Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.
William Jackson Chief Emerging Markets Economist
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Current supply shortages have been driven by several forces which look set to persist for six to twelve months. They have caused sharp increases in some prices (most notably energy and used cars) and also limited output. Central banks are unlikely to respond to specific shortages and should only tighten policy if aggregate demand exceeds aggregate supply on a sustained basis. Since this seems unlikely in most economies, we still expect the pace of tapering and then tightening to be very gradual.

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November’s PMIs offered tentative signs that the worst of the supply disruption may have passed, but the bigger picture is that manufacturers in the emerging world remain stretched. And while it’s still too early to tell, the Omicron variant could exacerbate existing strains. The upshot is that supply constraints are likely to continue to weigh on industry for some time yet.

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The impact of Omicron on EM trade

If the new Omicron variant leads to tighter containment measures across the world, that would probably prop up demand for pandemic-related goods to the benefit of Asian exporters. Meanwhile, oil producers are likely to see external positions deteriorate if the plunge in prices is sustained. But arguably the most clear point for now is that the new variant will lead to renewed slumps in tourism, adding to balance of payments risks in the likes of Tunisia and Sri Lanka.

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The Omicron variant and the threat to EMs

There’s a lot that we don’t know about the new Omicron variant. But if it proves more virulent, the economic fallout would probably be largest in EMs in parts of Africa and South and South East Asia that have lower vaccination rates, more limited fiscal space and/or larger tourism sectors. The new variant may also temper the pace of tightening cycles in parts of the emerging world. In view of the wider interest, we are also sending this Emerging Markets Economics Update to clients of all our Emerging Markets services.

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Car woes to weigh on recoveries in Mexico & CEE

The supply constraints that have hit global vehicle output have probably reduced the level of GDP by a modest 0.1-0.2% in most EM auto producers, but some countries like Czechia, Hungary and Mexico have suffered much bigger blows. And the drag from vehicle production is likely to persist for some time yet.

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Brazil: signs of stagflation

The multitude of supply shocks hitting Brazil’s economy are likely to keep inflation at 7-10% well into next year and cause the pace of recovery to slow to a crawl in the next few quarters. Overall, we now expect GDP growth of just 1.3% next year, which sits below the consensus.

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The jump in Brazilian inflation to 10.2% y/y in September was largely a result of the hike in household electricity tariffs last month and, while the headline rate is at – or very close to – a peak, it will remain at 8-10% in the coming months. That’s likely to prompt another couple of 100bp rate hikes from the central bank, to 8.25%, before the year is out.

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