Emerging economies have fared better than their developed counterparts in the COVID recovery phase.
In the 19th century, western economies powered by the Industrial Revolution were the main drivers of global growth. In the 21st century emerging markets (EMs) have made increasing contributions.
EMs have accounted for almost two-thirds of increases in the world's gross domestic product (GDP) and more than half of new consumption over the past decade and a half.
Domestic demand is benefiting from improving labor market conditions, fiscal support and excess private savings accumulated through the pandemic. Changing supply chains or ‘reshoring’ has created opportunities for Asian economies like India. Central banks in emerging markets were able to achieve their inflation objectives without creating financial instability.
While domestic demand will likely remain resilient in many EMs, they continue to face strong headwinds. Subdued external demand from the U.S. and Europe will mean a weak export profile for most EMs in 2024. The slowdown in western demand centers will lead to lower export earnings, weighing on external balances and currencies. China’s rapid economic ascent not only helped propel the economic development of its neighbors, but also of distant commodity-dependent peers like Brazil. China’s looming structural slowdown is casting a global shadow.
Central banks in emerging markets were able to achieve their inflation objectives without creating financial instability.
EM central banks that have reduced policy rates ahead of the Fed and other major central banks have also seen their currencies depreciate, risking capital outflows and complicating the path for rate cuts in the coming months. In 2024, developments in global commodity prices as well as foreign exchange market conditions will ultimately determine the trajectory of easing.
EMs should make further progress on inflation in the coming quarters. However, a sustained rise in energy prices amid the two ongoing wars and renewed upward pressure on food costs would pressure central banks in the developing world.
Large fiscal support during the pandemic has exacerbated debt positions, making it more difficult for EM policymakers to provide economic impetus should growth falter in the coming months. A higher interest rate environment will keep borrowing and servicing costs elevated while complicating debt refinancing in vulnerable countries. Resolving debt crises in a number of smaller struggling economies remains the biggest challenge for policymakers and creditors alike.
The biggest long-term economic risk for EMs is fragmented globalization. Many EMs rely heavily on trade and on foreign investments from advanced economies. Less global integration will narrow the path to prosperity for many developing countries.
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