Global Macro Outlook Q3: The Long And Winding Road

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Despite falling price pressures, central banks in the region have been surprising the market with their hawkishness. Bank Negara Malaysia raised interest rates by a further 25 basis points (bps) to 3.25%. Since pausing in April, the Reserve Bank
of Australia has hiked at its two subsequent meetings for a total of 50bps, bringing rates to 4.10%. Meanwhile, the Bank of Korea and the Reserve Bank of India (RBI) delivered hawkish pauses at 3.5% and 6.5%, respectively, pushing back against the possibility of early interest-rate cuts, and the Bank of Thailand hiked its policy rate by 25bps to 2.00%, judging that further policy normalization is still appropriate.

Manulife IM in its Global Macro Outlook Q3 2024 report said it had anticipated that slowing growth and inflationary pressures would open the door for many of the region’s central banks to bring their tightening cycles to a close. In its observation, however, it said is subject to the condition that core inflation, which is a better measure of underlying price pressures, is declining in a reasonable timeframe. So far, data shows that core inflation is easing very slowly and remains well above average in almost every economy in the region. Recent developments indicate that the anticipated timing of dovish pivots has been delayed.

For Mainland China, most indicators of cyclical activity revealed an economic slowdown in May and early June, consistent with the contraction in the official manufacturing PMI survey. Most significantly, weakening credit momentum and property sales indicate that the reopening rebound is fading. The house argued that in order for the cyclical rebound to strengthen beyond the mechanical boost, a sustained recovery in household consumption and property sales would be required; however, there’s been limited evidence of either so far. Consumption indicators remain below pre-pandemic levels and growth rates.5 Meanwhile, property construction remains an important drag on the economy, with sales and construction activity remaining weak. For now, markets are eagerly expecting Beijing to lend a helping hand.

To date, the government has appeared reluctant to deliver broad-based easing. With the 2023 GDP growth target of “around 5.0%” easily achievable—thanks to base effects—and policymaker concern over the threat to the financial stability of an excessive debt buildup, we continue expecting limited policy stimulus.

India on the other hand, the RBI kept its policy rate at 6.5% for a second meeting but surprised the market with its hawkishness. Even as the RBI lowered its inflation forecast, the bank remained concerned about upside risks stemming from increased government support for agricultural crops announced on June 7 and the likelihood that El Niño could affect the monsoon season. If this were to happen, India could experience below-normal rainfall and severe droughts, affecting crop
performance and possibly fueling broader food price inflation. On the nonfood side, the bank’s rate-setting committee acknowledged that crude oil prices have eased but conceded that much of this was due to base effects and that
domestic prices remain elevated. On the flip side, the RBI does have some breathing room, as the Indian economy is holding up much better than expected. GDP growth accelerated from 4.5% YoY to 6.1% YoY in Q1.7 What’s more, higher
frequency activity data such as the PMI surveys have pointed to robust growth in both the manufacturing and services sectors in recent months. The strength of the data so far this year has led markets to revise their 2023 GDP growth forecasts

The dovish expectations for the Bank of Japan (BoJ) were affirmed by Kazuo Ueda’s early speeches as the bank’s governor. He’s been much more cautious about potential tightening than the market had previously thought and highlighted that the risk of inflation slowing below the BoJ’s target was a greater risk than the risk of it overshooting. The precondition for BoJ tightening is for wage growth to be sustained at a level where it’s able to support inflation at or above the bank’s 2% target; specifically, the bank has stated that wage growth needs to be sustained at 3% to maintain inflation at or above its 2% target. The latest signs aren’t encouraging. Wage growth hit 4.1% in December but has crashed to around 1% since the year
began. Shrinking bonuses played a large part in that decline, but regular pay growth also slowed, settling around 1%, compared with the average of 1.3% in the second half of last year.6

Firms no longer enjoy the supernormal profits fueled by the weak Japanese yen (JPY) last year and are less willing to raise pay now. Indeed, ordinary profits fell in annual terms for the first time in two years in Q4 2022, suggesting that wages may follow suit.

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