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Global Weak Links Challenge Growth

May 09, 2022

Read Time 2 MIN

 

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

Chart at a Glance: China’s Weak Exports Weigh on Growth Outlook

Source: Bloomberg LP

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.

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