Global factors continue to weigh on China’s and Europe’s growth outlook, but how much negative news is already priced in?
EMEA Growth, Fiscal, Inflation Risks
We are on a research trip in Central Europe this week, and, of course, Russia’s invasion of Ukraine continues to dominate discussions – including both humanitarian issues and policy challenges created by additional inflation risks, more pressure on regional budgets and stronger growth headwinds. The twin deficit problem is making a comeback – especially in Hungary, where a sum of the fiscal deficit and the current account deficit can reach 14-15% of GDP this year if current trends continue. The Russian oil embargo is a key factor here – and one interesting possibility mentioned during our discussions in Hungary is that the government might use it as a bargaining tool in talks with the European Union about the reconstruction funds. The first day of the trip strengthened our near-term bearish views on Hungary’s Fixed Income exposure. Longer-term, when inflation starts to peak, the market’s very aggressive expectations for the policy rate might create some interesting opportunities – but not yet.
China Growth and Global Risks
Europe – including emerging markets (EM) Europe – is considered one of the world’s “weak links” as regards the growth outlook due to the spillovers from the Russia/Ukraine war. And it looks like global factors might add to near-term growth concerns in China – via the net exports channel. China’s exports growth moderated to 3.9% year-on-year in April, with exports to Russia dropping by mind-blowing 26% year-on-year. A big decline in the new export orders PMI (Purchasing Managers Index – see chart below) signals that the worst is not over yet. The growth headwinds, capital outflows and the narrowing interest rates differential are the main factors pushing the Chinese renminbi weaker against the U.S. dollar – the currency was down by another 93bps today (as of 7:15am ET, according to Bloomberg LP). For now, authorities are sticking to their “targeted stimulus” game-plan – but for now much longer?
LATAM Growth and Tightening Cycles
The GDP outlook might be showing tentative signs of improvement in parts of LATAM, but persisting inflation is a major policy challenge because aggressive rate hikes are anti-growth. Even though Mexico’s headline inflation print was a touch lower than expected in April, it still accelerated to 7.68% year-on-year. Core inflation surprised to the upside as well. So, it is hard to see the central bank not raising its policy rate by another 50bps at its next meeting – despite Mexico’s 2022 real GDP growth being downgraded to 2%. Stay tuned!
Chart at a Glance: China’s Weak Exports Weigh on Growth Outlook
Source: Bloomberg LP