For whom stagflation tolls: no repeat of the 1970s nor 1997 for emerging Asia

The geopolitical shocks of 2022 have added to the ongoing economic impact from COVID-19-related disruptions, causing a net stagflationary shock with higher inflation and lower growth in many of the major advanced markets. We believe a return to 1970s-style stagflation remains unlikely and forecast instead "inflationary recessions" in the US and euro area over next 18 months.

The war in Ukraine and subsequent sharp rise in food and energy prices – typically a larger share of CPI baskets in emerging economies – means net importing economies have yet to see peak inflation. Add sharp US monetary policy tightening to food and oil price shocks, and the outlook for emerging markets looks ominous. In the past, faster than anticipated interest rate hikes to contain inflation have triggered financial crises in emerging markets.

However, the risk of stagflation in any individual economy depends not just on the shock, but also on economic fundamentals. And here economies in emerging Asia stand on stronger footing. Domestically, the upward trend in inflation started later, especially in Asia, reflecting lagged demand recoveries from the pandemic. Another signpost of stagflation is labour market tightness: unlike in advanced markets, in emerging Asia unemployment rates have yet to recover to pre-pandemic levels, and the risk of a of price-wage spiral is lower.

Emerging markets are not immune to the coming global slowdown. But many Asia countries should still see higher GDP growth rates compared with advanced economies. We do not forecast quarterly GDP contractions in emerging Asian economies this year or next. For 2023, we expect both slowing growth and lower inflation in Asia, with the notable exception of China, which could see growth rebound if it relaxes its zero-tolerance approach to COVID-19.