Poland followed some central banks in Latin America that had already cut rates. Brazil and Chile managed to get inflation down to 4.6% and 5.3%, respectively, in August.13 Both countries had inflation in the double digits earlier in the cycle. Such strong disinflation has allowed their central banks to cut rates, though both their policy rates are above 10%, indicating a relatively tight monetary policy stance.
In much of Africa and parts of the Middle East, central bankers have more work to do. Turkey, Egypt, and Nigeria are all struggling with exceptionally high inflation, with Turkish inflation nearing 60% from a year earlier in August.14 Turkey’s central bank raised rates by 16.5 percentage points between May and August alone.15 However, this still leaves inflation-adjusted interest rates highly accommodative, suggesting the central bank may need to raise rates more substantially before inflation comes back down to earth.
Conversely, Asian central bankers have had a comparatively easier time with inflation in this cycle. Although inflationary pressures picked up across the globe, they were more muted in Asia as its postpandemic reopening occurred at a more gradual pace. For example, the most recent readings of inflation were below 3% in Malaysia, Taiwan, Thailand, and Vietnam.16 China’s inflation even briefly dipped below zero percent in July. Even so, only China and Vietnam have cut their rates. Meanwhile, despite relatively favorable inflation numbers, Thailand hiked rates in August.17
Moving forward, emerging markets may have a more difficult time getting inflation under control. Higher crude oil prices are raising costs for consumers. India had watched its inflation rate tumble from 7.8% in April 2022 to 4.7% one year later.18 Since then, higher food prices forced inflation to jump to 6.8% in August, which is above the central bank’s target. India’s rebound in inflation came before the recent rise in oil prices, suggesting that inflation could rise even further. The same is likely true for other emerging market economies, especially those that are net importers of oil.
Domestic demand needed to fuel growth
Nearly every economy, including the most developed ones, faces the same constraints when it comes to stimulating domestic demand. Specifically, large fiscal support during the pandemic has exacerbated debt positions, which will make it more difficult for policymakers to provide government stimulus should economic growth falter. Elevated interest rates add to this challenge. Some countries likely have more fiscal space than others. For example, windfall revenue from high oil prices gives some oil-exporting countries a bit more room to maneuver in the near term. Notably, Saudi Arabia’s replenished coffers have allowed for a substantial rise in government-funded capital expenditures.19 However, for most economies, policymaker support will be in short supply.
Countries in Latin America and Eastern Europe are likely best positioned to usher in the strongest growth in consumer spending. Part of this is because their economies had been mired in recession earlier and are now poised for a recovery. For example, real consumer spending in Chile, Czechia, and Hungary contracted for at least three consecutive quarters before returning to modest or flat growth in the second quarter.20 These economies have also seen dramatic reductions in inflation, which should strengthen purchasing power and consumer spending as we move to the end of the year. Plus, the lower rates that accompany lower inflation should ease some of the downward pressure on durable goods spending.
Asia’s emerging market economies have held up better recently, suggesting that a pickup in consumer spending will be less apparent than in Latin America or Europe. Domestic demand in these economies was already growing at relatively strong rates in the first half of this year. For example, real consumer spending in India, Indonesia, Malaysia, and Thailand accelerated in Q2.21 Because their central banks did not need to hike rates as much as other emerging market central banks, monetary policy will likely play a more limited role in supporting domestic demand moving forward.
Unfortunately, domestic demand in Africa faces more challenges as inflation has proved more difficult to subdue. High rates of unemployment continue to weigh on South Africa’s economy. Plus, inadequate infrastructure has limited the growth prospects of South Africa and Nigeria’s mining and manufacturing sectors, placing another weight on government revenue and exacerbating unemployment.22
Emerging market economies that have tamed inflation will be in the best position to keep economic activity moving in the right direction while the rest of the world struggles to avoid recession. Even so, policymaker support for more economic growth is likely to be in short supply as bloated government budgets and the risk of inflation limit intervention. Although the external sector is unlikely to be a source of support as the global economy slows, shifts in supply chains should give an added boost to some Asian emerging markets as well as Mexico.
