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Showing posts with label Central Banks. Show all posts
Showing posts with label Central Banks. Show all posts

Saturday, August 19, 2023

Recession unlikely for global economy but challenges linger on

 

THE global macroeconomic picture is still more sluggish than investors would have liked, particularly when viewed from the gross domestic product (GDP) growth perspective for the first half of 2023 (1H23), although it remains a stretch to say the world is heading for a recession.

A quick glance across the Causeway to Singapore sees the city-state registering a 0.5% yearon-year (y-o-y) growth rate for the second quarter of the year (2Q23), extending marginally from the 0.4% expansion it charted for the preceding quarter.

Elsewhere, such as in major markets like the United States, China and the eurozone, economists are of the opinion that growth has been sturdy during 1H23 but stiff hurdles still remain on the horizon.

While acknowledging that global GDP growth has been slower so far in 2023 due to several familiar factors such as higher interest rates and elevated cost pressures, newly appointed Bank Negara governor Datuk Abdul Rasheed Ghaffour is also not expecting the global economy to slip into recession.

He says resilient domestic demand in advanced economies is providing sufficient support, while also anticipating worldwide trade to improve towards the end of 2023.

Most notably, he perceives China’s slower-than-expected recovery to have limited impact on Malaysia’s own economic expansion and improvement.

“Malaysia’s economy is well diversified in terms of products, services and trade partners, which would cushion the Chinese impact,” says Abdul Rasheed.

According to Bernard Aw, chief economist at Singapore’s Coface Services South Asia-pacific Pte Ltd, although the global economy has been resilient year-to-date, growth outlook in the second half remains challenging, not the least from increasing signals of weakening Chinese economic activity.

Forecasting global GDP expansion to be at 2.2% y-o-y for 2023, and anticipating a similar growth rate of 2.3% growth for next year, he says: “We expect Asean GDP growth (2023: 4.3%; 2024: 4.6%) to be generally faster than advanced economies – at 4.3% and 4.6% for 2023 and 2024 respectively – as tourism recovery and domestic demand drives economic activity.”

Continuing subdued external demand for the region would imply that domestic demand has to continue to partially offset some of the slack, Aw, tells Starbizweek.

“However, the challenging economic environment worldwide, relatively high inflation and interest rates means that even growth in domestic consumption and investment may fall short of expectations,” Aw opines.

Commenting on the overall global interest rate environment, he believes that the trend of disinflation would continue into 2H23, mainly driven by lower energy prices, coupled with China’s deflation having fed into lower export prices, which has also moderated global price pressures.

On the flipside, Aw thinks underlying inflation will remain fairly sticky, despite not being severe enough necessarily for central banks to revert to hiking rates.

“Having said that, they will likely maintain the current restrictive interest rates for a longer-than-expected period,” he says.

Earlier in July, it was reported that the United States economy had grown 2.4% y-o-y in 2Q23, up from the 2% it posted for the first three months of the year and bringing 1H23 GDP to a commendable 2.2%.

“The improved expansion rate had been driven by consumer spending, on top of increases in non-residential fixed investment, government spending and inventory growth.

At the same time, China had registered a 6.3% 2Q23 y-o-y GDP growth rate, which was also an improvement from the 4.5% charted in the previous quarter.

The acceleration however was slower than the expected 7.3% forecast by economists on a Reuters poll, dragged back by tepid demand and sinking property prices which has sapped consumer confidence.

On the same note, chief executive of Centre for Market Education Carmelo Ferlito feels that China’s post “zero-covid” recovery has been fragile since the beginning.

“The economy is not an engine to be switched on and off, but rather it is a living emergent order.

“As such, China is paying the price to a degree with its severe, nation-wide lockdowns while it was implementing the zero-covid policy,” he says.

The decelerating growth in China, says Ferlito, is evidenced by the People’s Bank of China unexpectedly cutting a range of key interest rates on Tuesday, which is seen as an emergency move to reignite growth after new data showed the economy has decelerated further last month.

With Chinese officials from its National Bureau of Statistics also suspending reports on youth unemployment, he says the move would deprive investors, economists and businesses of another key data point on the declining health of the world’s second-largest economy.

Divulging more numbers, Ferlito says the twin moves of cutting rates and holding back unemployment data from the Chinese government has coincided with new data showing a slowdown in spending growth by consumers and businesses.

