Business intelligence provider Fitch Solutions Country Risk & Industry Research confirms that, although the world economy will see a sharp slowdown in growth this year, emerging market economies will see some healthy growth rates.

In a webinar on the global macroeconomic outlook, country risk global head Cedric Chehab says recession fears are easing as Purchasing Managers’ Indices improve slightly.

However, they are not out of the woods, he cautions.

The firm anticipates that the US and Eurozone will both experience a short and shallow (two consecutive quarters) recession in the second half of this year, with the Eurozone likely to only see 0.4% growth and the US 1% growth this year.

This compares with a forecast global economic growth rate of 2.1%, driven particularly by mainland China, at 5%.

“However, as long as jobs are stable, these economies are in a good state. These regions are not losing jobs at any significant rate; however, policy tightening continues to sink growth,” Chehab explains.

He adds that tightening financial conditions will continue to weigh on economies globally this year, while the global trade cycle also remains weak – as indicated by lower export volumes and value.

Corporate profit margins in emerging markets are under pressure as only so much of the higher costs can be passed on to the customer. Earnings growth is also contracting, primarily in the financial services and materials sectors.

The outlook for earnings is not as bad as it was a few quarters ago, but will nonetheless weigh on corporate productivity for the remainder of the year.

BANKING WOES

Fitch Solutions believes the recent banking sector stress means downside risks to global growth will play out through three main channels: banking sector uncertainty, tighter financial conditions and the potential for weaker credit growth as banks focus on strengthening their balance sheets.

The agency adds that bond market volatility has surged and could perhaps lead to greater contagion, leading to impacts on capital expenditure decisions. Chehab emphasises that only a few small banks are in trouble, which account for a small share of assets.

Although policymakers responded with a variety of measures to help mitigate the failure of Silicon Valley Bank and Signature Bank, their demise has led to questions about the health of regional banks, even though large banks remain well capitalised, he adds.

Despite a private infusion of deposits by some of the largest US banks into regional lender First Republic Bank, its stock price continued to decline over the week.

In addition, Credit Suisse, which has been plagued by multiple challenges in recent years, came under significant stress with credit default swaps surging to record highs as its stock price fell sharply.

As of March 31, UBS agreed to acquire Credit Suisse, and while this will help to mitigate some of the uncertainty over the near term, Fitch Solutions believes the combination of banking sector risks on both sides of the Atlantic makes the environment for investors much more challenging and could weigh on US and global growth.

INFLATION

Chehab states that, although the world is seeing significant downside risks to economic growth from the current volatility, it also means that there could be a silver lining on the inflation front.

Fitch Solutions expects inflation to only come down slowly in the US to about 3.5% to 4% by the end of the year, which means it is well above the 2% target. Globally, inflation is expected to average 6.5% by the end of the year, compared with 8.8% at the end of 2022.

The agency expects developed markets overall to grow their gross domestic product by 0.9% for the year, while emerging markets will likely see an overall growth rate of 3.7%.

The sub-Saharan Africa region is poised to grow by 3.5% this year.

Simultaneously, inflation expectations have picked up in recent months as growth continued to surprise to the upside.

However, the recent bout of volatility has led to a sharp decline in energy prices, with Brent Crude falling to $73/bl, which has, in turn, seen inflation expectations, as measured by the two-year US breakevens, fall from about 3.4% in early March to 2.4% currently.

Moreover, slowing economic activity in the event of additional market stress and banking uncertainty would also reduce wage and broader price pressures, which could provide more certainty for policymakers from an inflation perspective.

Messaging by major central banks such as the US Federal Reserve and the European Central Bank has continued to focus on the need to tackle inflation, even at the expense of growth.

Fitch Solutions expects dampened global growth over a longer term, with higher government debt levels to boot, owing to high energy prices and knocks having been taken as a result of crises in recent years.

Emerging markets, in particular, face lower private debt, but higher debt servicing costs.

POLITICAL RISK

Chehab says political risk is currently high in emerging markets with upcoming elections, including South Africa, Mexico, India, Spain, Thailand, Greece, Pakistan, Argentina, Indonesia, Poland, Taiwan (China) and Türkiye.

In aggregate, Fitch Solutions expects political risks will rise in markets with large and ongoing protest movements related to the cost of living crisis, such as France, which could see greater disruption to economic activity.

Any controversial government intervention could also add momentum to other anti-government protests, such as in Israel and Mexico.