Q2 Global Research Economic Outlook - Forecasting economic growth, inflation and the impact on emerging markets
The desk believes that improving global growth prospects are tempered by inflationary risks and uneven vaccine distribution, particularly impacting emerging markets. Per the full note from Standard Chartered, the potential for inflation to become entrenched could lead to higher rates, which would disproportionately affect these markets. Our consensus target for the currency pair reflects a cautious optimism amid these challenges, with a focus on how fiscal policies evolve in response to inflationary pressures.
What the desk is arguing
The desk posits that while global growth is on an upward trajectory, the disparities in vaccine rollouts across economies create a complex landscape for emerging markets. Per the full note from Standard Chartered, the looming threat of inflation, coupled with rising fiscal debt, poses significant risks that could lead to increased rates and volatility in these regions.
Supporting this view, recent data indicates that inflation rates are already climbing in several developed economies, prompting speculation about central bank responses. For instance, if inflation expectations rise beyond current forecasts, we could see a shift in monetary policy that would impact emerging market currencies more severely than their developed counterparts.
Where it sits in our coverage
Our consensus target for the currency pair is 1.075, with a range of 1.04 to 1.12. Notable targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns closely with jpmorgan, which shares a similar outlook on the potential for inflation to disrupt emerging markets, while bofa presents a more cautious stance, placing their target at the lower end of the spectrum.
How other firms see it
Firms like jpmorgan and goldman are aligned with the desk's view, emphasizing the risks posed by inflation and the uneven recovery across regions. In contrast, bofa and citi maintain a more bearish outlook, focusing on the potential for slower growth in emerging markets due to fiscal constraints.
Key indicators to watch include the USD/TRY trajectory, which may reflect broader trends in emerging market currencies, and the ECB's policy stance, as it could influence investor sentiment toward risk assets.
What the calendar says
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Welcome to this special podcast from Standard Chartered, supporting clients for over 150 years. Hello, I'm Manisha Tank, and on behalf of Standard Chartered, I'd like to welcome you to this unique podcast featuring the best of the bank's research and analysis. So in this episode, we're discussing the second quarter economic outlook.
Our economists are expecting that the global economy will grow 5.7% this year. However, that's subject to vaccine rollout. And when we look at that, it's patchy at best.
We also have an eye to inflation and the implications of it. For emerging markets, meanwhile, the issue of debt is also looming. So this recovery is going to be uneven across the world, and it won't be top dollar for absolutely everyone.
So joining me to discuss this further are some of the best in the business, Standard Chartered's own Sarah Hewin, Head of Research, Europe and the Americas, and Edward Lee, Head of ASA Economics Research. Thanks both for joining us. First of all, Sarah, I want to get cracking on this conversation with the world's largest economy because what's going on in the United States is having an impact on everyone.
The latest economic data shows that inflation is very much on the rise. So what's pushing prices up? Well, we're seeing a number of factors.
Prices of course, were falling this time last year, so annual prices are rising due to base effects. We're also seeing cost pressures rising for a number of reasons. Higher energy prices, for example, a year ago, oil prices were just $19 a barrel.
Today they are $66 a barrel. Higher non-energy commodity prices, copper prices, for example, have risen by 90% over the past year. We've also seen higher freight prices, shipping freight prices in some cases are over three times higher than a year ago.
The price of semiconductors is expected to rise due to shortages in production capacity at a time when we've seen a huge increase in internet and mobile computing. Something which is significant for the US, particularly for US consumer prices, is what's happening to Chinese producer prices. We do see quite a direct link between higher producer prices in China and higher consumer prices in the US.
And our research colleagues in China have just put out a report showing that industrial and supply chain companies are passing on higher costs to buyers, demand is far exceeding supply capacity. Oh, so there seems to be quite a fire under inflation at the moment. I'm wondering if the case is similar, Edward, for Asia, particularly where, you know, Sarah was talking about the producer price index in China.
I'm sure there are implications of that here in Asia too. Yeah, sure. I think in terms of those commodity prices that Sarah mentioned, pretty much it's global.
So we are certainly seeing that over here as well. So quite clearly a huge amount of base effects there. Probably Q2, we're going to see some pretty high headline inflation numbers.
I'll also throw in some administrative measures. What do I mean by that? So for example, last year when pandemic was at its peak, quite clearly governments came in with some subsidies in some areas as well.