“Concurrently, factory output grew much less than expected, adding to a recent raft of worrying signals. For the first time since February, China’s headline measure of unemployment rose, climbing to 5.3%.

“The jobless rate for people ages 16 to 24, meanwhile, had marched steadily higher for six consecutive months to hit a series of record highs, culminating in a reading of 21.3% in June,” he says.

Ferlito says an economic trichotomy is emerging on the global scene, before adding: “The United States is still fighting inflation, but countries like Germany and Holland are starting to experience technical recession, while China is facing challenges of its own.

“It is that post-lockdown crisis that the CME predicted two years ago.”

Echoing Bank Negara governor Abdul Rasheed, he re-emphasises that it is important to look beyond GDP figures, making his case that if the GDP of a country declines because of a cut in impractical government spending, that would be positive for a country.

Conversely, he argues if GDP growth were to accelerate due to an increase in spending financed by debt, it ultimately would be a bane to the government’s coffers and the national economy.

Meanwhile, the International Monetary Fund (IMF) is predicting a 3% GDP global growth rate for this year and the next, receding from the 3.5% achieved in 2022.

It says the rise in central bank policy rates to stave off inflation has continued to weigh on economic activity, but the good news is that global headline inflation is expected to fall from 8.7% last year to 6.8% in 2023 and 5.2% in 2024.

“The recent resolution of the US debt ceiling stand-off and strong action by authorities to contain turbulence in the US and Swiss banking earlier this year reduced the immediate risks of financial sector turmoil. This moderated adverse risks to the outlook,” the IMF says.

However, it cautions that the balance of risks to global growth remains tilted to the downside, as inflation could remain high and even rise if further shocks occur, including those from an escalation of the Russia-ukraine conflict.

Moreover, the IMF warns that China’s recovery could slow further, partly due to unresolved real estate problems, with negative cross-border spillovers.

On the upside, inflation could fall faster than expected, reducing the need for tight monetary policy, and domestic demand could again prove more resilient

 Related posts:



www.thestar.com.my/business/insight/2023/08/12/us-on-dangerous-ground
www.thestar.com.my/business/insight/2023/08/12/us-on-dangerous-ground





Saturday, January 7, 2023

Interest and inflation rates, how high is high?

 

CLICK TO ENLARGE

AS we welcome 2023, one of the central themes this year will be how high will interest rates rise after the relentless pursuit taken by global central banks in fighting inflation with persistent and measured rate hikes in 2022.

As can be seen from Chart 1, from the 75 basis points (bps) hike by the Bank of Thailand to the 425 bps hike by the US Federal Reserve (Fed), the year 2022 has certainly been a busy year for central banks.

Central banks had no choice but to raise rates to fend off inflationary pressure that has been persistent throughout the year, although there have been some signs of easing lately.

Not to be left behind, even the Bank of Japan, while not lifting key benchmark rate, allowed its 10-year Japanese government bonds to move 50 bps from its 0% target, instead of 25 bps earlier.

It is a move that is seen recognising that inflation is finally biting the Japanese too.

CLICK TO ENLARGE 

CLICK TO ENLARGE

 Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

Can inflation be tamed?

Reading inflationary pressures and forecasting where it is going is not an easy task especially when inflation prints itself is a combination of many factors and not just commodity prices and supply chain disruption that has been the core issues among central banks the past year. Although the global economic momentum has eased, global aggregate demand is still rising and much higher than it was before the pandemic.

Hence, there has been not only a persistent rise in consumer demand but one that is not matched by consistent supply provided in the marketplace, resulting in a hike in aggregate prices.

In theory, inflation is tamed by using monetary tightening measures as it is believed that by raising interest rates, consumers and businesses will be impacted by higher borrowing costs, resulting in lower consumption as well as a slower pace of investments, which in turn will reduce aggregate demand.

Nevertheless, rate hikes have also other consequential impacts on the economy in the form of a weaker or a stronger currency, depending on the relative increase in domestic rates vis-à-vis the comparative increase in other corresponding currencies.

For example, for the United States, the relentless increase by the Fed has caused a significant rally in the US Dollar Index, which rose to a high of US$114 (RM501) last year, up almost 20%, before easing to close the year at US$103 (RM454), down 9.3% from its peak, but still higher by more than 8%.

The surge in the dollar made US imports cheaper from the rest of the world, in particular those from China, even cheaper, which allows the US retail prices at the store to be relatively lower than they used to be before the rally in the dollar.

