I’m off to the annual meetings of the World Bank and IMF this week, a good chance to take the pulse on global market consensus and the worries of policy makers. Global trade risks and their impact on an already decelerating global economy are likely to top the worry list – with the impact of tariffs, policy uncertainty on value chains in focus along with questions of policy and macro divergence, all of which have left many less optimistic than in the spring. Given the recent escalation of U.S. – China trade tensions, and signs of slackening in global export growth, the focus is likely to be on the downside risks to global growth, the divergence between U.S. economic activity and that of most of rest of the world.
These trends could be reinforced by the recent run up in the oil prices and its impact on fuel producers and consumers. typically a $10 increase can hit growth by 0.1ppt, we are now at well over that trend. Which countries are willing to pass on the increased costs to their consumers? or will EM with weakened FX seek to avoid passing on those costs? Will we start to see some demand destruction? Will greater imports from oil producers (GCC/MENA) help enough)?
What else is on my mind?
- EM contagion or containment in the face of DM monetary divergence. Many EM hiking defensively (aggressively and more modestly) as easing cycles have ended. Will the range of idiosyncratic risks remain idiosyncratic? Are selected EM cheap enough?
- Impacts of the Eu crisis management and deadlock on Italy and other fiscal measures? With a desire for tighter fiscal stance at the EU level, the EZ might remain a drag on global growth and reliant on demand elsewhere.
- concerns about the role of the US dollar, and the USD funding system. Will European officials renew their efforts to increase trade flows in EUR. What details are being ironed out for efforts by Europe/Asia to skirt U.S. sanctions
- How worried are borrowers about the conditionality around liquidity finance (IMF) and development (MDBs and others). Are the IMF and other entities likely to attract more funding? Do they need it? How would China and others respond to debt restructuring whether for BRI projects?
- How to increase volumes of funding for infrastructure and close the gap between those that want to invest in new projects and those countries/regions with needs? Is it a case of costs and returns being misaligned? What new platforms, coinvestment and government intermediation might be necessary. I’ll be particularly interested in green finance, including efforts to deepen the green bond market and other tools to better align incentives for ESG investments between investors and regulators.
What have I missed? What am I too fixated about? Check in next week to see what came up and what surprised me.
This year, being hosted by Indonesia in Bali, it should be a good chance hopefully a good opportunity to get a closer look on the policy response in South East Asia and China, key to Emerging Markets and a critical part of global sentiment. The answer to these questions depends in large part on the type of policy mix chosen by China, including adjustments to fiscal and monetary policy – becoming a bit more supportive on both fronts, though the latter more reflects an interest in buying time and continuing to roll over debts and provide liquidity to selected entities.
Downgrades to future global growth paths are likely, with risks to further downside. Already in the summer IMF forecasts were edged down a whisker in the medium-term, and I expect they may be again, even as U.S. growth forecasts remain solid or edge up. Thus, after about 2 years of upward revisions to global growth, I anticipate we will see the beginning of downgrades, especially to emerging markets, due to structural slowdown in China, less supportive capital flows in many other countries, and a moderation of growth in Europe after a period of “as good as it gets” above potential growth. As we’ve discussed, convergence of growth trends and coordinated global growth is behind us, the question is which regions may catch down to the more weaker ones, and which will attract capital in this environment.
Several economists are now talking about the risks of a recession in 2020, echoing calls for a slowdown I made earlier in the year for 2019 and 2020 due to the end of easy policy and easy sources of growth. With greater debt issuance in the U.S., the unwinding of easy policy and structural slowing of growth in China, the pace of global growth and global trade growth was likely to drop. A recession (in the U.S.) not yet in my baseline, but the easy sources of growth are behind us. Expect a lot of talk about potential policy response in the case of renewed stress. I am curious whether the conversation will remain in retrospective mode (on the just over 10 years after the financial crisis) or will shift further to the new measures that may be used.
I expect that growth forecasts will come down in Latin America, Sub-Saharan Africa, and rise only modestly in the U.S., MENA (GCC) and remain relatively stable in Asia as the increase in energy prices and tighter monetary and fiscal stances argue against upgrades. Given the impact of higher commodity prices, currency trends and tariff related trade volatility, some of the these sources of macro and market divergence are likely to persist, with a general challenge for EM to attract capital given the upward grind in U.S. yields.
Policy response especially in China is likely to take up significant focus. With tariffs set to be ratchet up, and prices likely to increase to U.S. consumers, the divide between the U.S. and Chinese monetary stance is likely to continue – and the costs of U.S. fiscal stimulus to mount on the global debt markets. Greater issuance of US debt is likely to boost yields and should widen spreads for other USD assets. Where China is concerned, attention should also focus on the impact on ongoing long-term policies, consolidation and intermittent deleveraging which should frame the impact across regions in china and the global economy. Other CBs in the EM world seem to be taking a cautious approach, pre-emptively hiking in countries ranging from Indonesia, India and Russia to name a few.
With the end of disinflation in many EM, and little fiscal policy space (aside from a few oil producers), few countries seem to have much policy space. On the energy front, I continue to watch whether companies and countries are able to pass on the increased costs, something particularly relevant for EM energy importers, many of whom phased out subsidies, but have shown signs of partial reversal.
Ziemba Insights 