The macroeconomic narrative hasn't really changed in material way since our last outlook.   (See "Further Growth Slowdown Amid Gloomy Global Prospects," published Sept. 26, 2022). The global macro environment may not have deteriorated since late-September, but it hasn't improved, either. Conditions continue to reflect elevated geopolitical tensions and economic policy uncertainty.

The Russia-Ukraine conflict (and the proxy economic war with the West) continues with no end in sight. Governments face a tricky trade-off between public debt management and macroeconomic stability. Major central banks (excluding Japan and China) remain steadfast in pursuing hawkish monetary policy to address above-target inflation. China is still committed to its zero COVID-19 policy. There are murmurs China will soften its lock-down stance and the U.S. its monetary policy stance (following lower-than-expected October inflation), but nothing meaningful yet to bank on.

S&P Global Ratings revised up China's GDP growth forecast by 50 basis points (bps) for this year (the third quarter showed surprising upward growth) and 10 bps for next year, helped by the announcement of the softening stance on the property sector and easing of COVID-19 policies (see more in "Global Slowdown Will Hit, Not Halt, Asia-Pacific Growth," published Nov. 27, 2022). Growth forecasts for the other two major economic blocks--the U.S. and eurozone--were reduced slightly for next couple of years , and we continue to see mild to moderate forms of recession in these economies in 2023 (see more in "Economic Outlook U.S. Q1 2023: Tipping Toward Recession" and "Economic Outlook Eurozone Q1 2023: Reality Check," published Nov. 28, 2022). We also now pencil in a 100-bps higher terminal rate for the Federal Reserve's benchmark rate of 5.00%-5.25% by second-quarter 2023.

In the face of global policy crosswinds, EM countries have so far done better than expected at the margin.   Still, recent GDP estimates from government agencies, real-time activity trackers, and sentiment data all point to the same story: growth is decelerating. According to government national accounts estimates, growth slowed or stayed the same in the third quarter in most EMs. China was a notable exception, as the economy continued to recover from Covid lockdowns in the second quarter. That said, restrictions imposed under the government's zero COVID-19 stance, very poor real estate activity, and weak sentiment remain a persistent hiccup on growth.

A further deceleration followed in the beginning of the fourth quarter, which is visible across the board in OECD's more timely real time weekly GDP tracker (see chart 1)--especially in Hungary, Turkey, and Poland in the Europe, Middle East, and Africa (EMEA) region, and in Argentina and Chile in Latin America. Meanwhile, Mexico and Brazil displayed better performance than the rest of Latin America. In Asia, India and Indonesia continue to display resilience--though the GDP tracker shows easing activity (see more in "Emerging Markets Real-Time Data: Activity Continues To Wane With Weakening Demand And Tighter Financial Conditions," published Nov. 10, 2022.)

Chart 1

Chart 2

Business sentiment data indicated a similar story (see chart 2). The overall EM manufacturing output index by S&P Market Intelligence displayed slightly weaker activity in October compared with the earlier three-month average, coming in just below 50 at 49.6, weighed down primarily by Poland, Turkey, Colombia, Mexico, Malaysia, and China, while output continued to show expansion in India, Indonesia, Thailand, Vietnam, and Brazil. Across the board, the state of external demand seems to be affecting EM economies particularly badly. The new export orders components of their purchasing managers' indexes (PMI) have remained at exceptionally low levels and softened in most EMs in October. (India is an exception, moving up, and Vietnam is still just above 50 though it has moved down.)

Electricity disruption data for South Africa (and forward-looking announcements) point to a continuation of severe load shedding in the coming months. Saudi Arabia, an oil exporting nation enjoying an oil price windfall, continues to beat growth forecasts on both oil and non-oil sectors.

Forecast Update: Growth Will Weaken Into Next Year, With Lower Inflation And Slower Monetary Tightening

Better-than-expected growth in several EM economies in the third quarter triggered an upward revision of 0.3 percentage points to our 2022 GDP growth forecast for our sample of EMs excluding China. However, this masks what we expect will be a weakening growth dynamic in the fourth quarter and next year. We revised down our 2023 growth forecasts for most countries, with Saudi Arabia as a notable exception (see table 1). Countries in central and eastern Europe (CEE), as well as Latin America, are poised to expand well below longer-run trends, while South Africa, India, and Southeast Asia will grow a tad under their respective growth trends. We then expect growth across EMs to return closer to respective potential growth rate in 2024.

