the eurozone's growth forecast by 60 bps to 2.7%, and China's by 70 bps to 4.2%. In the current (June) forecast round, we have further reduced our growth expectations for key large economies, revising the U.S. and eurozone's GDP growth down further marginally this year and a bit more for next year. For China, we have further lowered our baseline 2022 growth forecast 0.9 percentage points to 3.3%, considering the slower-than-expected easing of COVID-19 restrictions and a shallow recovery of domestic demand so far in the second quarter.

Moderating European demand for manufactured goods will weigh on exports in CEE and Turkey. In addition, CEE economies that are closely integrated with Europe's will suffer from supply chain disruptions due to the Russia-Ukraine conflict.

Commodity exports will likely remain robust, before softening next year. High oil and gas prices will continue to benefit energy-exporting Gulf economies, while elevated prices for industrial and precious metals should support metal exporters in Sub-Saharan Africa. Developments in China will be key to watch. As of now, prices for industrial metals have fallen from their early-April peaks. However, if China's government decides to respond to a slowdown in the economy with infrastructure investments, metal prices can receive a boost.

Inflationary Pressures Will Persist As Food And Energy Prices Continue To Rally

Higher food and energy prices continue to fuel inflation in emerging EMEA economies, with weaker exchange rates adding to higher prices in some cases. S&P Global Ratings has raised Brent oil price assumptions to an average of $100 per barrel (bbl) for the rest of 2022 and $85/bbl in 2023. This is $15 higher than our March assumptions (see "S&P Global Ratings Raises Oil And Natural Gas Price Assumptions On Further Market Price Step-Ups," published on June 8, 2022). Key hydrocarbon benchmark prices are persistently higher and appear likely to remain elevated for longer as the Russia-Ukraine conflict and sanctions continue. Demand for oil and products continues to trend upward even as additional supply constraints affected already tightly balanced markets at the start of 2022 before the conflict. Meanwhile, the extreme geopolitical uncertainty from the Russia-Ukraine conflict continues to wind up the already tight European gas market.

Prices for food staples have shot up and remain elevated, and although they have eased from recent peaks, they remain elevated, while price pressures for the next year are already building. Ongoing fertilizer shortages, harvest disruptions in Ukraine, export controls, and escalating fuel and transport costs will all exert upward pressure on food prices next year. Rising food prices and diminishing supplies will last through 2024 and possibly beyond, in S&P Global Ratings' view (see more in "The Global Food Shock Will Last Years, Not Months," published on June 1, 2022).

Emerging markets in EMEA are sensitive to the trends now coursing through commodity markets via several channels. Many emerging EMEA economies are net exporters either of food or energy or both (see chart 2), creating a tight correlation between domestic prices for food and energy and international prices. Apart from that, several emerging economies in the region import commodities from Russia and Ukraine. Some economies are particularly vulnerable, in particular commodity-importing MENA economies and Central Asia. Five MENA economies, such as Egypt, Jordan, Lebanon, Morocco, and Tunisia, are among the hardest hit by economic spillovers from the Russia-Ukraine conflict, given that they source more than one-half their total cereal imports from Russia and Ukraine (see "Economic Research: Food Price Shock Reverberates Through MENA Economies," published on May 26, 2022).

Spending on food and energy accounts for a large part of households' consumption basket in emerging EMEA economies. Indeed, the share of food in total expenses is higher in emerging markets than in developed markets, and twice as high as in the eurozone or the U.S. in some cases (see chart 3). That makes the pass-through from rises in food prices to headline CPI inflation more pronounced. Energy expenditure as a part of total consumer spending is also high in emerging Europe, making the region particularly vulnerable to higher energy prices. Overall, households in emerging economies spend much more on food than energy (see chart 3), and therefore food price increases are having much more of a negative impact on budgets than energy price increases of the same magnitude. That said, higher energy prices feed through to producer prices, both domestic and global, and then flow at least partly to core consumer prices (see more in "Which Emerging Markets Are Most Vulnerable To Rising Food And Energy Prices?" published on April 21, 2022).

Chart 3

As commodity prices are still elevated compared with the last year (see chart 4), year-on-year headline inflation has been broadly increasing across all emerging-market EMEA economies since beginning of the year (see charts 5-7), mostly due to food and energy inflation. However, we see some notable structural differences among key economies in EMEA. For example, although commodity prices contribute greatly to Poland's inflation, which reached 13.9% in May, price pressures in the economy are broad-based, fueled by a solid labor market underpinning strong wage growth, as well as an expansionary fiscal policy--that we see continuing in 2023. At the same time, core inflation in South Africa seems to be contained, pointing to muted underlying price pressures--though rising food and energy prices have pushed headline inflation above the target band of 3%-6% in May. Turkey's central bank maintains its unconventional monetary stance, keeping the key rate unchanged at 14%, despite inflation being one of the highest among our rated sovereigns (73.5% year on year in May). The lira has resumed its slide, and inflation expectations have unraveled, suggesting that inflation will remain high, even if it drops in year-on-year terms on the base effect and softening energy prices.

