Economic activity in the emerging markets (EM) has continued to exceed expectations since our last publication ("Activity Picked Up In Early 2023 Amid Global Macro Crosscurrents," March 10, 2023), according to the latest EM high frequency indicators. Indeed, service sector activity has been holding up remarkably well. The performance of the industrial sector, on the other hand, has been mixed across EM countries.

In China, the latest high frequency indicators offered a mixed picture following a better-than-expected first-quarter GDP print. Credit posted double-digit growth in the first four months of this year on favorable base effects, but the flow of credit (specifically, new yuan loans) did slow in April. And while domestic economic activity picked up in April, it was less than what markets had expected. Sluggish import data in China also indicated a lack of domestic demand.

Meanwhile, China's services sector rebounded in March and April with double-digit growth, as pent-up post-lockdown demand filtered through the economy. China's tourism sector also rebounded, with domestic air traffic almost returning to pre-pandemic levels in April: There were over 50 million passenger trips, compared with an average of 54 million trips per month in 2019. Several EM countries are benefiting from the easing of travel restrictions, although the volumes they're seeing still lag far behind pre-pandemic levels.

Overall commodity prices kept falling since our last publication, on slowing global demand for nonenergy commodities. Commodity prices are down by more than 10% from the first week of March. Metal prices have also seen downward pressure--but not the prices of precious metals, which have increased 7.8% during the same period.

Energy prices have remained range-bound in the last three months after having slumped in the months before. Crude oil prices, for example, have been stuck at current levels despite the latest OPEC+ announcement of further output cuts. Food prices have also edged lower in recent months--down 4% since the first week of March--primarily because of the tumbling prices of corn, soybean oil, and wheat. The drop in commodity prices (and especially in the price of food) augurs well for putting a lid on headline inflation.

The fast-moving nature of global risks highlights the need for more timely data to supplement traditional economic indicators. The charts below illuminate aspects of the recovery and expansion across EMs.

Sentiment

Business sentiment

Overall, global business sentiment largely remained steady over the past three months. The S&P Global Market Intelligence Purchasing Managers' Index (PMI), a closely watched indicator tracking global manufacturing, showed little change in activity, once again, through the middle of the second quarter. The global manufacturing PMI in May came in at 49.6, unchanged from the previous month, with the output index reaching a one-year peak at 51.5. Notably, the manufacturing output index for India signaled the fastest pace of expansion since November 2020, while the corresponding index for China indicated the fastest pace of expansion since June 2022 (see chart 1). This could be a sign that global manufacturing output is likely to surpass expectations in the second quarter. That said, new orders were still constrained, with the global manufacturing PMI new orders index staying just below the neutral mark, at 49.3 (see chart 3). The new orders index has stayed below 50 for the last 11 months, suggesting underwhelming demand for manufacturing goods.

The median manufacturing output index for our core EM countries (excluding China) improved slightly in May, to 49.6, after posting an average reading of 49.4 the previous three months. This was buoyed by faster growth in India, Thailand, Philippines, and Turkiye. The new orders index for all EM countries (excluding China) inched down in May to 49.6 from 49.9, indicating that domestic demand could remain weak in countries such as Vietnam, South Africa, Brazil, Poland, and Colombia. Meanwhile, the manufacturing new orders index stayed in expansion territory for India, Saudi Arabia, Thailand, and Philippines. The median new export orders index fell deeper into contraction territory, to 48.8 from 49.5, reflecting weaker external demand; the index was led lower by Vietnam, Poland, Malaysia, South Africa, and Mexico, despite the expansion in India, Turkiye, Philippines, and Saudi Arabia (see chart 2).

Supply chain pressures continued to ease, which, in turn, enabled EM input prices to fall in May to their lowest level since the beginning of the pandemic. A further drop in input prices bodes well for EM countries where inflationary pressures remain elevated. Input prices decreased across EM countries--except in Malaysia, where prices ticked higher from the previous three months but stayed below the trailing-12-month average. It's clear from output prices that companies have been passing the price pressures they were experiencing on to consumers--but at a slower pace.

