S&P Global Ratings continues to expect most emerging markets (EMs) to grow below trend in 2024. Domestic demand continues to be very resilient to the high global interest rates. However, as the effects of tight monetary policy work their way through the overall economy, we expect domestic demand to soften in most EMs in the coming quarters.

Weak growth in major trading partners (the U.S., Europe, and China) will keep growth subdued in export-oriented sectors in EMs. In some EMs, especially those in Asia and Europe, activity seems to be close to bottoming out. However, we expect economic recoveries to be slow and highly susceptible to setbacks, constrained by the weak global conditions. The latest war between Israel and Hamas could prolong risk aversion toward EM assets and increase volatility in energy prices, although the impact so far has been contained. Continued expansive fiscal policies, as several major economies hold elections in 2024, put upside risk to our near-term GDP growth forecasts.

Chart 1

Soft Landing Still Means Weak External Dynamics For EMs

Our baseline scenario is for a "soft landing" in the U.S. economy, with the economy weakening but avoiding a deep recession.   We expect GDP growth to fall from 2.4% this year to 1.5% in 2024 (see "Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking," published Nov. 27, 2023). Despite the soft landing, this still implies a significant deceleration in the U.S. economy, which will have important implications for several EMs through trade and investment channels, especially for those in Latin America.

Headwinds for U.S. consumption are intensifying. Real income growth started to slow more noticeably in the second half of 2023, excess savings accumulated through the pandemic continue to be depleted, and the resumption of student loan repayments are further lowering disposable income. We therefore expect weak U.S. demand for EM exports in 2024.

Chart 2

The eurozone has been leading the growth slowdown among large economies, which has spilled over to EMs with large exposure to that region.   We expect this to remain the case for most of 2024 (see "Economic Outlook Eurozone Q1 2024: Headed For A Soft Landing," published Nov. 27, 2023). EMs that have strong manufacturing ties to Germany, such as Hungary and Poland, have seen manufacturing production contract so far this year (see chart 3). While there are early signs that manufacturing production could be reaching its trough in Germany, the recovery is likely to be subdued and constrained by weak global demand, which will also limit growth in exposed EMs.

Chart 3

China's near-term outlook has improved modestly in recent months, but the economy still faces significant headwinds.   We forecast China's GDP to grow 4.6% in 2024, down from 5.4% in 2023 (see "Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way," published Nov. 27, 2023). As the property sector struggles and consumer and investor confidence stays subdued, the growth outlook remains modest. This will contribute to limited recovery in EMs that benefit from strong Chinese consumption, especially those in Asia.

Effects Of High Global Interest Rates Will Continue To Funnel Through To EMs

The current global synchronized monetary policy tightening cycle has been felt more by smaller economies, especially those that had preexisting macroeconomic fragilities such as weak external and/or fiscal accounts. In larger EMs, the main effect of the high rates will be larger interest cost burdens, which will either constrain spending on other items or lead to higher debt. Ultimately, we expect structurally higher interest rates, in the absence of structurally higher growth expectations, will constrain investment growth in EMs.

Higher interest rates in most EMs (see chart 4) haven't noticeably affected consumption, most likely due to low levels of financial intermediation, fiscal support, and strong labor market dynamics. However, as investment remains suppressed for a prolonged time and fiscal support remains more challenging due to higher interest cost burdens, we think employment rates will worsen and eventually lead to weaker consumption.

Chart 4

The Federal Reserve Will Influence The Magnitude Of Easing By EM Central Banks

Disinflation will likely continue across most EMs in the coming quarters, which we expect will encourage central banks to start lowering interest rates or continue doing so for those that have already started. The median EM consumer price index (CPI) moderated to 4.8% year-on-year in October, from 5.1% in September (it peaked at 8.2% year-on-year in August 2022; see chart 5). The main drivers of disinflation continue to be moderating food and energy prices. The recent swings in energy prices are not apparent in the CPI data so far. However, risks around food prices are high. The start of the El Niño climate pattern has been officially declared in several countries and is already affecting harvests, especially in South America where there have been substantial floods.

Chart 5

Markets are already pricing in significant interest rate cuts by EM central banks in the next year (see chart 5). We project the median EM policy rate (excluding Argentina) to be 125 basis points (bps) lower by the end of 2024 than at the end of 2023. We expect larger interest rate cuts in Latin America, where central banks started hiking earlier and more aggressively, and milder interest rate reductions in EM Asia, where monetary policy tightening was not as significant.

However, swings in the Fed's policy expectations will matter. If the Fed's policy is more hawkish than what is implied by the market, EM interest rate curves are likely to adjust upward, and central banks will likely proceed more cautiously with easing to prevent disorderly capital outflows.

Chart 6

War In The Middle East Increases Risks, But Impact Is Contained So Far

The latest war between Hamas and Israel increases already elevated geopolitical risks. While not underestimating the severity of the human tragedy unfolding in Israel and Gaza, our current base case is that the conflict will likely be largely contained to Israel and Gaza, limiting the geographic and credit impact of the conflict (see "War in Middle East Compounds Global Geopolitical Risks," published Oct. 18, 2023). A key risk from the conflict for EMs is the potential for a longer period of higher risk aversion from investors. In addition, there's risk of an uptick in energy prices if the war becomes more widespread and involves energy-producing countries in the Middle East.

So far, however, risk aversion has remained relatively contained--EM credit spreads are marginally lower than they were before the conflict. After an initial uptick, oil prices are also now below the level they were when the conflict began. Brent crude oil was trading at about $90 per barrel and is now close to $80 per barrel. Nonetheless, the war reopens another geopolitical fault line, which will generate another layer of uncertainty in 2024.

