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Economic Research: Emerging Markets Real-Time Data: Mixed Picture Amid Higher Prices And Tighter Financial Conditions

Indicator Summary

The high-frequency indicators in emerging markets display mixed trends. Elevated inflation weighed on consumer confidence, and weakening external demand hurt business sentiments. Still, domestic-demand-led activity continued to recover in many of the core EMs. Global commodity prices as well as price pressures on businesses eased in August. EMs portfolio flows turned positive in August (driven by EMs, excluding China) following five months of consecutive net outflows. That said, the financial stress is above average (globally including EMs) as key central banks worldwide maintain a hawkish stance.

The fast-moving nature of global risks means a need for more timely data supplementing traditional economic indicators. The charts below illuminate aspects of the recovery across the emerging markets.

Activity

Mobility.  Mobility data reflects resilience in economic recovery from the pandemic. On average, mobility for retail and recreation in the emerging markets was 12% above the pre-pandemic level. In the developed market, it stood 2% below the pre-pandemic level (see chart 1). New COVID-19 cases remain low relative to earlier this year, on the back of rapid progress in inoculation across emerging markets--which led to authorities reopening economies. Meanwhile, China remains an exception--it has a zero-COVID-19 policy, and recovery from the omicron wave faces lockdown hiccups.

International tourist arrivals.  As the economy reopened, activity picked up in touch-sensitive services sectors, namely tourism and air transport (which were severely hit during the pandemic). International tourist arrivals jumped in the last few months, especially in Mexico, Turkey, and India. For instance, in the first seven months of the year, Turkey (one of the top tourist destinations in the world) attracted 21.1 million foreign tourists--versus 22.8 million during the same period of 2019--almost surpassing the pre-pandemic level (see chart 2). Notably, foreign tourists took advantage of easing restrictions in the summer after two long years, which bodes well for the tourism-dependent economies. Meanwhile, in Thailand, foreign tourists' arrivals are gaining momentum, though they're still 75% below levels at the same time in 2019.

Hotel occupancy.  With a strong recovery in international tourist arrivals and air traffic, hotel occupancy is also returning to normal. As of June, the hotel occupancy rate was close to 72% in Turkey (compared with the 2019 level), whereas it was 62% in Mexico and 47% in Thailand. These rates are up sharply compared with January levels of 50% in Turkey, 44% in Mexico, and 32% in Thailand (when omicron-led COVID-19 cases were surging) (see chart 3).

Auto sales.  The global auto sector recovered gradually from severe supply constraints due to semiconductor and other raw material shortages--which weighed on production and, as a result, sales. Notably, autos were one of the bright spots in household spending during the pandemic. According to S&P Global Mobility, auto sales in emerging markets (excluding China) dropped by 12.1% in July on a seasonally adjusted monthly basis--dragged by Asia, particularly the plunge in sales in Indonesia, Malaysia, India, and Thailand (see chart 4). Likewise, auto sales also dropped in Latin America, driven by Brazil, Mexico, and Argentina. However, a few exceptions across regions were Turkey, South Africa, Chile, Peru, and Vietnam, which posted strong sales growth in July--perhaps auguring well for their third-quarter auto sales.

That said, on a year-over-year basis, total auto sales increased by 3.7% in July, mainly owing to a persistent uptick in sales in Asia with strong double-digit growth in Vietnam, Malaysia, and Philippines. India and Indonesia also posted over 6% growth. We also saw a recovery in Latin American countries, especially in Brazil and Mexico. We highlight that auto sales were weak during the second half of last year caused by low inventories and supply disruptions.

Steel production.  As global demand slowed in the first half of the year, world crude steel production declined again in July, by 6.5% year over year to 149.3 million tons, signaling weaker activity, especially in China. Steel output in China dropped 6.4%, the 13th consecutive monthly decline. In addition, Turkey and Brazil, which account for a 3.8% combined share of world steel output, posted dismal performance again in July, dragging down their overall steel activities. Meanwhile, India--the second-largest producer of steel--expanded its crude steel output for the 17th straight month, reflecting resilience in India's demand for steel amid rapid spending on infrastructure (see chart 5).

Sentiments

Business sentiments.  Business sentiments deteriorated further in August on aggregate, but at a country level the picture was mixed. The closely watched indicator of global manufacturing--the Purchasing Managers' Index (PMI) from S&P Global Market Intelligence--reconfirmed that activity eased globally, led by Europe. The global manufacturing output index slipped below 50 in August, underpinned by worsening new orders, which fell to their lowest since June 2020 (see charts 6-7). Weaker external demand seems to be playing an important role as the new export orders component moved further down--below the 50 threshold--across emerging market economies in August (excluding South Africa, India, Vietnam, and Saudi Arabia)(see chart 8).

