The IMF and World Bank Spring meetings kicked off this week in Washington, and are a good opportunity to take the pulse of global investors and policy makers on global risks and opportunities – emphasis likely to be on the former. The institutions own forecasts for growth signal another downgrade in expectations, perhaps catching down to consensus. With a new WB head coming in, how will the organization change. After a strong rally in many risks assets (though mixed story for EM), what are the prospects going forward? What will drive differentiation among EM going forward (growth, use of credit, exposure to commodities)
If you’re going or watching from elsewhere, what are you watching for? What did I miss?
Here are a few things I’m watching for:
How weak will 2019 and 2020 growth be and how will policy response shift? There’s no question whether global growth has slowed down, but how extensive is the slowdown likely to be and how much of a revival is likely in 2020 and beyond? The slowdown in global growth and global trade growth in 2019 is now over-determined and clear in the data, with signs the the U.S. is finally joining many of its trading partners in slowing down. The question is how weak underlying momentum is, whether the recent improvement in global PMIs reflects a bounce from very weak end 2018 or whether the recent easing in financial conditions will have some stabilizing effect. the IMF is likely to again revise down growth prospects for this year, the latest in a succession of downgrades and point to further downside risks, but how much of an improvement will they see next year?
Its long been my view that 2019, would be a growth slowdown, but that U.S. recession would be unlikely.
Chinese policy remains critical to the global outlook and there are some signs that the stimulus might be stabilizing local growth – if at the cost of reviving local imbalances. Overall, stimulus is likely to do more to stabilize the outlook rather than cause a major upturn in growth. Globally, the reluctance to use fiscal space (especially in parts of Asia and Europe) or lack of fiscal space, elevates long-term growth concerns.
Energy outlook and sanctions? The move up in oil prices differentiates assets and growth outlook, with oil producers having outperformed many peers. Are we starting to see demand weakness? Will US shale outperform again (probably)? How much volatility will the implementation of the Iran and Venezuela sanctions bring? Another round of Iran waivers/exemptions will be issued again for Iran, consistent with another 200K in reductions, but it will likely come down to the wire and add maximum confusion. OPEC+ members are likely to be cautious on adding supply. This suggests that much will depend on demand and sanctions implementation in May. That said, U.S. shale production is showing signs of renewed investment and will likely surprise in production. This will likely prompt a price reversal in H2.
Big Global Central Banks still driven by markets market determined?: After rounds of hikes and QT, the Fed is now signaling a dovish stance. In fact markets are now pricing outright cuts, which would arguably be more problematic than good as it would signify that growth was even weaker than expected. Ample QE stance still supports risk assets including equities and some riskier bonds. With forward looking equity valuations in the U.S. now starting to look expensive again, should the fed begin signaling that cuts are off the table, market actors may test them again. All in all, the central banks may find it difficult to return to normalization. The performance of growth-linked, depends on the growth outlook not just liquidity.
Other global central banks have some reduced pressure, but few even among the emerging world will be likely to have much space to ease (a few in Asia, trade- reliant Eastern Europe and Latin America are among the few with policy space). In many cases (not the U.S.) the fiscal stance is still quite restrictive.
How much of a trade drag? The WTO’s preliminary trade growth forecasts suggest a further slowdown to only 2.6% growth, as trade uncertainty, tariffs and other friction reinforce other weakness of demand (and difficulty measuring it). Consensus still expects some sort of deal with China. Our longstanding view has been for a deal that keeps the two sides talking, avoids new tariffs but does little to lift the new ones. Managed trade especially in Commodities will address the bilateral trade balance but not necessarily the structural issues. Meanwhile, minimally processed commodities are going to be a larger part of the US exports and growth – to the detriment of countries like Canada, that used to dominate such supply in the local market.
How will Congress use its limited pre-election year policy space? Congress, as always has a lot on its plate including several important foreign economic policy priorties including the USMCA, which is running into challenges, sanctions legislation (which may be more rhetorical) not to mention key domestic issues including healthcare, the continuing resolution to fund the government and more. Democrats in the House, seem more apt to use their political capital on domestic issues, while the Republican leadership in the Senate may be reluctant to vote on anything controversial. I’m not ready to count out either USMCA ratification or new Russia sanctions being passed this year, but both are becoming less likely. Expect even more utilization of executive orders both on key foreign policy objectives like Venezuela, Iran — as well as any “deal” or deal to have a deal with China.
What scope for Policy change and any reform potential in Key EM?: One key element of the global outlook is that several major emerging economies are struggling to grow (South Africa, Brazil) others are facing recession or near-recession after the capital outflows last year and local excessive credit (Turkey, Argentina). Even those that are growing near potential are still growing more slowly than in the past, in part because of limited policy space or policy uncertainty(India, Indonesia, Russia). April 2019 brings a number of key elections in large emerging markets – India, Indonesia, South Africa, just to name a few. In some cases like South Africa, policy change is very unlikely with President Ramphosa likely to be confirmed in his mandate, though the degree of Union and other support may erode policy space further. Keeping a tight fiscal stance amid continued growth stagnation, will perpetuate chronic issues including some of the contingent liabilities. India’s election remains heated and the BJP coalition could benefit from the timing of election. Despite some strong policy implementation including a roll-out of electrification, India continues at best on a two steps forward, one step back economically, and political leaders continue to take advantage of some of religious groups.
Turkey’s election will likely be on the minds of investors after the pre-election speculator squeeze and current recession. Will it be more of the same – just enough policy tightening to retain capital, and more arrests, accompanied by public bank finance? How will its neighbors and trading partners respond (including the Europeans, who have so little demand of their own that Turkish recession is a drag for Germany)
Meanwhile new governments in Mexico and Brazil are likely to be front and center among EM investors, struggling to assess whether key sectoral policy and fiscal trajectory. How will MORENA thread the needle between anti-corruption and reducing energy imparts and sicking to its investment? Will Brazil pass the pension reform? What will actually drive growth? Will oil exports begin to pick up? etc. What other countries will come to the fore?
Debt crises in Frontier markets: there are a wide number of public discussions (at the IMF, WB, the think tanks) as well as the renowned DebtCon, that will be looking at the limitations of current sovereign and quasi sovereign debt issues. SSA Frontiers will be particularly in focus as will the suspended debt of Venezuela. The Institutions can’t do much until they are asked in, which tends to be in crisis mode. What will the next steps be in Venezuela? How can the development institutions manage the plethora of political risks? Many in Washington are looking for next steps on Venezuela, where President Maduro is clinging on despite the increasing financial challenges.
Many oil producers are jumping into the debt markets with a vengeance, looking to borrow cheaply to front-load space. How will they manage it? Debt is far outstripping equity investment in places like Saudi Arabia. Its balance sheet is strong, but the pace of growth increase is concerning.
Ziemba Insights 