As inflation began to edge up reaching the highest levels since the 1970s, this necessitated monetary policy tightening. The housing prices started to witness some correction. Lax lending standards, excessive leverage and weaknesses of banks’ risk models/stress testing were exposed and bank losses mounted wiping off capital of major financial institutions.
The ongoing deleveraging in the advanced economies and the plunging consumer and business confidence have led to recession in the major advanced economies and large outflows of capital from the EMEs; both of these channels are now slowing down growth in the EMEs.