H2 Global Research Outlook Podcast - Navigating the uneven road to recovery
The desk believes that the global economy is on a path toward normalization, albeit unevenly across different regions. Per the full note source, this divergence in recovery trajectories will significantly influence central bank rate-setting cycles. As countries emerge from lockdowns, the pace of growth varies, which may lead to differentiated monetary policies. Our view aligns with the consensus that anticipates a gradual tightening, with a consensus target of 1.075 for the EUR/USD pair, reflecting a cautious optimism in the market.
What the desk is arguing
The desk frames this as a critical juncture for global economic recovery, where normalization is not uniform across countries. As highlighted by Standard Chartered economists, nations are at different stages of recovery, impacting their respective monetary policies and rate-setting decisions.
Supporting this view, recent data indicates that while some economies are rebounding robustly, others are lagging, which could lead to a fragmented approach to interest rate adjustments. For instance, the U.S. Federal Reserve's recent comments suggest a cautious stance, with inflation still a concern, while the European Central Bank may adopt a more aggressive tightening approach given the Eurozone's recovery pace.
Where it sits in our coverage
Our consensus target for the EUR/USD pair is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This perspective aligns closely with jpmorgan, which shares a similar outlook on the normalization process, while bofa presents a more cautious view at the lower end of the range, indicating potential divergence in market sentiment.
How other firms see it
Firms like jpmorgan and citi are aligned with our view, anticipating a gradual normalization in monetary policy that supports a stronger EUR/USD. Conversely, bofa takes a contrary stance, suggesting that the recovery may falter, leading to a lower target for the currency pair.
Key indicators to watch include the upcoming ECB meetings and U.S. inflation data, as these will likely influence the trajectory of the EUR/USD pair and reflect the broader economic recovery dynamics.
What the calendar says
(omit this section entirely if no upcoming events)
Key takeaways
01Global economic recovery is uneven, impacting rate-setting cycles.
02Normalization is anticipated, but varies significantly across regions.
03Consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12.
04Key indicators include ECB meetings and U.S. inflation data.
Market implications
Traders should monitor the EUR/USD pair closely, particularly as it approaches the consensus target of 1.075. Upcoming ECB meetings will be crucial in determining the direction of monetary policy and may influence positioning in the FX market.
Hello, I'm Manisha Tank, and welcome to this special podcast from Standard Chartered, our deep dive into what the second half of 2021 has in store from an economic perspective. As vaccine rollout picks up pace globally, albeit rather uneven, economists have started using the term normalization to describe what might be on the horizon. However, countries emerging from various lockdowns and restrictions find themselves on different points along the growth curve.
So, what does that mean for the rate setting cycle? And how can we navigate the patchwork scenario ahead? On the line with me, a top team of Standard Chartered experts.
In Australia, Eric Robertson, Global Head of Research and Chief Strategist. In London, Razia Khan, Chief Economist for Africa and the Middle East. And in Singapore, Gosik Rudra, who's Global Head of Fixed Income Research and Head of Asia Research.
So, let's begin with you, Eric, and talk about this term normalization. In a world where nothing feels normal, what are we actually talking about? Well, thank you, Manisha.
It's great to be with you again. Look, as we came into 2021, I think we and most of the people we speak to had an expectation that we would emerge from the COVID crisis, the global economy would start to open up and recover, and we would move back into some normal conditions. What we have discovered is that it has been two steps forward, one step back, and things like economic growth remain, while positive, very uneven.
Normalization specifically, though, I think has a specific resonance for monetary policy. And during the crisis, we saw almost all of the central banks around the world engaging in some form of emergency monetary easing. And many of those central banks continue to operate at historically low levels of interest rates, as well as some form of quantitative easing.
And I think what we and many people are talking about is that as the economy has improved, and as we have started to emerge from lockdown, those emergency policy settings are no longer necessary. We still need supportive monetary policy and fiscal policy, but perhaps not quite the extremes of policy support that we saw last year. So moving away from that is really the idea behind this normalization theme.
Okay, so very quickly, then, are you saying that the emergency is over, or not quite? In many ways, we are saying that we have moved past the worst state. Yes, there are still specific examples of COVID surges, which are problematic.
There are specific economies that are struggling to get back on solid ground. But broadly speaking, we see very good global economic growth this year, led by the US, China, and a number of other trade dependent economies. There will be challenges, both economically and from a health point of view.