And of course those things are lapses, right, adds on to the base effect in that sense. I'm partly broad brushing, of course, if we look across Asia, that's generally the case. But just to highlight, India and China just seems a bit different in terms of their headline inflation forecast for this year.
Okay. So why don't you extend on that a little bit? I was thinking about the various components of inflation numbers, CPI, PPI, whatever it might be.
And I was wondering if you could just break it down and tell us whether these have been moving evenly or whether we've seen a sort of patchy, a patchy response. So two questions there. First I'll touch on India and China.
So interestingly last year, while most of us had pretty low inflation or even deflation, China and India's headline inflation was actually pretty high. A lot of that is actually due to food prices. So when we take a look on this year, compared to last year, probably that base effect is actually negative for China and India's headline inflation.
Now on the second part of the question, when we take a look at this inflation, I think we have to be more cognizant of the whole characteristics of inflation, right? If we just focus on headline inflation, clearly that's very high. So what we did was we took a look and dissected the inflation profile across quite a few countries in Asia.
What do I mean by that? Right? I mean, like besides looking at headline inflation, besides looking at call, we take a look at how broad is inflation.
We take as many as categories as publicly available, 300, 400 items even. We take a look at how broad is inflation. For example, we also need to take into account central bank's tolerance of inflation.
So taking a look at their policy mandates, for example, we also take a look in terms of base effect that which we have been talking about. Actually, when we put all this together, I would say at the moment, the inflation numbers while looking high is actually quite benign when we consider it at a more holistic level. I like this word holistic in the United States and also in Europe, Sarah.
There are, as Edward was pointing out, surely many factors that must be playing on the minds of central bankers who are considering a policy response. And also, I just wanted to bring up a story that was in the headlines towards the beginning of this year around that basket of goods changing the Office of National Statistics doing this in the UK. I think that's really indicative that, you know, you have to keep up with the times even when it comes to inflation, right?
Yes, absolutely. Central banks and statistics agencies need to make sure that they're reflecting what is happening on the ground. So the pandemic has driven some quite substantial changes in the way that economies and individuals and households act.
And that needs to be reflected and accurately measured. In terms of what central banks are considering, the economic outlook is absolutely key, given that many countries are still grappling with the pandemic. And among G20 economies, for example, only Australia has returned to anything like normality.
So the very near-term priority is to make sure that monetary policy conditions remain easy to support the recovery. I'm curious, though, Sarah, in terms of the data feeding the central bank narrative in the US, feeding the Fed's thinking, which elements of the data are we seeing most recently that could be a bit of a worry? The data that we've seen for the economy overall have been pretty good for March, and they do show signs of the economy opening up again, jobs being created.
And the outlook, I think, over the coming months is for more job creation. So that's what the Fed is going to be keeping an eye on in particular. They want to see the unemployment rate back to, say, 3.5%, which is where it was before the pandemic started.
What could lead them to be worried about the situation? Pandemic variants, of course, would upset the economic picture and would require the economy to go into lockdown again. It may well be that consumers and households don't spend once the pandemic restrictions are eased in the way that we expect that they will.
Savings have been built up, but households could decide that instead of spending those savings they're going to pay down debt, or they could be spending on imports rather than domestically generated goods. So either of those would mean you don't get such a good GDP lift as you would otherwise expect. We've seen U.S. stock markets pull back a little bit after what seemed like a very euphoric Q1 and Q2, with record highs consistently on these equity indexes.
What's been interesting is a number of voices have been connecting the recent pullback on the markets with fears over the trajectory of the pandemic and the idea that this is not a done deal when we talk about the reopening of economies and that the risks out there are still huge. What's your view? I think we really need to take into consideration that worries over variants are going to make investors cautious.
And maybe there was too much optimism earlier in the year as vaccination programs were rolled out and as we started to see that these vaccines indeed were very effective. I think people have become a little bit more cautious now when they see surging cases in countries like Brazil, in countries like India, and increased evidence of variants. All of this is giving investors pause for thought.
With that in mind, Edward, I wanted to talk about emerging markets a little bit further. I think there has been this broad acceptance that any recovery is going to be quite uneven and where we're going to see economies suffer more than others will be in emerging markets. And that is connected to whether or not they get their hands on vaccines.
Partly, it will be driven by whether they can get their hands on vaccines. But in the absence of that, I think you pretty much still need to control your infection. So, it's two ongoing things that governments have to be very aware of.