Service sector sentiment has remained strong as households continue to shift spending to services. The global services PMI had another robust reading in May, increasing to 55.5 from 55.4 and signaling the fastest pace of expansion in 18 months. This was mainly supported by resilience in services activity across most countries--and especially in India, the EU, the U.S., Ireland, Japan, China, and the U.K. An uptick in services activity is a positive sign for tourism-dependent EM economies, like those of Thailand, Turkiye, Indonesia, and South Africa.

Consumer sentiment

The Ipsos Global Consumer Confidence Index inched higher by one point to 47.2 in May, but it has fallen 1.5 points since March, an indication of consumer concerns about the uncertain economic outlook globally. Consumer sentiment remained weak in EMEA emerging markets, and especially in Poland, Hungary, and Turkiye, because of inflation and perhaps other persisting reverberations of the Russia-Ukraine war. Consumers in Latin America were more upbeat amid an uptick in economic activity--especially in Brazil and Mexico, where economic activity has surpassed pre-pandemic levels (see chart 4).

In Asia, consumer sentiment picked up across the region--but even then, sentiment in India and Thailand stayed below pre-pandemic levels. In Thailand, consumer optimism continued to spread amid a surge in tourist arrivals, particularly from China. Over 8.7 million international tourists came to Thailand in the first four months of this year; Chinese tourists made up 10% of the total.

Trade

The data on China's merchandise trade flows (in nominal U.S. dollar terms) presents a mixed picture through the middle of the second quarter, with imports extending their lackluster performance. Meanwhile, exports shrank sharply--by 7.5% year over year in May--after posting a double-digit growth, on average, through March and April. Merchandise imports plunged 4.5% year over year in May, following a 7.9% drop in April. Imports of goods have declined seven out of the past eight months. This suggests domestic demand remains constrained in the world's second-largest economy--particularly demand for high-tech consumer products, which plunged 18.5% in the first five months of 2023. Notably, high-tech imports accounted for over one-third of total imports (see chart 7).

China's merchandise imports dipped 6.7% in the first five months of this year from the same period a year ago; they had risen 6.9% during the first five months of 2022 from the same period a year before that. Imports from the rest of Asia were a major factor: They plunged 15.6% in the first four months of this year from the year-ago period, while imports from Europe grew 5.6%. Notably, China's imports from our core EM countries fell 2.5% year on year in the first four months of 2023, compared with a 10.1% year-on-year increase in the first four months of 2022. And imports from Asian emerging markets, EMEA emerging markets, and Latin American emerging markets have all been on similar trajectories:

• Imports from Asian emerging markets fell 5.2% year on year in the first four months of 2023 (versus a 5.2% year-on-year increase in the first four months of 2022).
• Imports from EMEA emerging markets fell 2.8% year on year in the first four months of 2023 (versus a 25.8% year-on-year increase in the first four months of 2022).
• Imports from Latin American emerging markets rose just 2.5% year on year in the first four months of 2023 (versus a 10.9% year-on-year increase in the first four months of 2022).

The drop in imports might also be linked to price effects stemming from the decline in overall commodity prices--which, in general, fell 13.8% in the first four months of this year from the same period last year (see charts 5, 6, and 7).

Tourist Arrivals

The growth in international tourism continued to pick up steam, and a few countries have even seen tourist arrivals surpass pre-pandemic levels. The reopening of the Chinese economy, in particular, has started to boost global tourism.

International arrivals overall in the first quarter were at 80% of pre-pandemic levels, according to data from the World Tourism Organization, a U.N. agency. Over 235 million tourists traveled internationally in the first quarter, more than double the number in the first quarter of 2022. International arrivals in Europe reached 90% of the 2019 level, while international arrivals in Africa reached 88%, and international arrivals in the Americas reached 85%.

International arrivals in the Asia-Pacific region, however, lagged in the first quarter of 2023, at 54% of pre-pandemic levels, though the pace of the recovery there has picked up in the past few months. Indeed, some countries in the region have seen a sharp rebound in international tourist arrivals. Thailand and Indonesia have been seeing the gap narrow between the number of international tourist arrivals and the pre-pandemic levels, but arrivals in those countries are still close to 30% below those pre-pandemic levels. According to a World Tourism Organization survey, international tourism is likely to see further expansion between May and August of this year. But the economic slowdown in advanced economies and elevated inflation in airfares may pose a challenge for the tourism sector globally--a sector that faced severe strains throughout the pandemic. As tourism continues to recover along with business travel, hotel occupancy rates have also improved (see charts 8 and 9).