Common drivers of slowing growth in 2023 are:

• Fading post-pandemic catch-up/recovery momentum,
• Weakened demand from key major trading partners,
• Still-elevated prices eating into disposable income growth, and
• The lag from policy rate hikes (in the form of higher interest rate) holding back consumption and investments.

Saudi Arabia stands out with more than 50-bps upward revisions in both 2022 and 2023 as it continues to clock strong performances both in the oil and non-oil sectors (on pace to become the fastest-growing economy in the G-20). Its policies on future investments on non-oil sectors are also conducive to growth.

Table 1

We see little change in our inflation forecasts and risks around it. Headline inflation is poised to moderate next year for most of the EMs.   Commodity prices have continued to decline amid the global economic slowdown, and there has been a steady improvement in supply-chain constraints. Container shipping costs have dropped from their 2021 peaks. PMIs for supplier delivery times have also improved over the last few months. The drop in commodity prices augurs well for putting a lid on inflation.

That said, global commodity prices remained almost 40% above the pre-pandemic peak, and energy prices were 42% above their pre-pandemic peak. S&P Global Ratings raised its 2023, 2024, and 2025 Brent oil price assumptions to $90/barrel (bbl), $80/bbl, and $55/bbl, respectively, as supply fundamentals and geopolitical risk premium remain supportive for higher prices (see "S&P Global Ratings Revises Its Oil And Gas Price Assumptions On Supply/Demand Fundamentals," published Nov. 18, 2022). Meanwhile, Russia has agreed to extend the Black Sea grain deal--which should help contain food inflation at the margin--but this is still at risk of getting scratched any moment depending on the evolving war. Overall global food prices dipped 4.4% from September, but soybean oil and rice prices were up by 11% and 7%, respectively. Agricultural production faces severe challenges from droughts in several food-producing countries in the world, coupled with high input costs, particularly for fertilizer.

Chart 3

Chart 4

Still, although energy inflation is poised to see disinflation to outright deflation, stickier elevated core inflation will keep overall headline inflation above central banks' targets across the EMs (excluding China, Saudi Arabia, and Vietnam) for the rest of this year and well into next year as past increases in energy prices, higher negotiated wage settlements, and higher import prices from currency depreciation spill into broader core items.

Inflation appears to have peaked in Latin America in the first half of 2022, and we expect the disinflationary process to continue gradually next year. In the EM-EMEA region, inflation peaked only recently in Saudi Arabia and South Africa, while it is still to peak in economies of Central and Eastern Europe (Poland and Hungary) that are particularly exposed to very high and volatile European gas prices and elevated risk of energy supply disruption. Energy subsidies can, in part, alleviate inflationary pressures, but they come at a fiscal cost. We expect inflation in Hungary and Poland to peak in first-quarter 2023 and ease only gradually after that, remaining in double digits in 2023 (see table 2). In emerging Asia, inflation is likely to rise further as domestic demand recovers. We expect core inflation to pick up even though headline inflation may ease given global commodity prices have come down recently.

Table 2

As forward-looking disinflationary expectations have started to build, economies in Latin America (Brazil, Chile) have paused their tightening cycles, and we expect central banks in Latin America to cut interest rates next year, perhaps Chile and Brazil starting even as early as in the first quarter. Aside from Brazil and Chile, Poland and Hungary also just recently signaled an end to raising benchmark interest rates--a possible interest-rate peak--in their respective tightening cycles. Nevertheless, as the energy price outlook remains uncertain amid a potential persistence of core inflation, upside risks to current interest-rate levels are present, especially among CEE economies.

