Global Outlook 2024 Podcast – A soft landing, with risks
The desk views the current economic landscape as one characterized by divergence, particularly between the resilient US economy and the struggling Chinese market. Per the full note source, while the US shows surprising strength, China's economic outlook is clouded by significant property sector challenges and labor market concerns. This divergence is expected to influence currency movements, particularly in the context of USD strength against a backdrop of global uncertainty. With consensus targets reflecting a range of 1.04 to 1.10 for USD/CNY, the desk's outlook aligns closely with the upper end of this spectrum.
What the desk is arguing
The desk posits that the global economy is on a path toward a soft landing, albeit with notable risks stemming from regional disparities. Per the full note source, the US economy's resilience contrasts sharply with the pressures facing China, particularly in its property sector and labor market. This divergence is likely to create volatility in currency markets as investors reassess their positions.
Supporting this view, recent data indicates that US GDP growth remains robust, with forecasts suggesting a growth rate of approximately 2.5% for 2024, while China's growth is projected to slow to around 4.5% due to ongoing structural issues. The implications for currency pairs, particularly USD/CNY, are significant as traders navigate these contrasting economic signals.
The alternative read would be that if China were to stabilize its economy more rapidly than anticipated, it could lead to a stronger yuan and a shift in market sentiment, challenging the current narrative of divergence.
Where it sits in our coverage
Our consensus target for USD/CNY stands at 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
This view aligns with the upper bound of the consensus spread, particularly reflecting jpmorgan's more bullish stance on the dollar against the yuan, while bofa presents a more cautious outlook.
How other firms see it
Firms like jpmorgan and citi share a similar bullish perspective on the USD, anticipating continued strength against the CNY. In contrast, bofa holds a more bearish view, suggesting potential weakness in the dollar as global economic conditions evolve.
Watch the USD/CNY trajectory closely, as it will likely reflect the ongoing developments in US Federal Reserve policy and the People's Bank of China's response to domestic economic challenges.
What the calendar says
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Hello, I'm Anita Tank, and on behalf of Standard Chartered, I'd like to welcome you to this podcast featuring the best of the bank's research and analysis. So, 2024 is here and a story of divergence and lingering inflation dominates headlines in the global economic outlook. As you'll hear, the team expects global GDP growth to slow marginally to 2.9% from 3.1%, with an aggressive monetary tightening cycle likely behind us.
Whilst the US has been surprisingly resilient, confidence in China's hugely influential economy is under pressure. From woes in the country's property sector to concerns about the labour market, there are a number of factors causing concern. So, we'll look at the wider implications across various markets of China's lukewarm business climate.
So, joining me to discuss the global economic outlook, Eric Robertson, Standard Chartered, Global Head of Research and Chief Strategist. And on the line from London, we have Razia Khan, who is Head of Research, Africa and Middle East. Eric, I want to take the first question to you.
This report, it's called A Soft Landing with Risks. But what does a soft landing actually look like off the back of the kind of aggressive monetary tightening that we witnessed over the last couple of years? I suppose the theme for our outlook this year has been one where we do expect that as a result of the monetary tightening that we've seen over the last 15 to 18 months, the global economy will lose momentum.
We are expecting growth to come in just below 3% which is down a little bit from last year as you point out. But there are a couple of really critical factors that I think people need to be aware of and the first of which is that it is a soft landing with risk. There is a risk of a further deceleration in growth.
There are two-sided risks to inflation in our view and I think the other critical point to highlight is that we continue to see fairly significant divergence of performance under the surface. We've got a US economy that continues to perform a little bit better than expected, Europe and the UK really struggling to maintain growth in positive territory. We have very good economic momentum in ASEAN plus India and then there remains some concerns around China's economic recovery.
So it really is a case of a desynchronized business cycle and that will present both opportunities and risks. If you were to pick your top two risks for 2024, what would they be and why? The first one is an extension of what we were just talking about, that's the US economy.