Reflecting these developments, we have revised upward our 2022 inflation projections for all economies except Saudi Arabia (see tables 3-6 at the end of the report). We see risks to those inflation forecasts as tilted to the upside.

Chart 4

Chart 5

Chart 6

Chart 7

The Scale And Speed Of Monetary tightening Will Differ Across EMEA Emerging Economies

Domestic inflationary pressures amid a global tightening cycle will prompt the central banks in the region to continue raising rates, to anchor expectations and protect capital flows. Global monetary tightening is advancing at a higher speed than we anticipated three months ago. We now expect the Fed to raise the federal funds rate above 3.5% by mid-2023, as well as swifter monetary policy normalization by other major central banks. As yields in advanced economies rise, emerging market assets become relatively less attractive, which raises the risk of capital outflows from emerging economies. Countries with larger current account deficits such as Turkey are most at risk, while for commodity exporters like South Africa, improved external positions offer support amid the Fed tightening and ongoing market volatility.

Taking into account structural differences in inflation drivers, different stages in the tightening cycle, and varying sensitivities to foreign capital flows, the speed and scale of monetary tightening will be different across the economies. In Poland, the central bank has already raised the key rate by 425 bps to 6% this year, and we expect it will bring the key rate to 7.5% by end-2022 to tackle broad-based inflation that is running well above the target at 13.9% in May. Once inflation is on a firm downward path, it should start lowering rates in 2023. At the same time, the South African Reserve Bank will likely gradually normalize monetary policy over 2022-2024, but taking into account rising inflation risks and faster tightening by the Fed, we now expect it to raise the policy rate to 5.5% by the end of the year (we previously expected 5%). In Saudi Arabia, we expect additional monetary policy tightening in lockstep with the Fed. Turkey is a notable exception, with the central bank set to remain on hold despite acute exchange rate and inflationary pressures.

We See Little Upside To Our Forecasts For Now

The risks to our forecast remain firmly on the downside and even more so since our March update. The Russia-Ukraine conflict is more likely to drag on and escalate than end earlier and deescalate, in our view. A hard downside scenario would involve a broad-based trade rupture between Russia and the "German-centered industrial complex," taking down growth, incomes, employment, and confidence, and spreading to the rest of the global economy (see "Global Macro Update: Growth Forecasts Lowered On Longer Russia-Ukraine Conflict And Rising Inflation," May 17, 2022). Emerging European economies integrated with European supply chains (Poland and other CEE economies), or dependent on European demand (CEE, Turkey) are particularly vulnerable, but a global downturn would affect the whole EMEA region. Another risk related to the lasting conflict is continuing price pressures in energy and food markets. This would lead to higher inflation domestically and globally, which may require central banks in the region to raise rates faster or by more than currently priced in, which could risk a larger hit to output and employment.

Poland

Stronger-than-expected GDP reading in the first quarter - 2.5% over the previous quarter - coupled with upward growth revisions for the fourth quarter of 2021 led us to raise our 2022 GDP growth forecast for Poland. At the same time, we are expecting weaker quarterly growth for the rest of the year than what we did in March. Our updated growth profile results in Poland's GDP growth forecast of 4.5% this year (previously 3.6%) and 2.1% in 2023 (previously 3.1%).

GDP growth in Q1 was to a large extent driven by inventories, and we think these will unwind over the following quarters. We expect private consumption to remain main driver of growth this year, as well as through our forecast horizon. That said, household spending should grow at a slower pace than last year, as generous fiscal policy, strong wage growth, and spending by Ukrainian refugees won't be able to fully offset high inflationary pressures and declining confidence related to the Russia-Ukraine conflict, in our view.

We think the Polish manufacturing sector, which is closely integrated with European supply chains, will suffer from supply chain disruptions due to the Russia-Ukraine conflict and COVID-related lockdowns in China, higher commodity prices, as well as weaker demand from Europe, weighing on industrial production and exports.

Recent developments related to the dispute with the European Commission over Polish judicial system reforms point to a reception of the Recovery and Resilience Facility funds by the end of this year – only slightly earlier than our previous expectation of early 2023. These funds are set to support fixed investment spending, somewhat counterbalancing weakening of private investment impacted by high uncertainty - as well as imports, thus contributing to a negative contribution of net exports through our forecast horizon.