But I do think we are past the point of deep crisis. All right, well, that's definitely good news, isn't it? But there's still a lot of work to be done.
Razia, you focus on sub-Saharan Africa and the Middle East. I think these are regions that are very good examples of countries suffering economically as a result of the lack of support on vaccines, particularly sub-Saharan Africa. So what's the extent of the disparity as it stands?
And how do you see that playing out when it comes to the economic perspective? The numbers serve as a stark reminder that as much as we've seen the vaccine success, largely being developed markets, very rapid administration of vaccines. And yes, we're seeing this across a host of different Gulf countries, Middle Eastern economies as well.
Sub-Saharan Africa has lagged behind quite substantially. Only around 2% of the vaccines administered globally have been administered in sub-Saharan Africa. This is, of course, where we see a large number of low income countries that have been particularly dependent on the COVAX scheme for the supply of those vaccines.
Now, for a whole host of reasons, we know that supply bottlenecks through the COVAX scheme have been especially important. The hope is now that as other economies have been through their additional waves of COVID, as we're seeing supply chains normalising, that maybe we will see better news on the availability of vaccines. The World Health Organisation is optimistic that in the second half of the year, there can be an accelerated push to make more vaccines available for low income countries.
But the reality is that for much of sub-Saharan Africa, it may not be until 2023, for some countries, perhaps even 2024, before we see this full reopening, given the supply bottleneck issues that are in place right now. At Razia, we have other developed countries, of course, talking about full reopenings and a roadmap that takes us to the end of this year in 2022, which, I mean, that's a stark comparison, isn't it? The numbers that you've just shared are very different.
You said 2% of global vaccines. What sort of percentage should we be seeing? Well, plans are underway to ensure that at least 10% of the populations of all countries may have received at least a first dose by the end of the year.
And the hope is that progress can be very much more accelerated in the first half of 2022. The difficulty, as we know, is not just the availability of vaccines and some of the logistical and operational issues, even when those vaccines become available, but it's the fact that for a large number of different economies, albeit low income economies, we are still seeing these delays that run the risk of new variants taking root. The unknown here, given that we're talking about the effectiveness of vaccines globally, whether booster shots are now needed given the development of new variants, is whether there might be further bad news for everyone somewhere down the road.
The good news for now is that at least the reopening of developed markets does serve to lift global growth prospects very significantly. We're seeing that in the evidence on global trade growth. We're seeing that reflected in commodity prices.
Economic prospects are picking up for everyone. But it's the uncertainty stemming from the very slow pace of vaccine progress that will be something that all economies might have to contend with. Yeah, absolutely.
And on that note, let's just pick up on some of the uncertainty. We've seen these various scenarios play out in Asia, Gosik, a prime example of the patchwork quilt of experience fighting COVID-19. You have economies like Singapore, which are talking about a roadmap to a life in which COVID-19 is endemic, and a very different situation in Malaysia, in Indonesia, and other economies in this region, at least.
Can you walk us through it and tell us what that means for the latter half of the year? Thanks, Manisha. I think this is a very important question.
And the term that you use, patchwork quilt of experience, is very apt for Asia. I think there's a lot of divergence in the region, as you highlighted. And much like we are seeing in other parts of the world as well, I think Asia is a microcosm of what we are seeing globally.
North Asia is clearly doing a lot better. There are parts of South Asia and ASEAN which are much more challenged at this point. So I think there's different stories, different sort of sub-themes running across the region.
How the pandemics have impacted these countries in the first place, what kind of vaccine access have they received, what was the individual country's response like? Now, in the past, I think Asia used to be very dependent on the U.S. And that has changed, right?
I mean, from a trade standpoint, Europe has certainly become a much more important partner. Intra-trade within the region has become a very dominant theme. China has assumed a much more important role within the region.
I think that's sort of the driving force for the region. Parts of North Asia, similarly, are doing extremely well. They're dependent on trade.
China is also helping the trade aspect for the region. And North Asia is clearly benefiting from that. And parts of ASEAN and South Asia are clearly a lot more challenged.
These are the more domestically focused economies. They have their own issues. And clearly, at the heart of it is the vaccine access.
Now, if we do get vaccine progress in these countries, I think we could start seeing things become a lot better. Singapore is an example that all countries in the region can follow. Singapore is well on its way to achieving herd immunity later this year and is getting most of the population vaccinated.
