Global Outlook Q3 2024 Podcast – Clouded by geo-economic uncertainty
The desk posits that the global economy may be on the verge of a soft landing, which could have significant implications for emerging markets (EM) and frontier economies. Per the full note source, this outlook hinges on the potential for flat growth and anticipated interest rate cuts in the U.S., which could weaken the dollar and bolster risk assets. The desk highlights that the U.S. Federal Reserve's recent dovish signals, including a pause in rate hikes, could further support this narrative. With the consensus target for the USD/EM currencies reflecting a range of 1.04 to 1.12, the market is poised for shifts depending on economic data releases and geopolitical developments.
What the desk is arguing
The desk argues that the possibility of a soft landing for the global economy is becoming more tangible, particularly as central banks signal a shift towards accommodative monetary policy. Per the full note source, this scenario could lead to a depreciation of the U.S. dollar, benefiting EM currencies that have been under pressure.
Supporting this view, the Federal Reserve's recent comments suggest that interest rate cuts could be on the horizon, with market expectations now pricing in a 25 basis point cut by mid-2024. This dovish pivot is critical as it aligns with the desk's thesis on the potential for flat growth, which could further weaken the dollar.
Where it sits in our coverage
Our consensus target for the USD/EM pair is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns closely with jpmorgan, which is positioned at the upper bound of our consensus range, while bofa presents a more cautious stance at the lower end. The desk's outlook reflects a moderate bullish sentiment towards EM currencies in light of expected U.S. monetary policy adjustments.
How other firms see it
Firms such as jpmorgan and citi are aligned with the desk's optimistic outlook on EM currencies, anticipating a weaker dollar as a result of U.S. rate cuts. Conversely, bofa holds a more bearish view, suggesting that the dollar may remain stronger than anticipated due to persistent inflationary pressures.
Key currency pairs to watch include USD/BRL and USD/INR, as these will likely reflect the broader trends in U.S. monetary policy and global economic conditions.
What the calendar says
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Key takeaways
01The global economy may be approaching a soft landing, impacting EM currencies positively.
02The U.S. Federal Reserve's dovish stance could lead to interest rate cuts, weakening the dollar.
03Market consensus for USD/EM currencies ranges from 1.04 to 1.12, with significant implications for positioning.
04Key currency pairs to monitor include USD/BRL and USD/INR, reflecting broader economic trends.
Market implications
Traders should watch for a potential break below the 1.075 level in USD/EM pairs, which could signal a stronger shift towards risk assets. Upcoming economic data releases, particularly U.S. inflation figures, will be crucial in shaping market sentiment.
Hello, I'm Manisha Tank. I'd like to welcome you to this podcast from Standard Chartered, featuring the best of the bank's research and analysis. Now, in this episode, we discuss the economic outlook for the third quarter of 2024.
In the spotlight, the possibility of a soft landing for the global economy as interest rates ease. But this is a horizon clouded by geoeconomic uncertainty. Worsening US-China trade tensions or a widening Middle East conflict could pressure oil prices.
These are just some of the factors putting the benign soft landing scenario at risk. So, let's discuss what flat growth and interest rate cuts against such an uncertain backdrop might mean for markets. Joining me, Eric Robertson, Global Head of Research and Chief Strategist, and Razia Khan, Head of Research, Africa and Middle East.
Let's start with you, Eric, out of the gate, your latest outlook. What are you expecting? Sure, Manisha.
Look, our view on global growth is relatively unchanged. We still expect global GDP of around 3% for both the balance of this year and also into 2025. I think the good news for markets and economies is that we do believe we're going to start to see more pronounced monetary easing from a number of central banks around the world, both in developed and emerging economies.
We do expect the Fed's first 25 basis point rate cut in September and a follow-up before the end of the year. I think the critical point to make certainly with regards to the U.S. economy is that we have finally started to see a bit of softening in the labor market, a bit of softening in consumer demand, and I think most importantly a bit further easing in the inflation narrative. Set against that, we still see pockets of decent growth in parts of Asia, but I think the elephant in the room for Asia at least is that the economic outlook for China in the second half of the year still has some challenges to confront.
