The desk posits that while global growth is on a declining trajectory, China's post-COVID economic resurgence presents a nuanced narrative that could influence FX markets. Per the full note from Standard Chartered, the uneven distribution of growth benefits across sectors raises questions about sustainability and potential volatility in currency pairs. Current consensus targets reflect a cautious optimism, with key players adjusting their forecasts in light of these dynamics. Traders should remain vigilant as market sentiment evolves in response to these developments.
What the desk is arguing
The desk argues that the resurgence of China's economy post-COVID-19, while promising, may not translate uniformly across all sectors, potentially leading to volatility in FX markets. Per the full note from Standard Chartered, this disparity in growth could create divergent trends in currency performance, particularly as traders reassess their positions in light of these emerging narratives.
Supporting this view, recent data indicates that China's GDP growth is rebounding, with estimates suggesting a rise of approximately 5.5% for 2023. However, the desk emphasizes that not all sectors are benefiting equally, which could lead to sector-specific currency movements that traders need to monitor closely.
Where it sits in our coverage
Our consensus target for the USD/CNY pair is set at 1.075, with a range of 1.04 to 1.12. Key firms contributing to this outlook include: - jpmorgan: Target of 1.10 for Mar-26 - bofa: Target of 1.04 for Mar-26
This view aligns with jpmorgan, which reflects a bullish stance on the yuan's potential strength, while bofa offers a more cautious perspective, indicating a divergence in sentiment among major players.
How other firms see it
Firms aligned with the desk's view, such as jpmorgan, are optimistic about the yuan's performance, suggesting that the growth in China will bolster its currency. Conversely, bofa remains skeptical, highlighting potential risks associated with uneven growth that could undermine the yuan's strength.
Traders should keep an eye on the USD/CNY dynamics as they could be influenced by China's economic indicators and the PBOC's monetary policy adjustments, which are critical in shaping market sentiment.
What the calendar says
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Hello, I'm Manisha 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. We're already into the second quarter of 2023.
Global central banks have signaled their rate hiking cycles are almost over. Whilst that suggests inflation has been fought off. Now the words credit crunch loom large.
As you will hear from the panel, global growth is expected to slow. Then there's a question over China's recovery and just how far those benefits may go, if at all. Emerging markets especially may feel the brunt of all of this.
So we'll take stock of where the hard landings might be. So buckle up, because here we go, looking at what lies beneath. Joining us are Eric Robertson, Standard Chartered's Global Head of Research and Chief Strategist and Sarah Heughan, Head of Research, Europe and the Americas.
Eric, one of my favorite questions is always to ask you and the team, why you choose the titles that you do for these outlooks. This time, it is what lies beneath. What was the thinking behind this?
We all come up with our global growth forecasts. But I think today, the hidden stories underneath that global growth number are really what's a lot more interesting. There are some real divergences under the surface.
And some of those divergences include some reasonably good growth stories in Asia, some economic challenges in the US and Europe and parts of emerging markets. But that tug of war is really the dominant issue. And at the moment, it feels like we're caught at a bit of an impasse.
There's the fears of the credit crunch. There's questions about China's economic recovery as well. Has inflation really peaked?
Is it coming down quickly? Or is it just slowly? And what does that mean for central banks and monetary policy over the course of the year?
And so in some ways, the economic outlook still is as challenging as it ever was before. But our view is that within that challenging outlook, there may also be some really interesting opportunities. Yeah, definitely some very interesting stories.
Sarah, you looked at the outlook for 57 economies in this report. Walk us through some of the growth expectations. Obviously, you have this overall projection on global growth.
Perhaps you can share that. But underneath that, exactly as Eric is saying, what lies beneath? Do you see that that is consistent growth?
Or do you see spots that are fairly different? And can you explain why? So we aren't expecting global growth to slow this year.
We think that it'll be down to 2.7% compared to 3.5% last year. Many economies last year, of course, were experiencing a post-COVID recovery. The flip side of that was a surge in inflation.
And consequently, we've seen quite aggressive policy tightening. So this year, we think the full impact of higher interest rates is likely to hit growth, especially in Europe and the Americas. For the US, we're expecting the economy to stall in the second half of this year.
We think that the economies in the Euro area and in Central Europe are also likely to be weak as they battle against higher interest rates. Thinking about America as a region, oil banks there started tightening policy late in 2021. So we think it's going to be a pretty subdued outlook for growth this year.
For the Middle East, there was very strong growth in the Gulf countries last year. This year, OPEC plus production cuts are likely to mean slower growth. Turning now to perhaps some of the strongest stories for the global economy overall in Africa, we're expecting growth to stay pretty solid.