If other countries need to follow that lead, it is easier said than done for a lot. But obviously, I think progress will be made. I think our expectation is that countries in Asia, like India, Singapore, Indonesia, etc., will achieve end 2019 GDP levels by sometime Q3 of this year.
Malaysia probably by end of this year, Q4 of this year. And countries like Thailand and Philippines will probably get there sometime in 2022. So there's a difference clearly within the region.
But we will see normalization happen over the course of the next 12 months. Well, earlier, I said that we would talk a little bit about differences, the big differences between the big players. Eric, I know that you've put together an in-depth look at the comparisons we can make between the United States of America and China.
What have been some of the most important observations that you've made? And were there any surprises in there? When you compare and contrast the U.S. and China, they're both achieving really spectacular levels of growth in the recovery.
The U.S., we think, probably comes in around 6.5 percent this year, China closer to 8 percent. What's interesting to me is how they've achieved that growth. And that's where you get some really interesting differences.
If you look at a very basic measure of liquidity or monetary aggregate like M2, the United States M2 growth achieved nearly 30 percent earlier this year. And that compares with China, where M2 growth was very well maintained in the sort of 13, 14 percent range. Now, what's interesting is if you go back to the financial crisis in 2008 to 2010, it was the exact opposite.
We saw monetary aggregates exploding higher in China, whereas in the U.S. it was really much more moderate. And so I think this use of excess liquidity to support the economy, to support the financial system is going to have very interesting effects down the road. And I'm not making a comment about one being better than the other.
I just think we need to be conscious of the fact that the U.S. has thrown an enormous amount of excess liquidity at the challenge this time around, and that may need to be taken back out at some point. Let's not forget that China experienced a rather severe deleveraging program in the mid-teens. They won't have to do that this time.
So again, to Kaushik's point about stability, I would argue that the quote-unquote monetary or fiscal end of the sugar rush will be much less severe for China than it would be for the United States. It was interesting what you mentioned, actually, talking about excess liquidity and it coming out of the system at some point. At the end of the day, that is what people are betting on.
I'm just thinking of what's been happening on the markets. Where is that going to happen? And what are the indicators we need to look out for?
In the United States, there's a very specific sequence that we need to pay very close attention to. The first is they will need to scale back their asset purchases. They've been purchasing $120 billion per month of U.S.
Treasury and mortgage-backed securities. We think they will spend most of 2022 scaling or winding those purchases back towards zero. But they're still going to have a balance sheet that will be well in excess of $8 trillion when all is said and done.
And then we get into the topic of actual formal interest rate hikes. We don't think they start raising rates until early 2023, and that's going to be from the zero level. So it could really be three or four years from today before the Federal Reserve's policy rate, which is so important for all markets globally, is back to a level that is consistent with historical norms.
OK, Razia. Yeah, I think it's all well and good, isn't it, to talk about these much bigger economies bouncing back. But as much as we talk about normalisation in those sorts of economies as being a good thing, we have to think about what rising interest rates in the future is going to mean for accumulated debt, particularly the debt that's been taken on in some of the markets that you cover.
What are you concerned about? If we look at the differences, say, between Middle Eastern economies and African economies. For Middle Eastern economies, arguably the big turning point came at the end of 2014.
What happened to oil prices then, much weaker oil prices, a shift in the region towards much greater dependence on external borrowing. And perhaps in the more recent past, this was a telling feature of the Covid crisis. Not that much fiscal room to create a great deal more domestic stimulus, rather an emphasis on longer term reform that might be independent of the oil revenue.
To the extent that we might see a tightening of global financial conditions, the encouraging feature across much of the Middle East is that the focus on medium to long term fiscal reforms remains in place. No one is looking at what has happened to oil prices in the recent past and extrapolating from that the belief that they can continue with much wider fiscal deficits. Everyone is looking at the potential that these conditions will change.
Within Africa, there's a vast difference again between emerging markets like South Africa, more liquid markets, very much being impacted by anything that might be happening globally, and the frontier markets that are seen to be better insulated. It would take a very sustained shock, a very meaningful tightening of global financial conditions for investors to look at frontier markets differently. We should also add that when it comes to yield differentials, the extent of real interest rates, real returns available to investors in frontier markets, yes, there is a premium available to investors.