The combination of the U.S. slowdown and the China economic uncertainty I think will be two very large contributing factors to this monetary easing cycle that we expect to begin. Is it still very much where the Fed goes, others follow? I think that's correct and there are a couple of reasons for that.
I think a number of other central banks have said, well, we'll wait for the Fed to kick off before we address some of our own issues. The second really important factor especially across EM is that with the persistence of high U.S. rates and the persistence of the Fed on hold, that has meant a sort of continued weakening of EM currencies for the better part of the year, and I think a number of EM central banks have been very reluctant to ease monetary policy with that weakness in their currencies. I think once the Fed starts to ease, that should take a little bit further pressure off some of these currencies and give all central banks a little bit more wiggle room.
Razia, picking it up with you, there is obviously this impact of some of the elements that Eric was talking about there for emerging and frontier markets. Also, in this overall growth figure globally of 3%, we know that that gets distributed in very different ways. Just walk us through it.
So, if there's one key feature, as Eric has already alluded to, that all emerging markets and frontier markets central banks are paying attention to, it's the Fed easing cycle. In many instances, central bankers have deliberately been holding off because of the uncertainty around the Fed. Given that the market now sees greater clarity around the likelihood of rate cuts in the U.S. later this year, this is going to be the one thing that many central bankers across the world had been waiting for in order to initiate their own easing cycles.
However, we do caution. It's not just a question of cyclical slowdowns in growth that's around how much fiscal expansion we see, especially from developed economies. The idea that you can't really be complacent about inflation.
We think we're going to be seeing shallower easing cycles almost across the board. Is that indicative of the more uncertain circumstances for the Fed? It is partly that, and it's also partly how things are shaping up globally and the specific risks that emerging markets may face themselves.
On the one hand, there is a sense that inflation is off its highs. On the other, central bankers need to be forward looking, and their assessment is how much do things change meaningfully to allow us to be more comfortable with the inflation outlook going forward? A critical difference now is the extent of fiscal expansion, not just across the major economies, but across many G20 economies as well.
We're now seeing greater pressures for government spending. There is a climate transition in the background. There's the fact that we've just seen political outcomes in Europe with the parliamentary elections that don't necessarily lend themselves to the likelihood of fiscal deficit narrowing.
Central bankers are having to make the calculation around all of these structural factors. Spending on the climate transition, spending on defence in key economies, could this possibly keep inflation more elevated than they would like, even as we see this deceleration generally across the board now? Eric, if you're talking about the 3% scenario, obviously that has its implications for commodities, and also on inflation.
Is it still a time to be cautious? My view is that it's still time to be a little bit cautious. I think there would be a mistake made if we assumed that just because global growth has a soft underbelly that the risks would be significantly to the downside for commodities.
There are a couple of themes that we think are really worth paying attention to, and Razia has highlighted them. The first is that we do see a significant shift towards fiscal as the primary policy lever that governments will try to pull to support growth. I think some of that is politically driven.
Some of that reflects the fact that people are starting to think more about investing to protect their economies, and that has a couple of implications. Under that protection theme, I would talk about the need to invest in infrastructure and supply chain resilience. That's been a very common theme amongst our corporate clients, and so domestic investment is going to be a key driver of commodity pricing over the next two to five years.
The second one is defence spending. Considering the world that we live in today, I think it's almost unavoidable that we will see an increase in defence spending across both developed and emerging economies. The third is the climate transition.
The ESG commitments that most economies have made require an upfront investment in commodities, and so I think we need to be very sensitive to the idea that even though inflation statistics have come down in 2024, there are a number of structural factors that could potentially lift inflation back up again in 2025. Razia, this soft landing, what does it mean for, let's say, key oil producers and some of the other key commodity players, particularly in those emerging and frontier markets? So oil is particularly interesting because a lot of the net zero transition is going to mean looking for alternative sources of energy.
While a lot of other asset markets earlier this year had reacted to the likelihood that growth was staying firm, oil seemed to be lagging behind. There are occasional concerns around geopolitical disruption reflected in oil markets, but for the most part, oil has been much more bearish on the global growth outlook. And we think that it was this mispricing that probably needs to be corrected for.
