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Emerging Markets Outlook 2023

Mixed growth prospects for 2023

The variations are considerable depending on the region: in Asia, for example, the IMF is optimistic and forecasts growth to increase by about 5%. There are several reasons for this strong outlook in an environment where the global economy is slowing. Inflation remains lower compared to other emerging markets, allowing central banks to raise rates more moderately. Domestic demand therefore remains resilient and, with the exception of China, will also be driven by a sustained recovery from the pandemic. On the other hand, various Asian economies with a rather low share of exports as a percentage of GDP are less exposed to negative global demand dynamics. At the same time, the expected reopening of China could provide an additional boost, even if this time it will not be the source of growth. For the first time since 1990, China’s growth is expected to lag behind that of other emerging Asian economies (see Graph 1). The outlook is a little less rosy in Latin America. Rising inflation rates have forced central banks to raise interest rates sharply, which will weigh on domestic demand. Other countries such as Mexico are feeling the slowdown in U.S. demand. Added to this is the still high political uncertainty in the region with new populist governments in various countries. In the current political and economic environment, Eastern Europe is particularly vulnerable. This is not only due to the proximity to war, which keeps the geopolitical temperature alive.

High. The region is highly dependent on the course of growth in Western Europe, where recession is already raging in some countries. In addition, price pressure remains very high, with double-digit inflation rates despite sharp central bank interest rate hikes. This weighs on the domestic economy.

Possibility of monetary easing

Emerging market central banks have done well in this context of high inflation. They have moved ahead of the Fed’s hikes and have significantly increased their key rates during 2022. Some of them will have the opportunity to end the recovery cycle, and countries may be able to erase some of the recoveries by 2023. This is particularly the case for Latin American economies, led by Brazil, whose central bank has raised interest rates to more than 13% and where real rates (nominal rates adjusted for inflation) show more than 7%. It could thus be able to make a first cut, especially if inflationary pressure recedes. Other countries will have to be more careful. In Eastern Europe, inflation rates are in double digits, despite the sharp increase in rates. In real terms, they remain stuck in negative territory. Asian central banks have been slow to raise rates, and therefore have little room to leave them at the current level, or even lower them, especially as long as the Fed continues its stimulus cycle. As soon as the latter reaches its maximum rate, the first Asian countries such as India or Indonesia may be able to ease their monetary policy.

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