Balancing on the summit
Lagged impact of monetary tightening
We expect the global economy to slow further in the coming months. We maintain our 2023 global growth forecast at 2.7% and lower our 2024 forecast to 2.9% (from 3.0%). Developed economies are likely to lead the way lower as the US and Europe struggle under the weight of unprecedented rate hikes and tighter lending conditions. The story for EM is more mixed – Asia and the GCC region should continue to perform well, while Africa continues to battle headwinds including significantly higher borrowing costs.
Within Asia, India and the ASEAN region are enjoying healthy momentum and should continue to support global growth. China’s recovery, meanwhile, has disappointed expectations. After a strong start to the year driven by pent-up consumer demand, growth momentum in China has moderated in recent months.
DM economies have proven resilient
Developed-market (DM) economies have proven far more resilient than expected. Aggressive rate hikes by the Fed and the ECB appear to have had a limited impact on the US and euro-area economies to date. Although the US shows clear signs of slowing in the months ahead, it has managed to avoid a recession so far. While revised data shows that the euro area slipped into a technical recession in Q4-2022 and Q1-2023, it was milder than feared when Russian gas flows were severely curtailed last year.
That said, we expect the US to slip into recession in Q4-2023 and Q1-2024. We forecast very soft US growth next year as the delayed impact of monetary tightening and credit tightening hits the economy. The US consumer has been the bulwark against a sharper slowdown so far, but we expect consumer spending to weaken in the coming months, weighing on the broader economy.
In the euro area, while an ongoing recession is not our base case, PMIs suggest still-sluggish economic momentum; we see growth remaining weak. Strong household savings buffers and robust labour markets have helped to stave off a sharp contraction so far. That said, weak global trade poses a risk to the region; if trade does not recover in the coming months, Europe could face a higher risk of slipping back into recession.
Figure 1: We expect global growth to moderate in the coming months; Asia continues to outperform (GDP growth rates, %)
The reverberations of US banking-sector stress
Sectors exposed to regional banks remain vulnerable
The worst of the US banking-sector crisis appears to be over, but the lingering effects are likely to be felt for some time. While large deposit outflows from regional banks have stopped, they have left a number of banks vulnerable to further shocks. Regional banks have large exposure to the commercial real-estate and SME sectors, both of which were already facing challenges before the recent stress (Figure 2). Reduced access to funding will likely cause further stress in these sectors, exposing regional banks to second-order loan losses and earnings pressure.
Figure 2: US CRE maturity volumes by ownership USD bn
The magnitude of US interest rate hikes over the past 15 months is unprecedented in recent memory. The full impact on the broader economy and credit channels has yet to be felt. Regional banks and other lenders (such as the private credit sector) are already showing signs of stress. Overall lending appears to be slowing, and this is likely to be reflected in slower economic activity in the coming quarters (Figure 3).
Figure 3: Growth in US commercial bank assets loans and leases (SA, % y/y)
Asia’s growth is still healthy
India and ASEAN continue to enjoy strong momentum
In contrast to DM economies, India’s growth momentum remains strong and has surprised to the upside. Domestic demand growth is robust; pent-up demand for services has been a key driver of the upward momentum. Manufacturing activity also appears strong, as indicated by recent purchasing managers’ survey data. The capex recovery – particularly public-sector capex – is also encouraging, and should help to sustain India’s recovery.
Although growth in the ASEAN region has moderated slightly, it remains healthy. Despite the absence of positive spillover from China’s reopening, we expect several ASEAN economies – including Vietnam, Indonesia and the Philippines – to grow more than 5% in 2023, and Thailand and Malaysia to grow above 4%. We see upside potential for Thailand, where tourism traffic from China is still very low compared to pre-pandemic levels (Figure 4). The region is attracting healthy FDI flows driven by corporates’ ‘China plus one’ diversification strategy; Indonesia’s extractive industries have attracted significant FDI. With major DM economies slowing, trade is likely to remain soft, weighing on more open economies such as Singapore and Vietnam.
Figure 4: Recovering international travel in Asia; arrivals from China still low vs 2019 Latest arrivals, % of same month in 2019
China’s recovery is losing momentum
China’s recovery has lost momentum in recent months, after a strong start to the year as pent-up consumer demand was unleashed. Unlike China’s previous recoveries, which were fuelled by real-estate and investment activity, this one is driven mainly by consumer spending and services. While consumption has picked up this year, people are spending mainly on basic and lower-cost goods rather than big-ticket items. The authorities have introduced some measures to support growth, and while we expect more, we see a very low probability of a large stimulus package. We recently lowered our 2023 GDP growth forecast for China to 5.4% from 5.8%.
GCC underpinned by robust non-hydrocarbon growth
The GCC will likely continue to stand out as a bright spot in the global economy in H2, supported by robust non-hydrocarbon growth. While headline growth is experiencing a slow-motion slowdown given successive OPEC+ oil output cuts, non-oil growth is likely to do the heavy lifting in 2023. Dubai’s growth momentum continues unabated, and tourist arrivals from China are set to return to pre-pandemic levels in H2 (from 20% currently). Infrastructure investment underpins medium- to long-term growth prospects, with a diverse set of priorities ranging from hydrogen in Oman to gas output expansion in Qatar and social infrastructure and tourism investment in Saudi Arabia.
