Goldman Sachs Global Economics Analyst Pockets of Resilience in EM Early Hikers A number of economies in Latin America as well as Central and Eastern Europe (CEE) started hiking rates well before everyone else. Among the nine EM early hikers, the policy rate has increased by an average of over 800bp (Exhibit 21, left panel) while our 1 GS Financial Conditions Index (FCI) has tightened by an average of 450bp. Where are these economies headed and what can we learn from their experience for the broader global outlook? While no early hiker has clearly achieved a soft landing yet, activity has generally held up better than expected. A majority of early hikers are probably still expanding, based on GDP growth, PMIs, and labor market indicators. In particular, unemployment rates remain low in all economies, although they have edged up in several economies 2 that elevated job openings, reopening, and (Exhibit 21, right panel). We have found strong private sector balance sheets—again unique characteristics of this different cycle—help explain this resilience. Exhibit 21: The Policy Rate Has Increased by 800bp Since March 2021 for the Average EM Early Hiker, but Unemployment Remains Low Basis points Change in the Policy Rate Since March 2021 Basis points Percent UnemploymentRate in Average EM Early Hiker Percent 1000 1000 10 10 900 Average EM Early Hiker 900 800 US 800 9 9 700 700 600 600 8 8 500 500 400 400 7 7 300 300 200 200 6 6 100 100 0 0 5 5 Mar-21 Jul-21 Nov-21 Mar-22 Jul-22 Nov-22 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Note: EM early hikers are Brazil, Chile, Colombia, the Czech Republic, Hungary, Mexico, Peru, Poland, and Romania. Source: Haver Analytics, Goldman Sachs Global Investment Research Encouragingly, sequential core inflation and wage growth have begun to moderate across most early hikers, although they remain very high. The moderation in core inflation is most notable in Brazil, where we expect rate cuts to start in 2023Q2 and growth to pick up back to a potential-like pace of 2% in the second half of the year (Exhibit 22, left panel). In contrast, the CEE economies are in a more difficult position. This reflects CEEs exposure to the surge in European gas prices, as well as continued high, broad, and in the cases of Hungary and Poland still-rising inflation. We therefore expect the Czech and Polish central banks to resume their rate hike campaigns before long (Exhibit 22, 1 We define an “early hiker” as a country under our coverage that began to increase the policy rate by October 2021 with a cumulative increase in the first six months of at least 100bp. 2 Our classification suggests that Chile is likely in a mild recession, while the Czech Republic and Poland are close calls. 16 November 2022 19