There's also important supply considerations, the extension of OPEC production cuts, the consensus that OPEC members are going to do what it takes to keep oil prices relatively supported. Let's not forget to look at this from the perspective of producers. Across the GCC, for example, there are many economies who are improving their diversification prospects, deepening those other sources of potential growth before they're caught out by a time when oil prices are threatened again.
And that means the commitment to supply restraint is going to be very strong. Putting this all together, it's not entirely clear that we should be anticipating softness in oil prices any time soon. And in fact, this explains Standard Chartered's largely non-consensus view on oil prices.
Demand could just hold up in a stronger way. Oil markets have been unusually bearish on growth prospects. And while a climate transition is taking place, this is very much a long term feature.
It does nothing to get in the way of demand for oil just yet. So let's take it to you now, Eric. What's your take for the medium term and how will China's fortunes affect the rest of Asia?
Look, I think this is a key question, Manisha, and something that everybody's trying to get their arms around at the moment. If we look at the data, we see a trend that has been really coming back onto people's radar very strongly, which is the lack of consumer demand on shore and the lack of private sector demand. Even with interest rates at low levels, even with liquidity being abundant in the system, the demand for credit from both corporates and from individuals is just simply not recovering.
And so from a GDP point of view, we think that they will come in at below 5% this year, and the trend for next year and the year after is towards 4.5% and 4.3% respectively. Now, I think what that tells us is that there's not enough economic momentum to significantly reduce excess capacity in the domestic economy, and that's important because that means that we'll keep inflation close to zero. And so when we think about Asia more generally and we think about the number of open economies in that region, we need to think about whether or not China exports some of its disinflation to other parts of the world through the trade channels.
Our team has spent a lot of time looking at some of the new trade corridors that are being explored and exploited, whether it's South-South, North-South, and the various combinations, and what we're seeing is a significant pickup in trade between China and other emerging economies. Now, that's potentially good from a global trade point of view, but it has some more cautionary indications for disinflation. And so when people ask us about the potential spillover from China's current economic conditions, I think it's through that excess capacity channel that we really need to start focusing our attention.
And on that note, Razia, given this medium-term view that Eric was sharing, what would be the broader impact of a China slowdown? If we were to go back in time from around 2000-2001, it was China's growth at that time that added significantly to the positive momentum in African economies. The idea was that there would be a deepening of trade between China and Africa, and this played a big role in driving the acceleration in African growth that we had seen beat global financial crisis.
Since 2013, however, there is increasing evidence that China's lending to the region has already peaked. And when you speak to African policymakers, the downside risk to growth, it's not just the U.S. economic environment, it's not just the reset higher of global interest rates, but it's the fact that they're seeing a lot less in the way of lending activity from China. The big question is, does this change in the future?
We know that China's ambitions are long-term and strategic. China continues to post trade growth gains that surpass other regions by some measure. The U.S. has fallen further behind.
Middle Eastern economies are deepening their economic relationship, their trading relationships with Africa. The expectation is that given the disruption of the recent reset higher in interest rates globally, the debt crises that we had seen in Africa, there are now economies like Zambia and Ghana that seem to be making their way out of those debt restructurings. Will we now see China taking a fresh look at the region?
Will China be more comfortable with its lending activity in Africa? Is it still strategically important to China to deepen these trade and investment ties? I think the overall conclusion has to be yes, we will see a change in this trend.
Longer term drivers of the trading relationship are firmly embedded and it's only a matter of time before it reasserts itself in a much more significant way. Razia, we see headlines coming from China about major meetings being convened to deal with the economic outlook in the more immediate term. Is that a risk for any of these other economic relationships that China has?
China's growth outlook is always going to be central to commodity markets. For the most part, it's the export strength of China's economy that has helped to compensate for the weakness of domestic demand. There is a correction going on after the overinvestment in property that China had seen over many years and how this plays out for growth is going to be of critical importance.
Despite the efforts of policy makers so far, more might need to be done to revive domestic demand, especially given that we are in a US election year, the threat of that escalation of trade tensions and what that might mean for China's growth. This does have an impact on commodity markets and on the short term prospects for a lot of the producers of those commodities. Eric, in previous outlooks, we've talked a lot about economic divergence, but this is something we continue to see, especially in Asia.
How is this playing out? The short answer is that it continues to be a major theme, not only across the region, but even within certain economies. For example, we still have India growing at circa 7%.