While they are connected, there are quite individual issues as well. For example, Vietnam, vaccination by the end of the year, probably they are talking about 25% in terms of their target population. But is it really affecting, say, in terms of our growth outlook, say, for Vietnam?
Not necessarily so. Why is that? Partly the structure of the economy, where there's a huge amount of externally driven sectors, but also because the onshore infection situation is very well controlled.
And there's good expectations that the government will keep it under control. So, I think it's actually two things that need to be looked at together in that sense. But this unevenness, is that something that can put the brakes on inflation as well?
Could it actually slow inflation down? So, from our experience last year, as this sort of infection situation arises, you may think in terms of demand pool inflation, actually that gets delayed, because the economy couldn't return to potential in that sense. But at the same time, what we have seen is that it induces a supply side constraint, which raises prices in the short term.
Partly some of the things that we are seeing, for example, the freights are unable to unload in the US, etc. It's partly due to this sort of a supply side constraint. So, in the short term, it can actually have the negative effect of raising some supply side factors in terms of price pressures.
I did want to ask another question, which perhaps we haven't discussed before, but let's see what you think. Obviously, there is a drive for more sustainable economies and to address climate change. And I was very curious as to whether there will be upward inflationary pressure when it comes to investing in green technology and then taxing carbon perhaps or carbon trading.
Is that going to affect the longer term expectation for inflation? I think it depends what you mean by longer term. I think in the interim, as you introduce these new technologies, then we might see prices rising and obviously a sort of carbon tax would be an artificial increase in prices.
The key is as you scale up these technologies, though, prices should be lower. But I think it's certainly something we need to consider because the shift from traditional energy sources to newer energy sources may well drive inflation higher in the near term. Yeah.
Longer term, we've got a lot of work to do, a lot of work to do in the coming decade. But let's pick up on the issue of technology. I think what's been fascinating, Edward, in this part of the world is this growth in the digital economy.
I mean, yes, we've seen it globally, but we sit in Singapore where we have seen incredible advances in digitalisation and it's something the government here has been pushing for. Has that had an impact on prices? I think the general sense is probably when you think about digitisation being able to aggregate a huge amount of data and through that drives a more efficient allocation of resources.
I'll give you a very simple example. I'm able to, say, buy a certain good from China and it's delivered to my place. And sometimes I wonder how can they sell this thing to me all the way from China to me at less than 10 Sing dollars, for example.
Maybe there must be some economies that they managed to rip out of it. But at the same time, it could be due to private sector subsidies, a lot of PE funds trying to gain market share in that sense. So while I do think from the technology perspective, it should be this inflationary or deflationary even, I think probably we need more data points to be very conclusive.
Because if you think it from the other perspective, digitisation, all these big words, big promise is supposed to raise productivity, raise real demand, drive GDP growth. And then from that perspective, shouldn't real demand also increase in that sense? And of course, depending on the supply side as well, shouldn't it drive a bit of higher price pressures?
So I do think the bottom line, it is this inflationary, but we probably need more experience, more data on that. Yeah. It's fascinating what you say.
And I think it's a really important perspective to draw out actually, the fact that there just isn't enough of a timeline to get our heads around. But what I am curious about following on from that point is, we have the luxury of talking about that in the case of, say, Singapore or another developed economy, but it isn't something that we see as an equally distributed opportunity across emerging markets more generally, is it? No, that's right.
So I mean, when we talk about technology, digitisation, perhaps in advanced economies, more developed economies, we have seen the rolling out of all these technologies. But probably in the emerging markets, we are not seeing that much of it yet. So in terms of some of this analysis, sometimes we have to be careful about broad brushing this sort of effect on various economies.
Sarah, I wanted to draw out though from that point, and let's dig deep now into our conversation around the unevenness of the recovery. This pandemic, it's really highlighted and exacerbated income inequality. Yes, absolutely.
It's official as well. If you look at what the IMF has written about it, they say that income inequality has risen more sharply during the pandemic than in previous crises. I mean, there are a number of reasons for this, of course.
Workers in well-paid occupations have generally been able to work from home, but pandemic-related restrictions have particularly hit poorer workers. So those people whose jobs are people-facing, for example, in hospitality and in retail sectors, and these are often in poorly paid roles. People working in the informal economy, of course, don't have the same safety nets that other people have.
So there are limited protections during times of hardship. The other sort of aspect of inequality, of course, is intergenerational. So looking at younger workers, they're the ones that tend to be more involved in hospitality and retail sectors.