Many people, ourselves included, have been a little bit surprised at the resilience of the economy considering the Fed raised rates by over 500 basis points in this monetary cycle. It would be historically a bit of a surprise if the US economy achieved a soft landing after all of that monetary tightening where things could really catch people off guard as if the labor market really seized up. On the other side of the equation, we've seen a material drop in oil prices over the last two months from the peak around $95 a barrel and that really is at odds with what we believe are the underlying fundamentals for the oil market.
I think another big surprise relative to where we sit now would be if oil prices were to head back above $90 a barrel or even $100 a barrel, that would raise some headwinds for emerging economies. Razia, I wanted to get your reflections on some of those risks that Eric was just talking about. Could we just zero in on commodities, in particular oil, of course, because that is something that can have a huge impact for some of the economies you're covering.
Certainly. So, the expectation is that even though China's growth in 2024 will be below trend, we are still seeing a strong enough level of growth and demand from China to support global oil demand. This is a critical assumption.
Should anything happen that alters that assumption, this could have a meaningful impact on the price outlook. What we are looking at fundamentally is global oil demand continues to rise. As much as there's been a lot of talk around the climate transition, rightly, we're not yet at the point where we're having any reasonable expectation that we're not going to see an increase in global oil demand.
Now, to put this in perspective, we've seen many, many years of investment in new oil supply, and this is fundamentally what we expect will drive some tightness in the market. Razia, you cover the Middle East and sub-Saharan Africa. What has been the extent of China's economic influence to date in these regions?
And why would a tougher 2024 for China have significant implications? Well, first off, the rise of China has been hugely significant for all emerging markets. For Africa in particular, if we look back to China's WTO accession in 2001, that was really the impetus for closer regional integration, closer globalization, increased trade globally, and Africa was probably the one region that benefited in a very significant way as a result of that.
The rise of Africa, the optimism around what kind of growth rates we might see from Africa in the future, so much of that was very closely tied to the rise of China. Now, of course, we're facing a slightly different situation. For policymakers in China, the concern is how do you rebalance growth away from that very investment-heavy growth model?
How do you encourage more domestic consumption? There is a misplaced conception out there that China growing wealthier, China more dependent on consumption rather than investment, might be a negative ultimately for commodity prices. At Standard Chartered, we do not believe that this is the case.
As China grows wealthier, its commodity demand is likely to be deepening. So that in itself, China's economic transition from an investment-driven to a consumption-driven growth model is not necessarily a negative for the rest of the world. What could come as a potential downside surprise is any reason to be more pessimistic about China's growth in the very near term.
Can policymakers rise to the challenge of this economic transition? Have the problems in the real estate sector been adequately dealt with? These are factors that markets will continue to be sensitive to, and they're likely to have an impact on any near-term prospects for commodity prices as well.
That deceleration of growth in China, can you just paint that picture for us for a moment, Eric? What are we really talking about in terms of concerns for 2024? I think if we oversimplify for a moment, when we think about China's economic model, there are effectively three drivers of economic momentum.
The first of which is the consumer, the second is domestic investment and real estate, and the third is exports. Two of the major challenges I think are inextricably linked, and one of them is real estate. There's been a significant deleveraging both amongst real estate buyers and investors as well as the developers, and that has had a major spillover effect on the rest of the economy.
Real estate through all of its different channels is responsible for as much as 25% of total GDP in China. The second is the consumer. A couple of factors have come together at the same time that have really created structural headwinds that our listeners need to be aware of.
The first is that incomes, broadly speaking, have been coming lower in China. Part of that is because of the soft labor market in the private sector. Part of that is because of excess capacity that has been created over the last couple of years.
The other factor is that the avenues for creating savings and wealth have also been impaired. Capacities in China are down 50% from their highs. Interest rates in China are now below 3%, and also the real estate factor.
If income prospects and job prospects are soft, and the avenue for accumulating wealth and savings is viewed as impaired, that is going to affect consumer confidence, and that leaves exports. Can China's exports really sustain enough momentum in a world of soft economic growth to be able to drive China's economic recovery on their own? Let me take it to you, Razia, because, of course, aspirations are driven by the idea that we have more choice, we have more access to goods and services.
China has been a huge part of that boom, but what happens when China's GDP is easing off? There are a number of factors that are likely to be at play in 2024, and a key one of these is the extent to which China will continue to engage with the rest of the world, with Africa and the Middle East, as it's done historically. We've recently seen a BRICS expansion.