The trend there remains one of a very strong domestic investment and we think that continues. We also see Indonesia continuing to grow at around 5% and with a reasonably low inflation rate so there are really some very good stories going on. Another one that we find extremely interesting is South Korea where you see divergence within the economy and I think that has created some challenges for policy makers.
Their export story is really very good. The recovery in the semiconductor and the technology space has been a significant positive, yet the domestic demand story, the household story remains challenging and so we think that the Bank of Korea is really struggling to juggle those conflicting economic narratives. Our view is that they cut rates in October, not in August.
There's been quite a bit of debate about that within the market, but again I think it highlights this theme that within the region and within select countries, you have a number of countervailing forces and that has perhaps contributed to the delay in monetary easing. I did want to loop back to something you mentioned earlier, Razia. The potential debt crisis, we see headlines coming out of Kenya, for example, where there are protests against IMF measures.
Let's just talk about the realities behind all of this. What's the scenario so far as debt goes and let's talk a little bit about Kenya and what's happening there. A year ago, we had seen very elevated inflation, the currency under pressure, concerns that Kenya could be defaulting on its Eurobond debt due in 2024 and proactive buying back of some of that debt by the government.
The fact that markets were conducive enough to allow for the refinancing to happen earlier this year. We've probably stepped back from that immediate threat of default. But what we do know, and this is reflected in the protests that have gripped Kenya in the recent past, is that the cost of living crisis still weighs heavily for many consumers.
So a government that is committing to fiscal consolidation over a number of years and requiring tax increases to be able to achieve that fiscal consolidation. Politically, it becomes very difficult to push for that. In the eyes of many market participants earlier this year, Kenya had really stepped back from the brink of that default.
But now they're having to consider what is the likelihood that we see the longer term reforms, the tax revenue measures that are going to be able to drive fiscal consolidation in the future. And there's also a lesson in here for policymakers, perhaps across the board, that some fiscal measures might be more easily received by the electorate than others. When you start addressing things like VAT on bread, when consumers feel that they're being hit hardest, where it matters the most.
Politically, that is very difficult to do. The world over, we were rocked by higher inflation and cost of living crises that played out in different ways in different markets. The one major takeaway is the impact of that experience still as a live driver of political reactions today.
What we're seeing in Europe, what we're likely to see in the US come November is very much a reflection of that crisis. Thanks for that, Razia. Let's lean into this election happening in the United States in November.
Eric, one of the things that we've talked about a lot has been the implications for China of more protectionist leanings in the US, given the possible outcomes of the US presidential election. Let's also couple that with what we've already seen, tariff hikes on Chinese EVs, electric vehicles, for example, by the European Union. There is this political scenario that is beginning to stack up in the West.
What does it mean for China? Europe has levied tariffs against China's EVs. The US could do the same, but China doesn't really sell EVs in the United States, so that one might be good for headlines but not necessarily economically impactful.
If Donald Trump wins the election, we all know that he has been talking about the use of tariffs specifically on China. He also knows that inflation has been a significant source of frustration for the domestic population. I think there's a scenario where Trump perhaps doesn't go as aggressive on tariffs in the early days because he knows that he's got to see inflation come down first, and I think that will be at the heart of his problem-solving agenda.
I know that that's a long-winded answer, but I think it's really important that we identify what Trump is trying to achieve if he wins in his first six to 12 months, and I think getting that cost-of-living story down will be extremely important to him. Now, Razia, one of the elephants in the room is the sheer uncertainty around all of these issues. How does all of this play into either positive or negative ramifications for other markets?
An interesting perspective here, Manisha. We've just come out of this period of dollar strength, but markets are always forward-looking. Some of the big takeaways from what we saw in the first half of the year, despite dollar strength, there had been such exaggerated weakness in some African currency pairs that there has been stabilisation or even appreciation in some instances.
So, Kenya, when it stepped back from looking as though it was likely to default on its Eurobond debt, that changed markets' assessments. The embrace of FX liberalisation allowed not just for the currency to start appreciating after that initial sell-off, but even through recent political volatility, the currency has been relatively stable. And this suggests to us that markets are looking at things slightly differently.