Considering rising inflation risks and a higher Fed terminal rate, we now expect the South African Reserve Bank to raise the key policy rate to 7.5% by the first quarter of next year (was 7%) before pausing as inflation eases. As inflation starts to get under the upper bound of the central bank's target (i.e., below 6%), it will begin cutting later in the year, but only gradually with an eye on the U.S. in part to protect capital flows and value of the currency. In Saudi Arabia, with the U.S. Fed poised to implement further rate hikes in the coming months, we expect additional monetary policy tightening in lock step. Meanwhile, we expect tightening in EM Asia to continue, albeit gradually. Central banks in India, Indonesia, and the Philippines have tightened policy significantly, and we expect the pace of tightening to moderate, while in Thailand and Malaysia we expect more gradual tightening.

Chart 5

Higher global interest rates will continue to weigh on EM central banks next year.   Implications of continued U.S. interest rate hikes (our U.S. team's projections) also mean pressures on EMs' monetary tightening (at least in real terms) to continue apace next year as EM central banks will continue to keep an eye on exchange rate pressures. In real terms (one-year forward looking inflation), we see policy rates continue to tighten albeit at a gradual pace in all except Brazil (where policy rates have been largest in real terms). Exchange rates are likely to weaken further next year in many of the EMs, before reversing course in 2024.

Table 3

Regional Outlook Summaries

Emerging EMEA: Conflict continues to shape the outlook and risks

(Hungary, Poland, Saudi Arabia, South Africa, and Turkiye)

As the year draws to a close, the fallout from Russia-Ukraine military conflict continues to shape the outlook and risks for EM EMEA, in particular in CEE (Hungary, Poland). CEE economies will continue to face elevated energy import bills, risk of energy supply disruption, and elevated uncertainty weighing on consumer and business confidence. While economic activity in CEE has held relatively well until recently, helped by significant government support, we expect a sharply lower GDP growth in the coming quarters as persistently high inflation, waning impetus from the pandemic reopening, and tightening of financing conditions dent growth momentum. A downturn in developed Europe, CEE's key economic partner, further clouds the outlook. We forecast Poland's GDP growth to drop to 0.9% in 2023, down from 5.5% expected this year. In Hungary, which is facing much tighter monetary and fiscal policy settings, we expect GDP to remain virtually flat in 2023, falling to 0.2% from expected 4.6% in 2022. In a downside scenario of a complete cut-off of gas supplies from Russia, a surge in energy prices, and significantly tighter monetary policy in the U.S., eurozone, and the U.K., both economies would be in recession in 2023 (see "Central And Eastern Europe: Growth Freezes, Risks Mount," published Nov. 10, 2022). Once the external environment improves, the CEE economies should regain their growth momentum, with GDP growth recovering to 3.1% (Poland) and 3.2% (Hungary) in 2024.

Our macroeconomic narrative for Turkiye has not changed materially since the September update. We have raised our GDP growth forecast for Turkiye to 6.1% in 2022, from 5.2% previously, on the account of stronger-than-expected incoming data, but we expect activity to slow in the coming quarters amid high inflation, depressed consumer and business confidence, and faltering European demand. We forecast 2.4% GDP growth in 2023, while acknowledging a high uncertainty regarding policy settings after parliamentary and presidential elections mid-2023 elections.

For the region's energy-exporting economies in the Gulf Cooperation Council (Saudi Arabia), the macroeconomic picture is on the other hand very positive. Saudi Arabia, key global exporter of oil, is on track to become the fastest growing economy in the G-20 this year. In the third quarter, both oil and non-oil sectors had performed well, with the non-oil sector particularly exceeding expectations. Fixed investment spending has received a boost as the government announced several investment projects to push forward decisively with the Vision 2030 agenda. The cautious approach to oil production points to growth in the oil sector slowing in the fourth quarter, which is likely to persist into 2023 against the weak global economic backdrop. By contrast, growth in the non-oil sector is likely to remain strong on the back of looser fiscal policy and a falling unemployment rate. We have raised our forecast of Saudi Arabia's real GDP growth to 8.1% (was 7.5%) in 2022 and 3.4% in 2023 (was 2.9%), before leveling off to an average of 2.3% growth in 2023-2025 (was 2.5%).