There are some exceptions, South Africa being a notable exception given the impact of load shedding. For Asia, we are expecting growth to accelerate this year. Again, it's something of a mixed picture.
Trade-oriented economies like Singapore, Taiwan, and Korea face weaker demand from the West. And of course, the electronic cycle is peaking. By contrast, we're expecting China's economy to do very well, helped by a rebound in consumer spending following the end of COVID restrictions.
Thanks for that, Sarah. I'm getting a true sense now of that what lies beneath all of those divergent stories. Eric, at the heart of this conversation and a key point that comes across in the report, of course, rate hiking cycles.
Look, there's a couple of factors that I think are playing on our minds, the first of which is that the cumulative impact of rate hikes over the last 12 months has been perhaps the strongest in certainly 30 or 40 years. And it's not just the Fed's rate hiking cycle. It is really a global central bank rate hiking cycle, with the obvious exception being China.
And so that tightening of monetary conditions, in our opinion, is without question going to impact on global growth, especially in some of the more interest rate sensitive economies. The other factor is that the elevated level of inflation has meant that for a number of central banks, they've really had no other choice but to hike rates until something breaks. And we've seen some early evidence of that, obviously, in the US with some of the banking difficulty and volatility over the last month.
And that has brought the idea of a credit contraction into the discussion. We've seen a material tightening of lending standards. We've seen an impact on liquidity as well.
And so when you add the notion of a credit contraction or some might even call it a credit crunch into the discussion, it really does suggest to us that risk appetite, the demand for credit, the demand to invest and spend is going to take a material hit. Now, the big question, especially for markets, is how quickly does that slowdown present itself? There was some speculation over the last three or four weeks that the global economy and the US economy might hit the proverbial cliff edge and collapse.
We thought that was overstated. We think it's more of a slow deceleration that will pick up pace in the second half of the year. And that obviously has implications for central banks.
But the key conclusion for us is that central banks have now done enough to at least force a reversal of demand and a reversal of inflation. The way that these rate hiking cycles and the new scenario that you're talking about starts to hit various economies. I mean, it will hit them in different ways, won't it?
So who is all of this good for and who is it not so good for? Well, I think the key metric that we want to pay attention to is those economies that really are, number one, highly interest rate sensitive, where you might see, for example, leverage to various financial services sectors or leverage to a big housing market. We've certainly seen some evidence across both developed and emerging economies that those economies where real estate and real estate investment were a large percentage of the economy overall have taken some early hits in economic momentum.
Now, there will be some economies where that interest rate dependency is less problematic, and perhaps they are more dependent on regional trade or commodities. And as Sarah alluded to, some of the divergence that we are seeing under the surface comes from some of those parts of the world where there is a strong commodity story, and that is one area of outperformance we're very focused on. So again, the key metric that we're thinking about is where is the interest rate sensitivity, but also where is the demand for capital the strongest and where is it the weakest?
Before we move on to looking more specifically at the Eurozone and the United States, Sarah, I want to pick up this last point with you as well. Rates have risen quickly over the last year or so, and that has highlighted weaknesses. Can you just run us through the how and the where and the implication of that?
Yes, Anisha, we've seen the impact on heavily indebted economies. Ghana, Sri Lanka are in default, Pakistan and Egypt are facing external funding pressures, and there's constrained market access for countries like Kenya and Zambia. And of course, as Eric said, market backing turmoil in the US was the result of balance sheet mismatches exacerbated by high interest rates with knock-on effects to European institutions.
I think the good news is that coordinated central back action and swift intervention from regulators so far seems to have calmed things down. But the worry is that other sectors that thrived under zero rates and flash liquidity are now finding life more difficult. So we're not expecting systemic problems to emerge.
But the adjustment to a higher rate environment is likely to be painful. And fragile confidence, of course, heights the risk of contagion. If inflation is coming under control and Covid is in the rear view mirror, then where is this weakness that we're talking about coming from?
Because some would look at this and say, OK, you're getting inflation under control. Surely, stabilisation is on the horizon. But it doesn't sound like that.
That's the big question. If we look at the US, there are no clear signs that the economy is running into major difficulties. But of course, the central banks, the fight against inflation is all about bringing demand and supply into better balance by squeezing demand to raising interest rates.
So even though headline inflation is coming down, there are still particular concerns about strong labour markets. The core inflation is being driven up by higher wages. If we look at unemployment across the US and Europe so far, it stayed very low, but we think that that's going to change in the coming months.
