By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Some countries buck negative trends in global economic surprises, but China is not one of them. The “feel good” factor stemming from the improving growth outlooks can affect policies in parts of LATAM.

Global Economic Surprises

Economic surprises are moving south again – both in emerging markets (EM) and developed markets (DM) (see chart below) – but aggregate numbers mask a lot of important country nuances. The economic surprise index for EM is to a big extent driven by China, which experienced several big data misses lately. The next important milestone is the release of official and Caixin activity gauges for May early next week. The consensus expectation is that the worst is already behind us – i.e., we should see some improvement vs. April – but both the services and the manufacturing PMIs (Purchasing Managers Indices) should remain in contraction zone. And this means that the real GDP forecast for 2022 (cut to 4.7%) will continue to move away from the official target of about 5.5% – without more active policy support that is (=not just statements and slogans).

Brazil Growth, Fiscal Policy

Among other major EMs, Brazil is still struggling with inflation, but its 2022 growth forecast is gradually moving away from the brink (raised to a “mighty” 0.7% recently), and the country’s fiscal performance has been significantly better than expected so far this year. The question is whether Brazil can avoid getting carried away by its macro successes in the election year. This week’s approval by the lower house of a bill that lowers taxes on certain goods (re-branded as essential) is an example of such policies. The bill is supposed to reduce inflation pressures, but the problem is that while the anti-inflation impact will be short-lived, the loss of revenue for the budget can be sizable (to the tune of 0.7-0.9% of GDP) and longer lasting.

Colombia Presidential Elections

Brazil’s regional peer, Colombia, is also doing quite well as regards the growth outlook (the 2022 forecast raised from 3.7% to 4.8%). And this “feel good” factor might be an important consideration in this weekend’s presidential election. Colombia used to be among the countries where policy continuity was never in question (so we always watched the elections, but did not really worry too much). However, the current list of frontrunners includes a rather interesting personality from the far left – Gustavo Petro – who is also leading in the polls by a wide margin. And many observers argue that Petro’s victory is to yet fully priced in by the market. So, stay tuned!

Chart at a Glance: Global Economic Surprises Moving South Again

Chart at a Glance: Global Economic Surprises Moving South Again

Source: Bloomberg LP

The Citigroup Economic Surprise Indices (CESI) measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected. CESIG10 measures economic data surprises across the world’s largest “G10” economies as a whole; CESIEM measures economic data surprises across emerging markets economies.

Originally published by VanEck on May 27, 2022.

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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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