Africa outlook improves on domestic reforms
The outlook for Sub-Saharan Africa (SSA) is improving after the region experienced a number of economic shocks in quick succession (COVID, the food-price surge caused by the Russia-Ukraine war, global monetary tightening). Domestic reform momentum is evident across a number of key economies. Most notably, Nigeria’s new administration under President Tinubu has embarked on long-needed fuel subsidy, power-sector and FX reforms. In South Africa, which has long grappled with a severe power crisis, the outlook is improving. A deeper power-generation shortfall has been avoided this winter thanks to the procurement of emergency power supply, increased ‘self-generation’, investment in renewables, and an extension of the life of some existing power plants.
Some SSA countries have also made important progress on debt restructuring initiatives. Zambia reached a deal with official creditors at the end of June, raising hopes that commercial creditor negotiations under the Common Framework may now also accelerate. Ghana has made rapid progress on securing a first tranche of IMF funding, following an MoU from official creditors. Kenya has adopted deep fiscal reforms in order to improve domestic and external financing prospects.
Stubborn DM inflation is a challenge
Inflation is coming down, but not fast enough
Unprecedented rate hikes by the Fed and the ECB have been far less effective than expected in bringing down inflation. While inflation has eased, the pace of decline has been much slower than policy makers would have liked (Figure 5). Labour markets in both the US and euro area are still very strong, and wages have been stubbornly high. That said, other components of headline and core inflation have been moderating in both the US and Europe, and we expect this trend to continue over the coming months.
Figure 5: Inflation is moderating but still above pre-pandemic levels Weighted average headline CPI (% y/y)
We expect the ECB to deliver a 25bps rate hike – the final one of this cycle – in July. We see the Fed also hiking by 25bps in July, then staying on hold for the rest of the year – assuming that US underlying inflation continues to ease and the labour market shows signs of cooling. With both inflation and growth likely to moderate in the coming months, we expect the Fed to start cutting rates in early 2024.
EM inflation appears to be better behaved
Even so, rate cuts are unlikely to be imminent
Inflation in most of Asia appears to be moderating, though it is still high relative to pre-pandemic levels. Idiosyncratic factors continue to pose upside risks to the inflation outlook; as a result, we expect policy makers to stay on hold for an extended period instead of pivoting quickly to rate cuts. We expect most Asian central banks to embark on rate-cutting cycles in 2024, following the Fed and the ECB. With the exception of the Philippines and Korea, Asian central banks never took rates to very restrictive territory; this limits the need to cut rates against a backdrop of healthy growth and still-high inflation. China is an outlier in the inflation narrative; its CPI inflation is very subdued and PPI remains in deflationary territory. The authorities may need to cut rates again in Q3 given deflation and recovery concerns.
In Latin America, inflation rates have been falling from their 2022 peaks for several months now (with the exception of Colombia). Inflation downtrends are well underway in Brazil, Mexico and Chile. Despite clear evidence of inflation peaking, it is still above central banks’ target ranges. Most central banks will need to see inflation move closer to those ranges before they can consider cutting rates. The inflation profile for Africa also appears to be improving. Although inflation is still rising in countries where fuel prices have been adjusted – namely Kenya (where fuel VAT will double) and Nigeria and Angola (on subsidy removal) – it seems to be moderating elsewhere.
Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Non-US analysts: The non-US analysts named in this report may not be subject to all the FINRA requirements applicable to US-based analysts.
|Chong Hoon Park is/are employed as an Economist(s) by Standard Chartered Bank Korea and authorised to provide views on Korean macroeconomic topics only.|
|Gordian Kemen holds a long position in the following financial instruments: EMLC.US; VEGBX.US|
|Razia Khan has been appointed to serve on the Presidential Economic Advisory Council (PEAC) established by the presidency of the Republic of South Africa.|
Valuation & methodology – Rates
Standard Chartered Research assigns a local-currency debt recommendation to each issuer based on our fundamental view of the issuer and the relative value of its debt securities issued in local currency, taking into account the ratings assigned to the issuer by credit rating agencies and the valuations of the issuer's securities, or of actively traded derivative instruments such as interest rate swaps and futures. Our fundamental view of an issuer is based on our opinion of currency, interest rate, fiscal, debt and growth dynamics in its local-currency bond markets, as well as expected demand and supply patterns, using both top-down and bottom-up metrics. Our recommendations for individual issuers are based on our view of their ability to outperform their respective sector in total-return terms. This typically incorporates our views on credit fundamentals, market technicals and interest rates, in the context of our broader views on market risk conditions.
Recommendation structure - Rates
|Standard Chartered terminology||Impact||Definition|
|Positive||Outperform||We expect the total return of the issuer's local-currency bond complex in USD terms to outperform in comparison to other issuers under our coverage* over the next 3 months.|
|Issuer recommendation||Neutral||Perform in line||We expect the total return of the issuer's local-currency bond complex in USD terms to perform in line in comparison to other issuers under our coverage* over the next 3 months.|
|Negative||Underperform||We expect the total return of the issuer's local-currency bond complex in USD terms to underperform in comparison to other issuers under our coverage* over the next 3 months.|
*See https://research.sc.com/research/api/application/static/forecasts#rates for our full rates coverage universe and current recommendations.
Standard Chartered Research offers trade ideas with outright Buy or Sell recommendations on bonds as well as pair trade recommendations among bonds and/or CDS. In Trading Recommendations/Ideas/Notes, the time horizon is dependent on prevailing market conditions and may or may not include price targets.
Recommendation distribution - Rates (as of 6 July 2023)
|3M duration outlook||Coverage percentage||(IB%)|
IB% - Percentage of investment banking clients in each rating categoryFor full Standard Chartered Research recommendations history for the past 12 months, please see https://research.sc.com/disclosures/credit.html. For conflict disclosures, see https://research.sc.com/disclosures/conflict.html.
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