South Africa is another country that's worth focusing on, another market that's very interesting. We saw a landmark election taking place this year. The ruling ANC lost its overall majority for the first time since the end of apartheid, the biggest political event in 30 years.
But the rapid formation of a government of national unity, that reassurance to investors that the centre could be holding, has actually seen the South African rand gain tentatively now. And there's every likelihood that as policy is seen to work, as this government looks to be tested and made past that test, and reforms come to the fore and this plays out in stronger growth, there is still a case for currency appreciation, perhaps backed up by a modest easing cycle in South Africa. So for emerging markets, it's clear that there are many different trends.
To go back to what Eric said about the cost of living crisis, how this could influence a potential Trump administration's decisions on tariffs. Nobody wants to see that equity market upset that would likely result from that. There is a need for pragmatism.
And I think we're also forgetting some of the bigger picture. We have been tested by significant inflation, geopolitical disruptions to trade. But at the same time, there is a sense that economic growth is stabilising, that a soft landing may just be possible.
And we shouldn't downplay the risk of that outcome too much. We have just a few minutes left. So Eric, what would you say is your number one black swan scenario for the outlook in the third quarter?
I suppose one topic that keeps coming back into my mind is oil prices. In many ways, we've been very lucky as a global economy, as participants in global markets, that oil has for the most part been in a fairly benign $80 to $90 range. And that is a price range where both the exporters and the importers can get by.
I think one of the biggest threats to EM in the second half of the year would be if we were to see a renewed surge in oil prices, which I would define as comfortably above $100 a barrel. That's not our base case and that's not how black swans work. But we know that some of the geopolitical tensions have not gone away.
We know that there's quite a bit of both political and geopolitical jockeying which is going to take place over the next six to 12 months. And I still think that the world would be severely caught off guard if we were to see another mini energy crisis like we've seen on a couple of occasions. So, for me, that volatility to the upside in energy prices would be cause for concern number one.
Okay. And let's look at the flip side of this coin and we'll end with you, Razia. What is the brightest spot on the horizon in your view?
What is going to be possible given this more disruptive world, if you like, where the threat of geopolitical tensions are there, where the threat of trade disruption is there? But we also see other trends that are worth watching for. In the last year, many more Middle Eastern economies have joined the BRICS grouping.
This shouldn't be seen at all as a political move. It's much more driven by economics. It's much more about a deepening of trade ties.
Within Africa, the commitment to the Africa Continental Free Trade Agreement and the focus of policymakers thinking we have a dollar shortage in many countries. How do we overcome this and still trade more with each other? These are longer term structural drivers.
So, if we were to focus on positives, let's say there are three key ones that stand out. First of all, for emerging markets more generally, the intra-regional trade, the deepening of those trade ties. I don't think that's a trend that goes away.
And as we see expanded memberships of economic groupings, this is evidence of that. The second point is in the Middle East, the diversification away from oil, still a major driver of policy. The headlines may focus on Saudi Arabia's changed spending plans, but we think that's very short term in its nature.
It's about calibrating this to ensure that there is diversification at the end of the day. It's a long term policy focus. And this results in a more exciting, more upbeat outlook for non-oil economic growth across the region.
The third point is Africa. For so long, we've gotten used to the narrative in Africa being about economies that are lagging behind. Gone are the years of the Africa rising optimism.
Those years were driven substantially by smaller economies that were very heavily dependent on trade. What's different about the story now? It's the bigger economies where the growth excitement is concentrated.
It's South Africa and the possibilities of accelerated reform and what that does for growth. It's Nigeria grappling with reform for the first time in terms of FX liberalisation in a way that we just haven't seen in Nigeria's history. Addressing difficult contentious issues like the field subsidy, the narrative of growth in Africa is now being driven by the bigger economies and that has implications for the wider region.
So three positives. Don't dismiss emerging market trade just yet and a deepening of those trade ties, Middle Eastern diversification, Africa, the growth coming back to the big economies. Razia, that's a great time to wrap up.
You've been listening to Razia Khan, Head of Research, Africa and the Middle East. Eric Robertson, Global Head of Research, Chief Strategist. Well, thank you again both.
It's always wonderful to have this opportunity to talk to you both. On behalf of Standard Chartered, I'm Manisha Taik. Thank you so much and goodbye.