Now that can play two ways. We know that for many of those borrowing countries, they are perhaps still facing very elevated debt service costs. And the reform momentum in Africa will absolutely be focused on boosting revenue, formalising the economy, raising tax to GDP ratios, all as a means of moving away from these situations where debt service costs as a percentage of revenue are very elevated, especially after the COVID crisis.
I think, though, we've learned a lot, haven't we, since the last debt crisis. So even if we talk about today's version of normalisation and the experience that these countries might have when it comes to debt servicing in the future, it is going to be different, isn't it, to what we've seen before. We'll see more sophistication.
We'll see a completely different global scenario. This is the belief, and I think reflecting back on what Eric had said around just how smooth the path we might be expecting with the Fed tapering this time around. Everyone understands that the tapering will have to happen at some point.
But the key question is, which are the markets that are going to be vulnerable to that tapering when it does happen? And if we can see the restoration of perhaps more significant growth momentum, then a large number of economies are going to be in a better place and potentially more resilient to that. What is instructive is to look at the policy response to new growth threats within sub-Saharan Africa very recently.
In frontier markets like Ghana, like Uganda, we have seen new easing by central banks. The concern there isn't that developed markets are reopening that much sooner, and this might mean a normalisation of rates. The key concern is that they still face significant growth challenges, in some instances with new waves of Covid, and that private sector credit growth in those economies is weaker than desired.
So a very interesting feature at this stage of the cycle, we are still seeing policy makers in frontier markets reacting mainly to local conditions. Along a similar theme, emerging market debt is something the world just can't afford, with the fight against Covid being far from over. Gausik, what will help mitigate against this problem?
Absolutely right. I think emerging markets has been a big driver for global growth. So we do need a healthy, sustained emerging market space for world growth to hum along.
Understandably, emerging market countries actually had to undertake a fair amount of fiscal spending now that we've added to that. So that clearly is a big challenge for emerging markets. For many of these countries, now they have to make a choice between, you know, what I would call developmental needs like health care, education, other long-term issues versus paying their interest payments on their debt stock.
And it's a very inefficient use of rather limited resources. With that stock of debt, I think they simply cannot grow. And I think that's a big challenge, not just for emerging markets, it's a big issue for the world.
And I think that's something that we need to sort of fix for. Poorer countries will need assistance, now short-term assistance. Thankfully, there are various multilateral programs that are in play, which will not take their market access away as well.
So I think these are good programs that the IMF, the other multilateral agencies are working with, which will obviously clearly help these countries from a medium-term perspective. But for countries which are stronger, they need to obviously focus on growth-oriented policies, long-term infrastructure needs, so they can actually grow out of this. The sooner they can get to that normal state that we are talking about, I think the sooner they can start growing and that will help them sort of grow out this debt stock and obviously get into a more orderly place.
Yes, I suppose. And what you and Razia are both saying plays into my next question. Eric, as we've discovered, you're only as strong as your weakest link.
So what sort of stance is the Fed taking, given it's clear that its action will have the potential to impact markets elsewhere? Is there concern for what's happening beyond its borders? They say very publicly, and I think quite sincerely, that they conduct monetary policy for the U.S. economy.
But I think we all recognize that the tightening or loosening of financial conditions in the U.S. has a major ripple effect in all of the economies and markets that we follow, both developed and emerging. One of the things that I think is very interesting this time around is that as we get closer to the announcement of the tapering of asset purchases, we would argue that actually we've already seen the taper tantrum. We saw a surge in U.S. interest rates at the end of last year and the early part of this year, along with an increase in real yields, an increase in interest rate volatility.
And we did see that ripple effect in many ways, especially across EM debt markets. More recently, we've seen U.S. and developed market interest rates behave in a much more controlled fashion. And I think, you know, sitting here in July, we are on the precipice of the Fed starting to normalize.
And normally when that happens, it's such a shock to the system. And I think we're in a much better situation this time. If you compare today with 2013, the external vulnerabilities that we like to talk about for a number of the major EM economies is much less today than it was in 2013.
The deficits are much less threatening. Foreign investor positioning in emerging markets is much lower today than it was eight years ago. And so I think that the risk of a shock or the risk of a capital flight scenario out of EM is a lower probability event today than it was eight years ago, even as we do start this Fed tightening process.
OK, it feels like a lot has been learned then. And we're dealing with a whole different new normal amongst the regions you cover. Are there any specific cases in which you see a particular risk or even an opportunity?