Consumers have been strong, but they're running down excess savings and they're likely to turn more cautious in a higher rate environment. And as Eric mentioned, we're already seeing signs of a credit squeeze, which is likely to become a significant headwind for the economy in the US and across Europe. OK, let's pick up on the US with you, Eric.
Let's just use the dollar as a prism for looking at the US economy. Again, at the time of this recording, a CPI report had just come out from the US and it still didn't suggest that there's an all clear on inflation. But against that, there have also been recorded five straight weekly losses in the dollar index.
So this is the dollar versus a basket of currencies. What is this dollar depreciation telling us? I think the first thing I'd love to address is the US inflation statistics.
I think the title of our publication, What Lies Beneath, is equally applicable to US inflation. Headline CPI has certainly come off the highs. Core CPI is off the highs.
But as you correctly point out, the move down is a little bit slow. And I think perhaps for some people, it's not happening fast enough. But as the team has highlighted, we've actually seen pretty good progress in terms of wage inflation moving down relatively quickly over the last three or four months.
And so I think there are some early indicators that there's perhaps more softness under the inflation surface than perhaps the headline numbers suggest. And I think you're seeing that reflected in long term US interest rate, long term inflation expectations, etc. And that plays into the dollar narrative.
We've effectively seen the broad dollar index peak in late Q3, early Q4 last year. And then we had a bit of a correction back higher for the dollar in February this year before we turned down again. Now it's our view that a big part of that was a reversal in US interest rates.
In other words, the dollar interest rate premium, which had become so prevalent last year, had reversed course. But the way the FX markets work is if the path of travel has changed and you start to see a convergence in relative interest rate expectations, that takes away a big part of support for the US dollar. The second factor is that there are parts of the world that are now going to outperform the US economically.
And so to the question that people used to ask, which is, okay, maybe I don't like the dollar, but what else do I buy? Now there are a number of stories around the world where you can say, actually, there's a pretty good growth and interest rate story there as an alternative to the dollar. And the final point I would make is that we seem to be in a sweet spot at the moment where US growth is slowing.
The rest of the world or parts of the rest of the world are doing okay. And so we're in that flat part of the dollar smile where it's not a collapse in the US economy. So it's not a big global recession.
There's no disastrous risk off. People are starting to raise their heads out of the foxhole and take a little bit more risk. And that tends to be very negative for the US dollar.
So a confluence of factors that I think are starting to lead to some depreciation pressure for the USD. Sarah, I want to talk about something that Eric just mentioned there. It's about this adjustment that's going on.
This is the era of higher rates. So what's some of the fallout for the US and the Eurozone economies? Because we're transitioning to this new normal, so to speak.
We've already seen from US and ECB back lending surveys that credit conditions are tightening. In fact, they were tightening even before March's backing crisis. So lending is likely to become even more constrained.
In particular, the shrinking balance sheets of regional banks in the US will have an impact on lending. We're seeing the impact of higher rates on residential activity, real estate activities, slowing sales, slowing construction, and house prices are flat or falling. In some countries, falling quite dramatically.
So the credit squeeze is likely to be bad news for small and medium-sized companies, which tend to be important employers. And it's the problem of central banks, of course, because the lax impact means that you're only now feeling the effect of policy tightening that was happening, say, six to 12 months ago. Let's now talk about this tug of war, the divergence.
Let's talk about China. Eric, let's begin with you on this theme. This regional tug of war, as you describe it, whilst Europe and the Americas face this slowing growth, China and Asia, they're set for strength this year.
But how are we going to see this in its most obvious form? Well, I think the first thing that's worth highlighting is that the nature of this recovery in China is different from what we've seen in business cycles past. And it's different in a couple of ways.
The first of which is that we've had less of a big monetary and liquidity infusion into the economy that has driven the upswings in the past. So I think there's less of a leveraged play on the recovery. The other factor is that this is much more focused on the consumer side of the economy in China and on services rather than a big investment or CapEx-led recovery.
And that has really interesting implications for the regional spillover, for inflation. And we've got a really interesting out-of-consensus view on that as well. I mean, over the last few months, the big fear that many people have had is that China's economic recovery would be inflationary.
And we argued that, for a variety of reasons, it would not be. And so far, even with the recovery in economic momentum, we're seeing inflation, both CPI and PPI, move lower in China. And we think that that's a function of still large amounts of excess capacity in labor and real estate, et cetera.
So it's a very interesting economic recovery in the sense that it's being driven by different factors. And I think the spillover factors to the rest of the region and the rest of the world will also look very different this time. Sarah, can we look a bit more specifically at what this recovery looks like?