Forecast Update

The growth narrative for EMs remains generally unchanged from our last publication in September.   We continue to expect a period of soft domestic demand across most economies, and softening growth in key trading partners will keep export volumes subdued. This implies below-trend real GDP growth in most EMs in the next year.

Our 2024 real GDP growth forecast for EMs (excluding China) is broadly unchanged at 3.8%, compared to its 10-year pre-pandemic average of 4.7%. We increased China's GDP growth forecast from our previous projections due to the combination of better growth than we expected in the third quarter and a series of new stimulus measures. We now forecast growth of 5.4% in 2023 (from 4.8%) and 4.6% in 2024 (from 4.4%).

Table 1

Regional Summaries

Latin America

Our 2024 real GDP growth forecast for the region remains unchanged at 1.2%, although we have made several country-specific revisions. We now expect the Brazilian economy to expand 1.5% next year compared to 1.2% previously, driven by continued, albeit diminishing, fiscal support. Lower domestic interest rates will bolster a recovery in investment, especially toward the second half of 2024. In Mexico, we now forecast 3.3% growth this year (from 3.0% previously), and 1.8% in 2024 (from 1.7%), in line with recent comparable upward revisions to U.S. GDP growth. Strong consumption (helped by robust remittances), resilient manufacturing output, and a sharp uptick in public nonresidential investment continue to drive growth in Mexico.

We lowered our 2024 growth projections for Argentina, Peru, Colombia, and Chile. The outlook for Argentina, in particular, is highly uncertain due to the fiscal and exchange rate adjustments that are likely under the next administration. We expect Argentina's GDP to contract in both 2023 and 2024. The Peruvian economy has been in a recession for several quarters now amid social unrest and weather disruptions to activity, and risks to our projections of near flat growth in 2023 and just above 2% growth in 2024 are mostly to the downside. In Colombia, fixed investment continues to contract, and uncertainty over policies under the current administration is likely to keep investment subdued throughout most of 2024. In Chile, we lowered our 2024 growth outlook by 10 bps to 1.9%. Uncertainty about the process of implementing a new constitution continues to weigh on investor confidence.

EM EMEA

We've made small changes to our growth outlook for the region. As we expected, a decline in oil production led to a contraction of Saudi Arabia's GDP in the third quarter, and we now project negative growth for 2023. On top of that, the non-oil sector is performing below our expectations, and given our view that oil production cuts will be extended into next year, we lowered our 2024 GDP forecast for Saudi Arabia to 2.7% (from 3.5%).

Weak demand and manufacturing production in advanced European economies continues to dampen activity in Central and Eastern European countries. However, third-quarter GDP slightly improved from the second quarter, generally as we expected.

We increased our 2024 growth projection for Poland to 3.1% from 3.0% due to a modest improvement in the investment outlook. We increased our forecasts for Turkiye in 2023 and 2024 marginally, because domestic demand continues to hold up better than we expected. We didn't make major changes to our projections for South Africa, where we expect growth to average around 1.6% in the next few years due to ongoing issues with power and rail infrastructure.

Emerging Southeast Asia

Our outlook for the EMs in Southeast Asia (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) is broadly unchanged (see "Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way," Nov. 27, 2023). We forecast GDP growth in Southeast Asia to pick up to 5.0% in 2024 from 4.5% in 2023, although this is still below its long-term average of 5.4% (2010-2019). Domestic demand is holding up despite tighter monetary policy and gradual fiscal consolidation. The exceptions are Vietnam and Thailand, where we see signs of weaker domestic demand, but we expect these effects to be temporary before these countries return to growth next year.

Services activity is still outperforming manufacturing activity in the region. International trade has been weak so far this year, but we see early signs of trade reaching its low point amid the difficult conditions. For instance, after several quarters of weak trade, there is now some rebuilding of inventories and an improvement in electronics exports. Still, weaker global growth complicates this picture. As a result, we expect a trade recovery but not a sharp rebound. This will diminish trade-related headwinds on growth next year but not much significant growth support.

Inflation remains controlled in the region. Inflationary pressures spiked in August and September due to higher energy and food prices, but these effects were temporary and have eased since then. Inflation is running close to or below pre-pandemic averages in all economies in the region, except for the Philippines where inflation is easing but remains elevated.

We think central banks are likely to maintain restrictive monetary policy settings despite the contained inflation. High U.S. interest rates and tight external funding conditions mean that central banks are wary of foreign exchange pressures and will take a measured approach in easing monetary policy. We expect interest rates in the region to decline gradually in 2024 as global interest rates begin to ease.

Risks To Baseline Growth

The potential escalation of the war in the Middle East is a major risk to our growth outlook for EMs due to the possible effects on energy prices. In addition, El Niño threatens to disrupt the ongoing disinflation process due to its potential to increase food prices.

The risk that the U.S. economy goes from our current baseline of a "soft landing" to an outright deep recession remains elevated. This would have significant negative implications for the global economy, with an outsized effect with EMs that share strong economic ties with the U.S., such as several Latin American countries. Alternatively, a stronger-than-expected U.S. economy, while a generally positive development for EMs, could in the short term push up interest rates and the U.S. dollar (with negative implications for inflation through foreign exchange pass-through effects).

Downside risks for the trajectory of the Chinese economy remain, but currently most of the spillover effects are concentrated in EM Asian economies. Finally, a heavy and divisive electoral agenda this year and next in several EMs could take a toll on investment due to lack of policy visibility.

Appendix

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Related Research

• Economic Outlook Asia-Pacific Q1 2024: Emerging Markets Lead The Way, Nov. 27, 2023
• Economic Outlook Eurozone Q1 2024: Headed For A Soft Landing, Nov. 27, 2023
• Economic Outlook U.S. Q1 2024: Cooling Off But Not Breaking, Nov. 27, 2023