Still, the overall emerging market manufacturing output index displayed mixed signals. While the index eased to 51.1 in August, it stayed in expansionary territory, primarily driven by a persistent uptick in output in emerging Asia (India, Indonesia, Thailand, Colombia, and Vietnam). For those with a PMI headline index under the 50 mark, Poland got worse, Turkey improved slightly, Mexico stayed about the same, and China moved back down to contraction. There were surprisingly large rebounds for Colombia and South Africa, both moving from contraction to expansion (above 50) in August. That said, the PMI survey did provide some respite on surging input costs, which decelerated to their lowest level since December 2020. In addition, the global supplier delivery index signaled a steady improvement in the past few months to its best level since November 2020. Even though input costs moderated, they remained elevated amid supply chain constraints and raw material issues in several parts of the world.

Consumer sentiments.  The Ipsos' Global Consumer Confidence Index dipped by 0.8 points in August to 46.1--the lowest level since April 2021. A surge in prices and rising interest rates also dampened consumer confidence, exacerbating consumers' worries about affordability. The overall index fell sharply in the past few months, especially in Argentina, Hungary, Poland, and Mexico (see chart 9). The drag in consumer confidence certainly does not bode well for the consumer sector outlook.

Prices

Commodity prices.  Global commodity prices fell markedly in the past few weeks amid slowing demand and improvement in the global supply chain. The total commodity price index was down by over 15% since June 10, while energy prices plunged over 20% and non-energy by 8.8% as of Sept. 2, 2022. However, global commodity prices remained almost 54% above the pre-pandemic peak, and energy prices were over 80%. Meanwhile, food prices were up by almost 80% through May this year, compared with January 2020, and then declined over 15% until the third week of August--providing much-needed relief to the soaring prices. But, since the third week of August, food prices were up by 4.1%, particularly corn, wheat, and coffee (see charts 10-12). Notably, agricultural production faces severe challenges from droughts in several food-producing countries in the world, coupled with high input costs, particularly fertilizer (see chart 13).

Supply chain

Shipping costs.  The ocean shipping cost, which was soaring during the pandemic and, thereby, pushing the input prices even higher, saw a marked deceleration. The Freightos global container index plunged close to 50% from last September's peak. The cost to ship a 40-foot container on the major trade routes from China to East Coast North America decreased by over 60% ($7,300 per box), and from China to Northern Europe by 34% ($8,100 per box) (see chart 14). In addition, the manufacturing PMI survey showed that the supplier delivery time improved from earlier in the year, when it reached a record high (see chart 15).

However, the freight rates are elevated relative to their pre-crisis levels for both these routes, by almost 200% and 370%, respectively. Meanwhile, the conditions have reversed in the past few months amid demand slowdown and improvement in the supply chain from earlier in the pandemic, when freight rates jumped by almost 7x-8x on the back of supply-chain disruptions, and delays in ports causing piling up of empty containers in the ports. Inventory has increased since then as major retailers stocked up in anticipation of shipping delays and higher demand, which remained sluggish.

Financial conditions

Financial conditions have tightened in the last few months on the back of the U.S. Federal Reserve's hawkish monetary policy moves to tame surging inflation. These prompted central banks in EMs to move faster to raise rates (to counter inflation and capital outflow pressures from the region). The fed funds rate has increased by 225 basis points since the beginning of the year. In the emerging markets, we saw several central banks front-loading their benchmark rate hikes. For example, the central bank of Brazil raised rates by 1,200 basis points in December 2020 and 450 basis points since the beginning of this year (see chart 16). The 10-year bond yield also rose sharply, which meant prices fell as inflation remained high and the central bank's hawkish stance continued to control rising prices.

After the Jackson Hole Economic Symposium in late August, the OFR Financial Stress Index edged up following a brief cooling early in the month--indicating an increase in volatility. The policymakers' hawkish comments reversed early August, cooling off stress in the overall financial market (see chart 17).

The U.S. dollar has also strengthened quite remarkably against other currencies. In the beginning of the Russia-Ukraine war, the dollar held steady against EM currencies with favorable terms of trade prospects. That has changed, however, since June, when the Fed turned decidedly hawkish. EM currencies weakened across the board in the past two months. Some of the emerging market currencies weakened markedly, particularly the Turkish lira, which depreciated by almost 27% since the start of the year, followed by the Argentinean peso, which depreciated close to 26%. Meanwhile, the Brazilian real and Mexican peso outperformed their peers--by strengthening by over 7.8% and 1.8%, respectively (see chart 18).

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Chart 18

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The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.

This report does not constitute a rating action.

Chief Economist, Emerging Markets:Satyam Panday, San Francisco + 1 (212) 438 6009;
satyam.panday@spglobal.com
Research Contributors:Debabrata Das, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai
Prarthana Verma, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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