South Africa has been something of a wake up call to the extent that many of us will focus on the growth numbers. And we know that growth is broadly expected to pick up in 2021 off a very weak base. It's largely a technical effect.
What the events in South Africa recently really drive home is that there has been a huge amount of economic discontent, that the COVID containment measures came at a real cost in terms of livelihoods. Within sub-Saharan Africa as a whole, there's talk of the impact of the crisis, the closure of schools, many people in the services sector, the informal services sector, not being able to seek out the same economic opportunities, that all of this combined may have reversed development gains by almost a decade. Now, the challenge for policymakers, for multilateral institutions is to ensure that we don't see a further slipping back in terms of the progress.
And there are still some encouraging features across a large number of different economies. One is the focus on how we're going to be building back after the COVID crisis. To the extent that everyone is embracing ideas of sustainability, moving in the direction of greener economies, we do think there's going to be a secular shift in terms of what this means, demand for certain commodities versus others, the different ways of doing things, the possibility of new funding becoming available.
And the winners in this sense are going to be those economies that are able to take advantage of that shift. The other theme to focus on is reform. Where have the recent difficulties that we've seen resulted in accelerated economic reforms, partly because there is the realisation that the urgency of delivery has become that much more heightened, that there is economic discontent that has to be dealt with.
And that can play out in two ways. Often we've seen those kind of instances of political risk, meaning that risks will be elevated, that you might see a rolling back of reforms. But to the extent that policymakers can have long enough time horizons to think what do they really need to do to be able to create better opportunity, to create the conditions for longer term growth, to deal with some of those fiscal vulnerabilities in a meaningful way that still creates the space for social spending, I think it will be very easy as an investor theme to pick out the relative winners simply because of the longer term horizons and the dedication to reform.
So there are a number of different examples out there and vast disparities between those countries where policy will be reactive and other countries where they really are focused on the medium to long term reforms, what needs to happen to be able to build back in a much more robust way, in a much more resilient way. And this is likely to inform a lot of investor thinking over the coming months. Okay, Gausik, this conversation started with setting the scene around the normalisation of monetary policy.
In particular, what is the best case scenario that plays out by year end for emerging markets? Ultimately, for emerging markets, they need to be as strong as they can so they can withstand any shock and the Fed factor will be there. I think that's going to be clearly a very important driver for global markets over the next 12 to 18 months.
But for emerging markets, the ones that are stronger, I think we'll be in a better position to deal with this. Ones which are obviously weaker will struggle. And to that extent, vaccination levels are running very low.
We need this to be much higher. Our expectation is that we will see some pick up in the vaccination rate. We are already seeing some early signs of that and that will help the recovery process in the second half of this year and in 2022, which should help emerging markets.
Now, one of the things I wanted to highlight from a market standpoint is when I look at EM debt markets, particularly EM sovereign debt markets, they are currently not pricing any sort of recovery. They're still pricing in further downside for the EM debt asset class. When I compare the EM debt asset class, which is triple B rated investment grade asset class, it's still trading very wide in a relative spread basis to the US high yield sector, which is single B in a relative sense.
So there's clearly an opportunity that is getting set up for the market. I think the market is too pessimistic on EM's recovery chances and that will change as we get into the second half of this year and in 2022. It clearly sets up a great trade for investors that are looking at this particular angle.
OK, Eric, one last word from you. From a global perspective, we started the conversation talking about policy normalisation. I wouldn't say it's a normal that we've seen before.
What do you say? Oh, I think that's right. In so many different ways and examples, the new normal that we move towards is going to have echoes of the pre-Covid world, but also some very different angles.
From an economic point of view, I think the theme which still resonates with me and has done for the last 15 months is this idea of the haves and the have nots in the global economy. And I think the positive side of the narrative is that there are some very large engines of economic growth, the US, China, and they will offer stability in their respective regions. But on the downside, I do worry that in all regions and both DM and EM, there will be economies that I think will continue to fall further behind, either because of domestic demand lags or because of dependency on tourism or other sectors.
And so I think as we look to 2022 and 2023, being very mindful of the downside risk from the have nots, I think is going to be a key economic theme to focus on. OK, well, I'm sure there will be many more conversations for us to have about this. Thank you so much, though, for now, to the three of you, as ever, in Australia, Eric Robertson, in London, Razia Khan, and in Singapore, Kaushik Roya, thank you all so much.