We have again revised up our inflation forecast and now expect average annual consumer price growth of 12% this year, boosted by higher energy prices. We expect inflation to remain elevated next year, at 10%, despite lower international oil prices - a lesser deceleration compared to global trends. This is because country-specific factors have been driving up inflation in Poland, and will continue to do so next year. These factors include a solid labor market with strong wage growth, as well as expansionary fiscal policy, which we see continue into 2023. What's more, the government announced further increases in the minimum wage, which will support household spending, but will likely itself be inflationary. The end to temporary VAT cuts at the end of this year will also lift prices in 2023. In the light of inflation continuously overshooting the target, the Polish central bank hiked their policy rate by another 75 bps to 6% in June. We now see it peaking at 7.5% at the end of this year, before loosening cycle starts towards from end-2023.

Despite recent advancements in the settlement of the dispute with the European Commission over Poland's judiciary system, further delays in an agreement with EU, and subsequent delays in the reception of funds, remains a key risk to our economic outlook. This would lead to weaker than anticipated public investment, as well as negatively impact already subdued private investment due to increased uncertainty.

Table 3

South Africa

We have revised up South Africa's real GDP growth to 2.2% (was 1.8%) in 2022. The upward revision was largely due to stronger-than-expected quarterly growth of 1.9% in the first quarter (7.7% annualized). An upward revision in real GDP during the fourth quarter of 2021, combined with the first quarter positive surprise, brought South Africa's level of real GDP above pre-COVID-19 pandemic levels. The lifting of omicron-related restrictions put a wind in the sails broadly across manufacturing and service sectors to begin the year. Only mining and construction sectors reported a quarterly slowdown over the period.

That said, the economy is highly unlikely to sustain such robust performance in the coming quarters. Activity data for April showed that both international and domestic shocks--including renewed COVID-19 lockdown measures in mainland China, a slowdown in Europe, KwaZulu-Natal floods, and renewed power cuts--dealt a big blow to industrial sectors. Preliminary estimates by the government show seasonally adjusted mining production decreased 4.3% in April from March 2022, which translated to a 3.2% decline for the three months ended April 2022 compared with the previous three months. Manufacturing production also decreased--5.4% in April 2022 compared with March 2022. The South African Reserve Bank's composite leading business cycle indicator decreased 0.3% in April 2022 and 4.7% on an annual basis--the largest year-on-year contraction since May 2020. While retail sales held up well, GDP probably still contracted in the second quarter and the unemployment rate increased further.

We don't expect a very strong rebound over the remainder of the year either. Headline CPI inflation rose to an above-target 6.5% year on year in May on the backs of higher fuel and food prices--likely peaking in the second quarter and coming down only gradually over the next several quarters through this year and the next. Rising inflation will erode households' real incomes. Prospects for growth also remain limited by widening electricity deficit and structural constraints--problems with energy infrastructure are still present and poised to constrain production (loadshedding by state power provider Eskom is expected to be ramped up during winter months). Optimism earlier in the year about terms-of-trade benefits have also started to give way to creeping worries about ongoing price declines across iron ore and platinum group metal markets. (The S&P GSCI Industrial Metals price index peaked in March but remains above the prepandemic highs.) Still, exports will likely do relatively well over the year led by coal, in both volume and nominal terms.

Considering rising inflation risks and accelerated Fed tightening, we now expect the South African Reserve Bank to raise the key policy rate to 5.5% by the end of the year (was 5%). Terms of trade have improved thanks to higher export prices (although rising oil prices offset some of the gains), and we expect this to offer support for the South African rand amid the Fed tightening and ongoing market volatility.

Table 4

Saudi Arabia

We now forecast Saudi Arabia's real GDP to grow 7.4% (was 5.8%) in 2022, before leveling off to annual average 2.7% growth in 2023-2025. The upward revision for 2022 is largely due to stronger-than-expected first-quarter growth of 9.9% on the year, the most in 10 years, and much sharper than our expectations. The oil sector's output rose 20.7% year over year in first-quarter 2022. A further ramp-up in oil production now expected following the latest OPEC+ meeting will also add to growth. OPEC+ agreed to unwind previous production cuts at a nominally increased rate at their June meeting--offering an extra 648,000 barrels a day per month of oil to the market in both July and August, up from 432,000 in recent months and the largest monthly increase since January 2021.

