Base metal prices have far exceeded our initial forecasts, supported by low inventory. We expect average base metal prices to be 44% higher in 2021 and decline by 5% in 2022 as some supply constraints ease. 

Inflation has picked up amid high commodity prices, supply disruptions, and uneven growth recovery. Scope to postpone monetary policy normalization has rapidly narrowed, and we see most countries hiking this year. Persistent fiscal fragility could complicate orderly unwinding of monetary stimulus.

We use VAR models to decompose the effect of commodities and FX on EM inflation. Turkey and Russia, for different reasons, appear most exposed to exchange rate shocks. Headline inflation in South Africa and Brazil appear to be driven by energy prices, while price dynamics in Indonesia are more responsive to non-energy commodities. We expect tight stances in Brazil, Mexico, Russia, Turkey to keep expectations anchored.

COVID-19 has exacerbated regional labor market vulnerability, and lockdowns have worsened the deterioration in employment conditions. Uneven losses across formal and informal sectors suggest declining job quality. Slow post-lockdown job growth raises fears of a jobless recovery in some countries. 

We project a real GDP contraction of 7.5% in 2020 and a modest rebound in 2021. Tourism remains depressed, but remittances have surpassed pre-COVID-19 levels. SLV, JAM, and PAN are set to endure the steepest recessions, while GTM should contract the least due to its stable macroeconomic framework.