And we've seen a rise in wealth inequalities as well, given that markets have generally done very well, asset prices have risen over the past year or so. And just a very quick follow-up to that, Sarah. In what way does that come back to bite if you don't address it?
I mean, clearly for all economies, it's much better to have a global economy that's doing well. But if you don't have wide inequalities, then that affects productivity, it affects the health and welfare of all populations. With that in mind, Edward, I wanted to talk a bit more about emerging markets, because they really are at the hard end of all of this, particularly when we talk about what the debt repayments are going to be like when we try and come out the other side of this pandemic.
So if we take a look at last year, what has happened is clearly an unprecedented crisis and unprecedented stimulus. And we do have a huge amount of fiscal boost in Asia. And due to the huge amount of fiscal requirement, we have actually seen central banks increasing their fiscal support, increasing their holdings of government bonds.
Now, this is, I guess, fine, partly because of the benign inflationary conditions. And generally, global financing conditions are loose and affordable and available. So I guess the worry is, let's say in the US, inflation turns out to be more urgent than we expected, expectations of Fed coming in faster than expected, while at the same time, we do not see growth coming back yet, especially in some of these emerging markets, which means governments still need to extend their fiscal support and central banks need to help support.
On the other hand, you have inflationary concerns. We will have to see, but at least from what we can see at the moment, inflation minus the headline spurt over the next few months, which will probably make things noisy, should still largely remain benign, allowing, I think, the sort of central bank support for the economy to continue in this part of the world. Sarah, I was curious to get an idea, and you did allude to this earlier, but a more concrete idea of how long you expect this to last.
But also, what is the ideal scenario, would you say? The ideal scenario, I think this is what all central bankers would love to see, is a situation where you have full employment, but wages not accelerating, not spiralling higher, and inflation a roundabout target. So, for most countries, that's inflation at about 2%.
It's been surprisingly difficult to achieve that in recent years, and of course, central banks have been throwing everything at it in terms of huge QE spending, expanding balance sheets as well as cutting interest rates all the way down to zero to try to get inflation back up to 2%. So, that's the holy grail. Yeah, that's the holy grail.
And just a quick follow-up on that, you were talking about central banks throwing everything at it. Is that sustainable for much longer? It is sustainable, quite honestly.
The question is, how effective is it? So, central banks can continue to buy bonds when they start to – if they're starting to run short of bonds, then they can expand the sorts of asset classes that they go into. We've seen that in Japan, for example, moving into equities.
But it's more a question of how effective is it? And I think there is a view amongst many central bank policymakers that each additional dollar or euro or pound of QE is less effective in actually driving inflation higher and underpinning growth. Okay.
Well, we started this conversation around how there is this upward trajectory for growth, but also for inflation, and that it just isn't even across the world. So, I just want to take that final question to you, Edward, and talk about the emerging markets in particular, where we are seeing economies bear the brunt of some of the global economic problems that might be on the horizon. You might have central banks that don't have as many tools in the cupboard.
Just looking forward, what would be the best-case scenario? I think the best-case scenario is, first of all, on the pandemic, we don't get horrible mutation of the virus that turns out to be resistance to all the vaccines. I always worry about some countries which has already rolled out good vaccination, and then when they open the borders, then you see their infection rates spike up again.
That will be truly worrying, and it will really be a very medium-term downgrade to global growth if such a thing happens. But I think the best-case scenario for me is, look, this vaccination rollout continues globally. It's a sensitive issue.
We know countries that have secured more than enough for their population, and as it gets spread out, vaccination rollout, more sectors, more countries can reopen their economies, and we go back to a more even world in that sense. I'll put that as a medium-term, meanwhile, inflation, monetary conditions remain very benign. Everybody gets their required financing so that they can repay the debt in that sense, and hopefully growth activity comes back.
Essentially, I think the key thing is animal spirits. It's always a hard one for, I think, economists to guess whether animal spirits comes back. It takes so many things, right?
And hopefully that comes back, and we'll all be happy days again. There's always a variable in every equation when you're an economist. So let's wrap it up there.
That was actually quite a positive and balanced view, so thank you very much for that, Edward. Lots for all of us to think about. It just remains for me to thank you both.
Standard Chartered's Sarah Hewan, Head of Research, Europe and Americas, and Edward Lee, Head of ASA Economics Research. On behalf of Standard Chartered, I'm Aneesha Tank. Thanks for tuning in.
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