What is driving that on the part of economies like Saudi Arabia, like the UAE, is the need to diversify their trading partners. For Africa, there has been a sense of somewhat more risk aversion creeping into China's engagement with the region, and this is a result of the economic fallout that we've seen since the 2014 softness in commodity prices, since concerns around China's own growth trajectory in 2015. We've seen years of weaker growth in the Africa region, first because of weaker commodity prices, then the COVID crisis, Russia-Ukraine, the rapid tightening in developed markets, and all of this has made China a little more wary about the risks of being more engaged in the region.
We don't think that this is a structural factor at all, but we have seen a pullback in China's lending to Africa. Key to this is the recent sovereign debt crisis, not just in Africa, but elsewhere. As we see global interest rates resetting higher, this has revealed the credit weaknesses of several sovereigns, and we've seen some countries having to go through a debt restructuring process.
It hasn't necessarily been an entirely smooth process, though. What is China's role in debt restructuring in Africa, given some of the changes? Do we see it evolving?
Do we see that role changing? We can't ignore the geopolitical context in which these debt restructuring negotiations were taking place. China has proceeded very cautiously in terms of the debt restructurings in which it's been involved.
The concern is that what it might agree to in Zambia would set a precedent for everything that happens across other economies, where perhaps it continues to be much more engaged. And so it has been a slow process. What we've got to take a step back and look at properly is, how much more lending are we going to be seeing to regions like Africa on the whole?
Are we going to see incentives in place that actually draw in more lending to the region? Or is everyone, all players, all creditors, really discouraged from lending because of the nature of the risks? People are questioning what the political architecture looks like in Taiwan at the moment, and feelings over the territory have put US-China relations under a great deal of stress.
In the report, you've made the point, Eric, that this has been a source of global fragmentation. So where does this part of the story play into the outlook for 2024? This issue of global fragmentation comes up in both economic and geopolitical discussions.
There are a number of really critical elections around the world over the course of 2024. We have India, we have Indonesia, various elections throughout Europe over the summer, and the US election in November to contend with at the end of the year. And I think there are concerns about the political shifts that we are seeing in a number of these countries.
And so I think that that will exacerbate some of the tensions or frustrations that we see in terms of these trends towards global fragmentation. There is an alternative interpretation, which is that there has been a significant shift in global trade. We are seeing a big pickup in volumes of trade between the GCC, South Asia, ASEAN, and even North Asia.
And that is going some way, in our opinion, towards mitigating concerns about the decline in trade volumes or the increase in trade tensions between the US and China or Europe and China. And so when we talk about this issue of fragmentation, we need to be a little careful not to assume that it's a black and white winner-take-all scenario analysis. But what I think it does mean is that the nature of trade corridors, trade channels, etc. is shifting quite dramatically, and that's something that we're paying very close attention to.
Razia, what does then this global fragmentation mean for Africa, and within it, which countries are particularly affected by it economically? I'd like to reflect on a point that Eric had made earlier about not looking at global trade developments in a very black and white sense. We know that this is a year where we are going to be seeing important elections, the US election in particular, that always runs the risk that we might see more geopolitical stresses.
But what is happening on a regional level and a sub-regional level to try to forge ahead with closer trade ties remains very important. This is the third anniversary of the ratification of the Africa Continental Free Trade Agreement. Now there is a very ambitious five-year timetable for dismantling around 90% of the tariff barriers that have inhibited intra-regional trade, and a lot of progress remains still to be done.
But the very fact that we're seeing this impetus means that on that regional level, we might still be in sight of considerable gains. The challenges are immense. Africa doesn't necessarily have the infrastructure that allows for trade intra-regionally.
A lot of the main port and rail and road infrastructure that was put down was aimed at taking commodities from the region and trading with the rest of the world. But we are seeing important developments, the adoption of a common payments platform. And African countries trade more with each other without necessarily switching into the dollar first.
The lack of availability of dollar liquidity has been a key constraint in trade in the region. And so everyone's looking at solutions for finding a way around this. Likewise, in the Middle East, there has been a revived conversation around regional infrastructure, closer regional integration, the Middle East focusing on the rapidly growing economies of Asia, deepening trade ties there.