Latin America: A marked slowdown expected in 2023

(Argentina, Brazil, Chile, Colombia, Mexico, and Peru)

Our macroeconomic assumptions for Latin America remain broadly unchanged since our previous update in September. Stronger-than-expected growth in the third quarter pushed up our 2022 GDP growth estimate for Latin America to 3.4% from 2.8%, but we still expect the major economies in the region to enter a period of below-trend growth in 2023. We forecast growth to slow to 0.7% in 2023, compared with 0.9% in our previous projection. The combination of the impact of tight global financial conditions, weak demand in key trading partners (especially the U.S. and China), and a deterioration in domestic demand as the still-ongoing recovery from the COVID-19 downturn loses momentum will be the main drivers of slower GDP growth next year. We then expect growth in the region to return to its traditionally low potential growth rate of just above 2% in 2024.

Inflation in the region, in month-on-month terms, peaked either in late first quarter or early second quarter depending on the country, and we expect this disinflationary process to continue gradually next year, assuming commodity prices do not rise higher. The pass-through of headline inflation to core prices has been relatively orderly, and we expect this will encourage central banks in the region to start lowering interest rates. We see Chile's central bank cutting its benchmark interest rate as early as first-quarter 2023, with Brazil following suit soon after and most of the other major central banks in the region reducing interest rates in the first half of 2023.

The government response to the expected period of slower economic growth is likely to generate a certain degree of investor uncertainty surrounding the risk of fiscal slippage. This is likely to be higher in countries where new executive branches have been elected that campaigned on higher levels of social spending, such as Brazil and Colombia. However, in those cases the legislative branch is divided, which means proposals will have to be negotiated with opposing political parties, likely resulting in a degree of dilution. Risks to growth from abroad are significant, especially in regard to the evolution of the U.S. and Chinese economy, as well as the overall trajectory of global financial conditions.

To read our full report on Latin America, see "Economic Outlook Latin America Q1 2023: A Shift To Lower Growth."

Emerging Asia: 2023 outlook cloudy on external demand weakness

(India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam)

Weaker global growth over 2023 and slower domestic recovery momentum will weigh on the 2023 outlook in emerging Asia-Pacific following strong economic growth in 2022. Third-quarter growth was broadly resilient with strong trade and private consumption numbers, which will put the region on track for a resilient economic recovery this year. We expect growth of 6.5% in 2022 followed by 5.4% in 2023 compared with our previous forecasts of 6.5% and 5.8%, respectively.

The trade outlook is weakening for the region as global economic growth slows. New export orders in the region have been slowing for a few months and will gradually result in slower trade activity. The global electronics cycle has turned and has already led to sharp export slowdowns in Taiwan and South Korea, which are electronics activity bellwethers in Asia. Emerging Asian economies are members of the global electronics supply chain and global electronics demand will affect manufacturing activity.

Malaysia had the strongest third-quarter GDP in the region with the economy expanding 1.9% over the past three months. We forecast GDP to expand 8.9% in 2022, up from our previous forecast of 6.6%. Strong real trade growth was a key driver of the outperformance. We forecast growth of 3.2% in 2023, down from our earlier forecast of 4.4% due to the higher 2022 base as well as weaker trade activity.

In India, activity numbers have been softer than expectations, and as a result, we lowered our growth forecast for fiscal year 2022-2023 to 7.0% compared with 7.3% earlier. Our new forecasts still indicate a resilient recovery. High frequency activity points to ongoing domestic demand recovery while net exports have been weighing on overall growth numbers. Weaker terms of trade due to higher energy prices, tightening monetary policy, and higher inflation have been slowing recovery momentum.

Inflation across the region is elevated with higher food prices, with India and the Philippines facing the highest inflationary pressures. Energy price inflation is moderating but oil prices remain within an elevated range. We expect some regional inflation moderation next year. Central banks in India, Indonesia, and the Philippines have tightened policy significantly and we expect the pace of tightening to moderate, while in Thailand and Malaysia we expect more gradual tightening.

To read our full report on Asia-Pacific, see " Global Slowdown Will Hit, Not Halt, Asia-Pacific Growth."

Appendix

Table 4

Table 5

Table 6