Saudi Arabia continues to keep COVID-19 successfully under control, with 72% of the population fully vaccinated, largely avoiding the negative effects on the non-oil sector from the omicron variant in the first quarter. Non-oil growth was 4.7% year over year and is now 9.1% above the same quarter in 2019. S&P Global Saudi Arabia PMI came in at 55.7 for the second consecutive month in May, indicative of a robust improvement in the performance of the non-oil private sector economy. Backlogs increased for the first time since January 2020 and the PMI release reported business conditions have now strengthened in each of the past 21 months. However, the latest reading was below the series long-run average of 56.8.

The Saudi Central Bank (SAMA) raised its key policy rate 50 bps to 2.25% in June, following the Fed's 75 bps hike. A narrower move than the Fed was justified by SAMA noting that consumer price inflation in Saudi Arabia slightly edged down to 2.2% year over year in May 2022 from 2.3% in the previous month. Saudi Arabia is only the third G-20 country to have positive real rates, given low inflation. Brazil (high inflation, even higher rates) and China (low inflation and rates) are the other two G-20 countries (which also happen to be in our core emerging market sample) with positive rates.

With the Fed poised to implement further rate hikes in the coming months, we expect additional monetary policy tightening in lock step. As result of a stronger U.S. dollar, against which the Saudi riyal is pegged, and tighter monetary policy, inflation will likely slow to 2.8% this year and 2.6% the next, from 3.1% in 2021. Although global inflation has risen, price rises and the pass-through to consumers will not be as severe in Saudi Arabia as in other countries due to policy action, such as the cap on domestic fuel prices.

Table 5

Turkey

A stronger-than-expected GDP report in the first quarter as well as recent government initiatives to support economic growth have prompted us to raise our Turkey's forecast to 3.5% in 2022, from 2.4% previously. At the same time, we have revised 2023 GDP growth to 1.7%, from 2.9%. Our updated quarterly growth profile assumes much weaker economic performance for the rest of the year, with GDP contracting in the second half, as domestic and global shocks take an increasing toll on the economy. Acute exchange rate and inflationary pressures are hitting consumer purchasing power and undermining confidence, which will continue to weaken private consumption. Recession in Russia and Ukraine, as well as the growth slowdown in the eurozone and the U.K. will weigh on exports, which has been Turkey's important growth driver until recently. Ongoing strong recovery in international tourism remains a bright spot.

Turkey's GDP growth continues to moderate from the high pace of a credit-driven recovery as pandemic worries ease, with quarterly GDP growth easing to 1.2% in January-March (7.3% year on year). Still, this GDP report was an upside surprise against our expectations of economic contraction. The first quarter saw a rotation of growth drivers, as consumption and exports volumes both fell from elevated levels, while investment picked up after falling for two previous quarters. Imports fell even more, so that net contribution of foreign trade to growth was positive.

Surging food and energy prices, coupled with ultra-accommodative monetary policy, will continue to fuel inflation, and we expect annual CPI numbers to stay above 70% until end of the year, before dropping in December on the base effect and softening energy prices. The Turkish lira has resumed its slide, which is adding to price pressures. We don't see any sign of a change in the monetary stance of Turkey's central bank, and expect it will keep the key rate unchanged at 14% in the coming months, while using various macroprudential measures to curb credit growth and support the currency. Inflation expectations have surged and even under the assumption of lower energy prices and a relatively stable lira next year, we expect inflation to remain above 20% until at least mid-2023.

The recovery in tourism has gained steam, thanks to improvements in the pandemic and competitive lira. In the first four months of 2022, foreign visitor numbers were 2.7 times higher than last year, with the gap to prepandemic levels narrowing to 12%, compared with 45% in 2021. Arrivals from Europe and other regions are surging, while a decline in number of visitors from Russia has been contained so far (a 18% drop from January to April, compared with the same period in 2021). We expect a strong summer tourism season, which should boost foreign currency revenues and alleviate some pressure on the lira.

Risks to the outlook are numerous and include ongoing exchange rate pressures and financial market volatility as the loose domestic monetary stance interacts with rising global interest rates, as well as a sharper slowdown in key trading partners. On the other side, additional government support ahead of parliamentary and presidential elections in 2023 may push growth up, with the adjustment taking place in postelection years.

Table 6

Related Research

• Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent, June 27, 2022
• Economic Outlook Eurozone Q3 2022: Inflation Dulls The Post-COVID Bounce, June 27, 2022
• Economic Outlook Asia-Pacific Q3 2022: Overcoming Obstacles, June 26, 2022
• The Global Food Shock Will Last Years, Not Months, June 1, 2022
• Food Price Shock Reverberates Through MENA Economies, May 26, 2022
• Which Emerging Markets Are Most Vulnerable To Rising Food And Energy Prices? April 21, 2022