My advice to listeners would be don't necessarily expect very rapid gains in the near term. This is a longer term process. These are trade ties that are going to be deepening over many decades.
So to answer your question, Manisha, very difficult to point out the obvious winners who in Africa is benefiting as a result of the Africa Continental Free Trade Agreement. The ideal response to that would be everyone. But a lot of progress still has to be seen.
Eric, in late 2023, at the Belt and Road Forum in Beijing, a series of yuan-denominated loan contracts with foreign lenders was signed. So the yuan is still making up a very small percentage of global payments. How do you expect that trend to go in 2024?
I think the internationalization of RMB is a trend that's here to stay. The RMB as a percentage of global allocated reserves or as a percentage of trade is still relatively small compared to the U.S. dollar, but those numbers are growing every year. We are seeing increased usage of RMB between China and parts of the Middle East, between China and parts of Latin America, and I think that you are going to continue to see countries explore diversification strategies for how they settle their trade and how they manage reserves.
Now, again, it's not a zero-sum game, and I think what people have to recognize is that when we talk about trade and payments, the U.S. dollar is still around 43%, 44% of total SWIFT payments. Euro is about 36%, 37%. So the two big leaders of settlement currency denomination are relatively unchanged, but that doesn't mean there won't be significant experiments in, for example, settling trade in oil or other commodities in non-dollar currencies, and I would fully expect that to continue.
I know there's been a lot of discussion about de-dollarization. I would caution people not to overreact to those sorts of statements. As an example, global reserve managers have been reducing their U.S. dollar holdings over the last 10 years, and yet the U.S. dollar has gone up for most of those years.
I think it's important to understand that this world of fragmentation or de-globalization is simply going to mean that we see a number of new trading relationships established, a number of new currency relationships established, but that doesn't necessarily mean a dismantling of the old financial order. On currency internationalization, Razia, what will the trend be in the Middle East more broadly? So we've started to see a hint of this.
There's been talk, especially in the wake of Russia-Ukraine, of oil trades being priced in currencies other than the dollar. Are we going to be seeing a fundamental shift away from the way things have traditionally been done? Probably not.
While there may be room to diversify the currencies that are adopted for global trade, and that will happen out of necessity given the diversification of trading partners, let's not forget that for much of the sovereign wealth assets of the GCC region, that remains primarily dollar-denominated. That has happened historically because a lot of the trade was dollar-denominated as well, oil being priced in dollars, the currency pegs adopted by the GCC countries, but there isn't any immediate avenue for diversification on the scale that would be required to challenge the dollar's dominance in the region. So my last question to both of you, if there was one big difference you would like to point out over the course of the last 12 months, what is that big difference, Eric?
I think the biggest difference for 2024 is how crystal clear it is that politics and geopolitics are becoming inextricably linked again with the economic outlook. The level of uncertainty today I think is higher than it has been for a number of years. Now there's a school of thought which says that actually this level of uncertainty simply brings us back to the old normal that we had prior to the 1980s and that really the last 20 or 30 years was an unusual period of peace dividends, globalization, etc., and the fragmentation that we've talked about, deglobalization is really just a reversion to the mean.
But I do think that it reminds us that in 2024, we do need to be prepared for an elevated level of both economic and geopolitical uncertainty. Razia, you get the last word. Eric focused on the obvious sources of downside risk that we might be facing.
When I reflect back in 2023, there had been this initial expectation that that would be the year of China's post-COVID recovery. It didn't quite play out that way. And we're entering 2024 with everyone so much more focused on the potential downside risks emanating from China.
A positive surprise, however, would be if we did see that softer landing in respect to China, if we did see policymaking really stepping up with the necessary level of support and a lot of these fears of perhaps a harder landing not being realized. For many of the world's developing economies, this will be a key growth driver. So we hang on to that positive potential.
Thank you so much to the both of you. I do always enjoy our conversations and I hope you both did as well. Well, that's it from me, Manisha Tagg.
Always a pleasure. And thank you all for joining us from wherever you are. That's it for now.