US recession likelihood spells trouble for emerging markets

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The probability of a US recession within the next year remains elevated, which poses risks for several emerging markets (EMs), especially those in Latin America. US consumer strength has buoyed Mexico, but demand is likely to soften due to factors such as high interest rates.

A weakening eurozone is also causing concerns. Hungary and Poland, in particular, saw their real gross domestic product (GDP) decline, marked by a contraction in exports and deteriorating manufacturing production, according to an S&P Global article titled ‘Emerging Markets Q4 2023: The Lagged Effects Of Monetary Policy Will Test Resilience’ by Valerijs Rezvijs and Vishrut Rana.

The likelihood of a US recession within the next 12 months remains high, posing a significant risk to several emerging markets (EMs), particularly those in Latin America.
A strong US consumer base has supported Mexico, but demand is expected to soften due to high interest rates.
In Europe, Hungary and Poland are already seeing economic contractions.

In Asia, China’s slowed growth—forecast at 4.8 per cent for 2023 and 4.4 per cent for 2024—will likely impact several economies, although the impact may be mitigated due to the slowdown focusing on domestic activity.

Inflation in most EMs is slowing but is expected to fluctuate in the coming months. Core inflation rates remain high in about half of the EMs, and further rate cuts are expected to be gradual, given the uncertain trajectory of global inflation.

Structurally high interest rates without corresponding growth will constrain investment. As of H1 2023, fixed investment as a share of GDP in the median EM has dropped by 1 percentage point compared to pre-pandemic levels. Nonetheless, high real interest rates may offer some EMs room to ease monetary policy in the event of an economic downturn.

EM countries in the sample are Argentina, Brazil, Chile, Colombia, Mexico, and Peru in Latin America; Hungary, Poland, Turkiye, Saudi Arabia, and South Africa in Europe, Middle East, and Africa; and China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam in Asia.

Fibre2Fashion News Desk (NB)

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