In essence, while the surge in US interest rates has reduced disposable income due to higher borrowing costs, which in turn lowered consumer demand, it has also caused imported end product prices to be relatively cheaper than before, allowing aggregate prices to be lower as well.

This suggests that US consumer products are in for a double-whammy in terms of prices as aggregate demand has been reduced due to lower disposable income and at the same time for products that are imported, prices too have eased due to the strength of the greenback.

For an economist, this is good news as the intended outcome will likely be achieved in taming inflationary pressure due to persistent hikes in interest rates. A look at inflation prints from the peaks in 2022, both the core Consumer Price Index (CPI) and the Personal Consumption Expenditures index (PCE) have eased, falling by 67 bps and 62 bps from the highs and were last seen at 6% and 4.7% respectively.

Are we there yet?

After a 425 bps hike, the Fed’s message in the minutes of the Federal Open Market Committee (FOMC) released this week was an important one as it guided the market to expect higher rates going into 2023 but at the same time also signalled that the war against inflation is far from over and the Fed will continue to raise rates until it can achieve its targeted inflation print.

Compared with its September forecast of 4.6%, the Fed has now raised its median Fed Fund Rate (FFR) for 2023 to 5.1%, an increase of 50 bps while at the same time, the Fed also expects median FFR to drop by 100 bps each in 2024 and 2025 to 4.1% and 3.1% from earlier projected rate of 3.9% and 2.9% respectively.

Core PCE inflation, which is the Fed’s benchmark rate for inflationary pressure, is now expected to hit a median rate of 4.8% in 2022 before easing to 3.5% and 2.5% in 2023 and 2024 respectively.

By all means, the Fed is forecasting that inflation will be tamed in time to come. Hence, in all likelihood, we have seen the peak in inflationary pressure but perhaps we will be in for a higher US rate for longer before we see the Fed’s pivot.

Contrary to market expectations, the FOMC minutes this week revealed that the Fed is not expected to cut rates in 2023.

As for the market, based on Fed Fund Futures the Fed is expected to raise the FFR by 25 bps each over the next three meetings to reach 5.00% and 5.25%, followed by two rate cuts of 25 bps each in the second half of 2023, bringing the FFR back to 4.5% and 4.75% at the end of 2023.

Bank Negara to stand pat?

Compared to many central banks in the region or globally, Bank Negara move to raise the benchmark Overnight Policy Rate (OPR) by 100 bps last year is seen as rather muted.

Based on the year-to-date core CPI of 2.9% up to November 2022, the inflationary pressure experienced by Malaysia remained within Bank Negara’s forecast of between 2% and 3% for the year and going into 2023, core inflation prints will remain elevated at the beginning of the year but may ease later on, especially with the current government’s efforts in reducing the cost of living.

Given that scenario and the likelihood that the Fed and other regional central banks too are almost done raising rates, Bank Negara may stand pat and leave the OPR unchanged for 2023 at 2.75%. After all, a higher rate of between 25 bps to 50 bps as predicted by many broking firms will only result in higher borrowing costs for consumers and businesses, a move that will likely accelerate the pace of economic slowdown in 2023. By leaving the OPR unchanged, Bank Negara is signalling that it is done with raising rates and the current rate remains commodative and supportive of economic growth.

Positive real returns?

One of the arguments for higher interest rates is whether depositors are getting positive real returns, which is the difference between fixed deposit rates and inflation prints.

Chart 2 shows that based on November 2022 statistics, the depositors are at the losing end as the 12-month deposit rate was 132 bps lower than the monthly inflation print of 4%.

However, interestingly, as the market is anticipating rate hikes of 25 bps in the January 2023 Monetary Policy Committee meeting and another hike in March 2023, 12-month fixed deposit rates of many banks have passed the 3% mark and depositors could even easily enjoy rates up to 4% as promotional activities to attract fresh deposits have intensified over the past month. With that, depositors are already getting returns close to the headline monthly inflation prints.

In conclusion, while it makes sense for Bank Negara to stand pat and not raise rates in its first two meetings this year as widely expected, the market has already priced in the scenario that the central bank is ready to raise rates by 50 bps to take the benchmark OPR to 3.25%, the level last seen in March 2019, almost four years ago.

Pankaj C Kumar   Pankaj C. Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

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