EM in Focus EM Output Gaps — Significant Room to Grow, But Mixed Picture

Economics Research 30 July 2026 | 9:59AM BST

EM Output Gaps — Significant Room to Grow, But Mixed Picture

n Measuring the output gap—the difference between actual and potential Basak Edizgil | output—is difficult but it is impossible to assess the outlook for economic Goldman Sachs International growth, monetary policy, and asset prices without forming some judgment on Kevin Daly the degree of overall spare capacity in an economy. | Goldman Sachs International

n We update our production function output gap estimates for 22 emerging market economies. These estimates are intended to enable cross-country comparisons and should be considered as a complement to the data provided by

For the exclusive use of our country economists. As a cross-check on our findings, we compare them with those from international organisations (such as the OECD) and statistical filters. n Our analysis suggests that most EMs continue to operate close to or below potential, with meaningful divergence across regions and economies. Since our last update, output gaps have become more negative—that is, spare capacity has increased—in CEEMEA and China, while LatAm is operating close to potential in aggregate and EM Asia ex-China has moved into positive territory. o EM Asia: We do not view the sharp, semiconductor-led growth acceleration in Taiwan, South Korea, Hong Kong and Malaysia as evidence of broad-based overheating. Our estimated output gap remains negative in South Korea and is only slightly positive in the others. Most output gap estimates for China—including our own—now point to significant spare

fce07ef8421611dd87ec0014c24035ec capacity in the economy. o Latin America is operating close to potential in aggregate, with Argentina, Mexico and Chile exhibiting slack, counterbalanced by above-potential output in Brazil. o In CEEMEA, both the CEE region and South Africa continue to see aggregate demand fall well short of their supply capacity. In Türkiye and Russia, growth has continued to slow since our last update but both economies have been operating above capacity, contributing to inflationary pressures.

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EM Output Gaps — Significant Room to Grow, But Mixed Picture

Measuring the output gap—the difference between actual and potential output—is difficult but it is impossible to assess the outlook for economic growth, monetary policy, and asset prices without forming some judgment on the degree of overall spare capacity in an economy.

In this EM in Focus, we update our production function output gap estimates for 22 emerging market economies. We have previously outlined our methodology in detail here. Briefly, our approach examines the fundamental drivers of potential output— capital, labour, and technology—to calculate labour and capital usage gaps and combines these estimates to derive an overall output gap.

Given the inherent uncertainty in estimating output gaps, our estimates should not be viewed as the definitive assessment of economic slack for any specific economy (especially as our unified methodology may not fully capture the unique features of individual nations). We therefore present our results alongside a range of other

For the exclusive use of estimates, including those from international organisations such as the OECD and those derived from statistical filters.

Since Our Last Update, Negative Gaps Have Widened Modestly in CEEMEA and LatAm, and Shifted into Positive Territory in EM Asia ex China Exhibit 1 shows our regional output gap estimates for CEEMEA, EM Asia and Latin America; detailed estimates for each of the 22 EMs in our sample are provided in the Appendix. The results point to meaningful divergence across regions and economies, with a majority operating below potential but a number slightly above potential. Since our last update, output gaps have turned more negative in CEEMEA and China, while LatAm is operating close to potential in aggregate, and EM Asia ex-China has moved into positive territory.

fce07ef8421611dd87ec0014c24035ec n CEEMEA: Most…