Emerging markets economic outlook - Q3 2023

The rapid reopening of the Chinese economy in first quarter of 2023 was an unexpected and positive surprise for the global economy, in particular for Emerging Markets (EM). Unfortunately, the data coming out of China in the second quarter of 2023 has been weaker than expected, and thus global demand for EM exports has been weak. In this context, commodity prices, which are highly correlated with EM growth rates have remained subdued.

Consumption: As energy and food have a higher weight in the EM household consumption basket, the rise in prices in 2022 has a greater impact on real disposable income weight on private domestic demand. As international energy prices fall, the recovery in private consumption should be stronger than in the Domestic Markets (DM). In the case of China, pent-up demand for services is leading to a boom in tourism consumption, benefiting both domestic and international destinations.

Labour Market: Weaker economic growth has affected labour markets, leading to higher unemployment. In the case of China, relatively high unemployment, especially among youth (20.8% in May), and slow job creation remain key issues for policymakers.

Interest Rates: Usually, EMs follow the Federal Reserve's monetary policy: when the Fed raises interest rates, they raise interest rates and vice versa. This time, however, it has been different: many EM central banks have raised their interest rates before the Fed, which in many cases has led to lower inflation than in the developed world. Lower inflation allows them to cut rates sooner.

Inflation: Inflation is also expected to slow in most EM economies due to the same factors as in the DM: lower energy and food prices and tighter monetary policy. However, there are three factors that lead us to believe that inflation may still be a pressing issue for EM economies.

First, the war in Ukraine hasn't ended and attacks on critical infrastructure could depress the country's agricultural output, leading to shortages of key grains such as wheat. Second, the El Niño phenomenon is likely to cause droughts in Southeast Asia, reducing the production of food commodities such as rice, corn and soybeans. And third, rising interest rates in advanced economies could depress the value of emerging market currencies, leading to inflationary pressures, particularly in countries that are net importers of food and energy.

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Read our Q3 market updates

US economic outlook - Q3 2023

The US economy is growing more than expected, albeit significantly below potential or its long-term growth rate. In 2023, growth is expected to be in the area of 1.6%. Having said that, by the last quarter of the year and for the first half of 2024, that growth is expected to ground to a halt.

UK economic outlook - Q3 2023

The UK has entered a wage-price spiral and it’s experiencing stickier inflation. It is already experiencing growth that’s lower than most developed countries. Higher inflation could eventually mean higher interest rates and a deeper recession.

European economic outlook - Q3 2023

The cost-of-living crisis led to a decline in household consumption and weak investment sentiment in 2022, this pushed the economy into technical recession (two consecutive quarters of contraction of GDP) in the fourth quarter of 2022. Lower energy prices and food prices and easing supply chains bottlenecks should help to bring down inflation this year and improve household purchasing power. Annual...