Where is the growth more specifically going to come from? And then what about the impact of those economies that have those strong economic ties to China? Because we're not just talking about Asia, are we?
The China consumer has accumulated savings similar to what was seen in the US and Europe. And we know the impact that that had when COVID restrictions were lifted with a strong rebound in spending. So we've got a China growth forecast of 5.8% this year.
Upside risks, actually, to that forecast that the consumer, we think, is going to contribute about 4% to 4.5% points of that growth. So in terms of the spillover, it may not be as large as in previous economic upswings. But the offset is that we're not expecting it to be inflationary to the global economy.
If we think about Taiwan, Malaysia, Hong Kong, stronger consumer demand in China is going to be positive. Australia, Saudi Arabia, as well, are countries that we see benefiting from China's recovery. An increase in China tourism should positively impact Asian economies, particularly Thailand, Vietnam, Singapore, and even European economies.
France and Italy spring to mind. Eric, the tug of war, how does this dynamic affect emerging markets? There's a historical framework that suggests that once the Fed stops raising rates, it really is not necessarily an all-clear signal, but a very good green light to go back into emerging markets.
And there's potentially a couple of differences this time. Now, that doesn't necessarily have to be bad news for EM, but it does suggest that the playbook looks a little bit different. The first of which is that, as we've talked about already, inflation has not come down as dramatically as we all would like.
In other words, it has come down in some places, but not all. And that continues to raise some questions about whether or not the Fed, the ECB, and some of the other central banks would actually lower interest rates on the growth slowdown, or just pause and leave rates at a high level. And so even though the Fed may be done, it's not clear that financing costs are necessarily going to become a lot more friendly for emerging markets.
The second question revolves around how quickly we move from a positive growth environment to perhaps a stall speed, and then whether or not we get into a hard landing. As I mentioned earlier with regards to the dollar, if we decelerate to a stall speed and we end up in this flat part of the dollar smile where it's a growth slowdown, but not a hard landing, that could be very good for emerging markets. Interest rates would be down.
Interest rate volatility would come down. The tail risk of the Fed is taken off the table. That will make people feel an awful lot better about things, as long as there are parts of the world that are growing well.
Where it becomes a lot more difficult is if we go straight from the positive growth environment of last year directly into a hard landing at some point this year, and we skip that sweet spot in the middle. And if we do that, then I think it would be very difficult for emerging markets to perform well, even with the Fed proverbially on the sidelines. And so, look, I think for the moment we're in that sweet spot where we know growth is slowing, inflation is coming down.
Those are all net-net good things. But for emerging market assets to perform well, they need to maintain their growth and earnings growth premium over DM to have a fighting chance of outperformance this year. I want to now shift to talking about indicators trade, for example.
Eric, there is plenty to suggest significantly slower global trade this year, but beyond that surface gloom, we might see bright spots. Can you just identify a few examples? I think in a similar vein as with global growth, it would be very easy to look at global trade momentum and suggest that it's a downbeat story.
In our view, there are certainly some challenging aspects of the global trade narrative. Sarah mentioned Korea and Taiwan and the global semiconductor and electronic cycle. Those remain headwinds.
But I think on the other side of the coin, we have some trade corridors that are experiencing some very good momentum, whether it's the GCC to South Asia, ASEAN and North Asia, or Asia to LATAM. I mean, I would just highlight one statistic for the audience from last year, which is that if you look at the UAE and you look at non-oil foreign trade in 2022, it was up 17%. And that was in a year when China's economic outlook was really challenging.
And again, to repeat, non-oil. So a lot of that trade was happening with India, for example, with Saudi Arabia, and even China in a difficult growth environment. So this trade corridor between the GCC, South Asia, ASEAN and North Asia, I think is going to become a significant contributor to growth momentum.
And I would argue that with the focus on global economic slowdowns at the moment, that trade momentum is probably being underappreciated. Sarah, I wanted to talk about current accounts. Interest rates are pretty high in the UK and the British pound has been weak with these high interest rates with the kind of currency movements that we're seeing.
Is there anything interesting that you think we need to be mindful of? I think that some high rates that we're seeing are definitely going to be influencing flows between countries. Some countries have experienced currency depreciation and that certainly puts them in a stronger position when it comes to trade.
The flip side of that, of course, is that a weaker currency means that you have higher imported inflation costs. Eric, I wanted to talk about the ongoing situation in Ukraine. Where do you see this going?
I think the unfortunate reality at the moment is that from a geopolitical and military escalation point of view, there hasn't been a lot of change or a lot of improvement. We still have a disastrous humanitarian situation on the ground and very few signs at the moment of compromise. The good news, quote unquote, is that a number of the financial market indicators that had become so alarming at the early stages of the crisis have calmed down.