Electricity

Electricity consumption, which is an important barometer of economic activity, was mixed across EM countries (see chart 10). South Africa was an outlier, given the widespread rolling blackouts it has been having. Electricity generation fell 8.6% in April from the same month last year following a 5.6% year-on-year drop in March, further intensifying supply issues (see chart 11). As a result, consumption fell 8.1% year on year in April, following a 4.5% decline in March.

Auto Sales

Through the middle of the second quarter of 2023, growth in vehicle sales appeared to have lost momentum. Rising interest rates were a major cause, together with high inflation, which weighed on household spending. Vehicle sales in Latin America stayed below pre-pandemic levels, with sales slowing in most of the region's emerging market economies. Asian economies performed better, with India outperforming on resilient demand for new vehicles (see chart 12).

Steel Production

As global demand remained subdued through the second quarter, global crude steel production in April dipped 2.4% from April 2022 levels. Steel prices have slid lower over the last two months, primarily as a result of weak demand in China--and after three straight months of growth, Chinese steel production itself declined in April by 1.6% after steelmakers curbed production to balance supply-demand dynamics and boost product prices. Meanwhile, steel production in India was resilient, buoyed by public infrastructure spending and a pickup in private capital expenditures. Global steel output outside of India and China remained lackluster (see chart 13).

Prices

Commodity prices

Declining commodity prices have been the result of tepid global growth and recession worries. Global commodity prices have fallen nearly 6% since the start of the year and are roughly 33% below their June 2022 peak. Nonetheless, prices for all major commodities are still above pre-pandemic levels (see chart 14).

As of June 5, 2023, energy prices were 14% below where they were in the fourth quarter of 2022. Crude oil prices have yet to show signs of breaking out of their current range despite the recent OPEC+ announcement of further output cuts (see chart 16).

Since our last publication, food prices have also edged lower, led by corn, soybean oil, and wheat. Sugar prices, however, have jumped 18.8% since the beginning of March while the price of rice has increased by nearly 1%--both because of supply issues (see chart 17).

Metal prices have also softened since the start of the year (see chart 15).

Shipping costs

Ocean shipping costs are in freefall owing to lukewarm demand and the continued easing of global supply chain strains. Freight rates soared during the pandemic when lockdowns and port closures caused major supply disruptions. The Freightos global container index has fallen 36% year to date as of early June, and it was, at that point, 88% below its September 2021 peak (see chart 18).

Inflation

Headline inflation has begun to soften. Most EMs front-loaded their monetary policy responses, and their policy tightening cycles have themselves peaked. (For instance, Brazil, Chile, Poland, and Hungary have all been holding rates steady for the past few monetary policy meetings.) However, core inflation remains sticky, partly because of pent-up demand for services. Although it has moderated in recent months, core inflation is still higher in EMEA emerging markets than it is in other emerging market subregions. Of the emerging markets in Latin America, it is Colombia that has been driving inflation momentum, as it has reported inflation in the double digits in each of the last eight months (see charts 23 and 24).

Financial Conditions

Real interest rates in several economies are below their 2019 averages--Argentina, Turkiye, and Hungary, in particular (see chart 25). Steep interest rate hikes by a few EM countries drove real interest rates into positive territory--specifically, Brazil and Mexico, which were among the first economies to start hiking rates. The financial stress index from the U.S. Treasury Department's Office of Financial Research has eased sharply in the past two months in advanced economies. Financial stress in emerging markets, however, remains above the historical average (see chart 26).

Exchange rate dynamics

Several EM currencies have shown resilience, with the Mexican peso, Colombian peso, Hungarian forint, and Chilean peso leading gains so far this year. Meanwhile, the Argentine peso, South African rand, and Turkish lira have depreciated by nearly 27%, 10%, and 19%, respectively, since the start of the year. The rand has weakened by nearly 5% over the last three months on sour investor sentiment and capital outflows. The Turkish lira's 13% slide over the past month came amid post-election policy uncertainty (see charts 19 and 22).

Foreign exchange reserves improved for several EM economies--notably Brazil and Peru. It was partly the result of currency appreciation; increased capital inflows were another reason (see charts 20 and 21).

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