Global Growth – Peak Pessimism?

23 January 2023

Read Time 2 MIN

China’s policy U-turns are driving 2023 growth revisions. But the outlook for the rest of the world is more complicated, especially when social protests are involved.

FED Rate Cuts

We are only one week away from the U.S. Federal Reserve’s (Fed) rate-setting meeting, and growth is back in focus. The consensus expects a robust Q4 GDP print in the U.S. later this week (2.7% quarter-on-quarter annualized) but not much improvement in more forward-looking activity gauges (Purchasing Managers Indices). The latter explains why this year’s growth expectations for the U.S. are still well below 1% (the nascent uptick notwithstanding). The Conference Board’s leading index – which dropped more than expected in December (-1%) - signaled that such caution is not unreasonable. A combo of “barely there” expansion and continuing disinflation is the reason why the market (Fed Funds Futures) continues to price in U.S. rate cuts (45-50bps) in the fall – despite the Fed’s protestations. 

China Rebound

Improvements in the near-term growth outlook for China are more justified, following the policy U-turns in the pandemic control and the real estate sector. China’s economic surprise index went ballistic in the past few weeks, the official manufacturing and services PMIs are expected to move to an expansion zone in January, and the 2023 growth forecast is now back above 5% (see chart below). Emerging market (EM) Asia is widely expected to benefit from China’s rebound – both in terms of growth and capital inflows/tourism recovery – and these expectations are already driving the regional FX performance, which boosted EM Asia local bonds’ total return (J.P. Morgan’s GBI-EM Index) above higher-yielding LATAM bonds so far this year. 

LATAM Political Noise

And talking about LATAM, there is never a boring day in the neighborhood. I am sure many of you were entertained over the weekend by reports that Argentina and Brazil are planning a new common currency (called the sur). But jokes aside, policy and political developments in the region warrant attention because the growth is expected to decelerate very sharply in the coming months. Uruguay and Peru are the only major regional economies expected to grow by more than 2% in 2023. But if Peru’s social protests continue to intensify – hurting the country’s governability and tourism revenue – the GDP forecast will be cut, and bonds will continue to lag behind regional peers. Stay tuned!

Chart at a Glance: China 2023 Growth Forecast – Liftoff

Chart at a Glance: China 2023 Growth Forecast – Liftoff

Source: Bloomberg LP


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