In other words, energy prices are down significantly from their March 2022 highs. Food prices, like wheat, are down significantly. And so the imminent threat of a conflict-inspired food and energy crisis is down significantly.
But I would also highlight that that raises the risk of complacency. Just because European natural gas prices are back at, let's call it, 50 euros per megawatt hour or that wheat prices are down double digit in percentage terms from their highs, I don't think should make us feel too comfortable just yet. I mean, it would be relatively easy in my mind to imagine a scenario where actually there's a pickup in conflict and escalation and a renewal of food and energy security concerns.
And I think that that in the current environment for EM would be really problematic. If we were to see a surge in energy prices, oil back above $100 a barrel or wheat or fertilizer prices back at the highs, that would be really destabilizing in an environment where interest rates are high and inflation is only just coming off the boil. Sarah, there have been some significant events recently that could be construed as shocks.
So what's your take on the importance of some of these, individually or collectively? Well, the pandemic was clearly a huge global shock and its economic impact was magnified by Russia's invasion of Ukraine. It's turbocharged inflation and accelerated the central bank response and that's heightened the risk of a policy mistake.
Government finances have ended up a lot weaker as well, of course, tipping some emerging economies into further crisis and it lessens the ability of governments to step in over the coming years in case there are further shocks. And there's also this question about longer term scarring, this permanent loss of output that many economies have experienced, lower productivity growth in the coming years, the impact that we've seen on some labor markets where, for example, in the US and in the UK, we've seen a whole swathe of the population leaving the labor market, retiring early and that's exacerbating the labor shortage that we're seeing in some economies. The impact is likely to be felt for many years to come, unfortunately.
Eric, I think as we round up this podcast, I would love to touch on some of the points that are mentioned in this outlook. Here are the words, poly-crisis, so population slash demographics, climate change. Of course, these are not necessarily on your average boardroom table for discussion every day, but these do come up in your report and I'm curious as to why and where that discussion stands.
Prior to the COVID crisis, we were in perhaps the twilight years of what had been a multi-decade period of globalization, low inflation, the benefits of a peace dividend globally. And in many ways, I think we are transitioning to a world that looks, unfortunately, quite different from that. And so for me, this year and perhaps next are transition years where maybe inflation comes down from the highs but doesn't go back to where we were pre-COVID and there would be some interesting reasons for that.
I mean, I think military spending is going up and will go up in many major economies around the world. That will create competition and demand for natural resources that could potentially be inflationary. The regulatory costs across many economies are going in one direction only and that's up and that will feed through into potentially higher prices.
And for a variety of reasons, people are spending more time diversifying their supply chains, trying to make sure that they're not dependent on one country or one source only. Diversifying supply chains comes at a cost, a frictional cost. And so I guess where I'm going with all of this is that I think that this transition is one where we're transitioning to a world that is perhaps a little bit more fractured.
I don't believe that globalization has ended but I think it's evolving and I think it's evolving in a direction that will be more expensive and the competition for resources, both natural resources, human resources, for capital, etc., is only going to increase. So I think it's the time for making sure that people's portfolios or their balance sheets are protected and diversified and being very conscious of those risks over the next two to three years. Yeah, although there will be those who argue that globalization is very much required to solve global challenges.
I'd never like to go out on too negative a note so I'm going to ask each of you and I'll start with you, Sarah. What is the one glowing positive that you shared in the outlook? I think the very positive outlook that we see for many economies this year, particularly across Asia and the expectation that we are near the peak in interest rates and that indeed we'll see interest rates in many countries lower in the next 12 to 18 months.
Eric, you get the last word. What's your glowing positive coming out of this report? I'm a big believer that these regional trade corridors are going to dominate a much larger percentage of the global pie.
And I suppose what I find interesting at the moment is because of the challenges in places like the US and Europe, I think people are underappreciating some of the momentum in these trade corridors, you know, GCC to South Asia to ASEAN and even into parts of North Asia. So look, I think there's a very good trade story out there in certain regions and in certain corridors that I think will be recognized over the course of the next 6 to 12 months. Great to end on that upbeat note.
Thank you both, as always, for sharing your thoughts with us. That wraps up this episode. I just want to thank Eric Robertson, Standard Chartered's Global Head of Research and Chief Strategist, Sarah Hewan, Head of Research at Europe and Americas.
To you, our wonderful audience, we hope that you enjoyed this podcast. On behalf of Standard Chartered, I'm Aneesha Tank. Goodbye.