Base scenario

The global economy is expected to decelerate in 2022 after the rebound that got underway the previous year. Our base scenario for emerging markets, which became more cautious after the outbreak of the war in Ukraine, is practically unchanged, with slowing growth and rising inflation throughout the year. Emerging markets’ growth will likely halve, compared to 2021, reaching around 3.4% in 2022. Commodity importers will be hit harder than commodity exporters. But even if our negative scenario has become slightly more probable lately, we still believe that there are ways to avoid a sharp slowdown in emerging markets if the right decisions are made.

Regional outlooks

The Middle East is expected to grow at the fastest pace in a decade, mainly on the back of higher oil prices. Latin America is also benefitting, and growth will stay on track in several commodity exporting countries. Emerging Asia is showing a mixed picture, with threats of political and social instability taking a toll on growth in some smaller countries and the larger economies showing improvement.

Emerging Europe and the former Soviet republics, such as Kyrgyzstan and Tajikistan, are expected to see their economies contract. The commodity exporters in the region, including Kazakhstan and Uzbekistan, will be able to offset somewhat the impact of the war. Russia and Belarus are in a deep recession, largely due to the sanctions. Overall, however, the slowdown in the region has been less pronounced than expected.

Stagflation fears increase

Until recently we viewed the negative stagflation scenario to have very low probability. However, we recognize that fears of longer lasting high global inflation and a sharp slowdown of global growth have been increasing. This is understandable as the war in Ukraine drags on, still more sanctions against Russia are being taken, and COVID continues to erupt every now and then. At the same time, there is a risk that the slowdown in global growth could be compounded by a faster-than-expected tightening of financial conditions in advanced economies, triggering considerably higher borrowing costs for emerging markets and financial stress for countries with large financing needs.

Back on SDG track

To avoid falling in a stagflation trap, more perspective on the long-term horizon is needed. There is urgency to continue with the UN Sustainable Development Goals (SDGs), basically anchoring inflation expectations by working collectively on topics that affect long-term growth. Getting on the SDG track through coordination of debt relief efforts in low-income countries would be a start to reduce the threats of surging inequality and increasing social discontent. Policymakers and investors need to show that global fragmentation across trade, finance and investments is not an option.

With many emerging countries highly exposed to social inequality, climate hazards, and already facing related transition challenges, private finance plays a crucial role in helping to develop a broader and more mature sustainable finance ecosystem. At the same time, countries around the world must refrain from fragmented trade, fiscal, and monetary policies that make the global economy worse off. We all must work together to avert another disaster.