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H2 Growth - Good Omens, Bad Omens

August 17, 2022

Read Time 2 MIN

We continues to get upside growth surprises in EM - the question is whether they are going to last as activity surveys in several major economies are flashing red.

Growth Dynamics in EM and DM

The global peak inflation narrative looks more or less established (never mind a big upside inflation surprise in the U.K. this morning), giving the market an opportunity to focus more on the growth outlook - especially in independent global growth drivers. The dataflow in the U.S. looked a bit “rollercoaster-ish” this morning - solid retail sales, coming on the heels of the dismal Empire Manufacturing index. Back in EM (emerging markets), the growth landscape is very uneven. There are some upside growth surprises. In LATAM, Colombia’s economy posted a higher than expected double-digit annual growth (12.6%) and very solid sequential expansion (1.5%) in Q2. Brazil’s GDP proxy surprised to the upside in June (both in annual and sequential terms), giving more credence to the recent upgrades of Brazil’s 2022 consensus GDP forecast (now at 1.6%). In EMEA, Q2 GDP growth surprised strongly to the upside in Hungary and Romania. The Romanian economy expanded by 2.1% quarter-on-quarter instead of expected 0.2% contraction. The question is whether it is going to last.

EM Activity Surveys

And this is where we have to mention growth headwinds. First of all, the past tightening is bound to have a lagged impact on domestic activity, especially in conjunction with on-going post-pandemic fiscal adjustment. Second, July’s activity surveys (Purchasing Managers Indices, or PMIs) are flashing red not just in China but in several other major EMs (see chart below). Poland’s manufacturing PMI dropped to 42.1 (deep in contraction zone). Colombia’s manufacturing PMI unexpectedly dived below 50.0 (contraction zone). The Philippine PMI barely managed to stay above 50. PMIs in Mexico, Turkey, and the Czech Republic also showed a cliff-like sharp deterioration.

EM Slowdown and Policy Pivots

So, what are the policy implications? This week’s rate-setting meeting in the Philippines will be an interesting test-case. The consensus expects a 50bps rate hike on Thursday, following a sizable upside inflation surprise in July (6.4% year-on-year), but the economy unexpectedly contracted in Q2. Would the central bank take the softer growth into account? The dovish bias of Poland’s national bank is well-documented, and we suspect that today’s ugly Q2 GDP print (-2.3% sequential contraction, and a big downside surprise) will only reinforce it - especially if headline inflation eases a bit more in August. Stay tuned!

Chart at a Glance: Falling EM PMIs - Harbingers of Growth “Doom”? *

Chart at a Glance: Falling EM PMIs - Harbingers of Growth “Doom”?

Source: Bloomberg LP

*The Davivienda Colombia Manufacturing PMI™ is compiled by IHS Markit from responses to questionnaires sent to purchasing managers in a panel of around 350 manufacturers. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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