Policy Space and Politics
November 07, 2022
Read Time 2 MIN
U.S. Elections, Growth
This week’s newsflow is dominated by the U.S. mid-term elections – the impact on the fiscal outlook (and growth and interest rates) is gaining in importance with the prospect of the higher peak policy rate. Concerns about policy room in another independent global growth driver – China – also refuse to go away. China has already used a lot of fiscal space – the government’s primary deficit is expected to be the largest among major emerging markets (EM) and developed markets (DM), both in 2022 and in 2023 – and today’s foreign trade numbers point to persistent growth headwinds. China’s exports and imports contracted in annual terms in October (see chart below), surprising to the downside and reflecting the combined effect of softer global demand and the weakened renminbi. China’s growth is still expected to accelerate in 2023 – but this will be conditional on the removal of COVID restrictions (a lot of buzz, but no concrete steps/timeline yet).
EM Growth and Policy Normalization
The expected growth cliff is already affecting the policy mix in parts of EM. Central banks in EMEA are becoming increasingly dovish – Poland’s rate-setting meeting would be another important test case later this week. In LATAM, Colombia is in a tough spot – the real GDP growth is expected to moderate from 7.3% this year to mere 1.9% in 2023, while inflation continues to surprise to the upside (12.22% year-on-year in October). The government’s policy agenda – which is often ideologically-driven and includes a controversial pension reform proposal among other things – added pressure, both on the currency (the Colombia peso was the worst-performing major EM FX in Q4) and local bonds (the second largest quarter-to-date loss among GBI-EM constituents). And this can limit the central bank’s ability to slow the pace of rate hikes to support growth (or worsen the outlook for local debt if it does).
EM Asia Disinflation, Growth Outlook
The growth outlook for EM Asia is not too bad compared to EM peers – Indonesia reported a stronger than expected Q3 GDP print (5.72% year-on-year), and the consensus sees another healthy expansion (approximately 4.8%) in 2023. This should reduce pressure on fiscal accounts, while allowing the central bank to continue tightening at a measured pace if disinflation stalls. Thailand’s prospects seem to be improving on several fronts at the same time – headline disinflation, the return of the current account surplus and stronger real GDP growth in 2023 (according to the Bloomberg consensus). However, core inflation is still grinding higher, which means more “catching up” rate hikes for the central bank including another 25bps move in November. Stay tuned!
Chart at a Glance: China Foreign Trade – More External Growth Headwinds
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.