Global growth outlook and geopolitics add to headwinds for China
Soaring inflation, rising interest rates, and conflict in Europe have led to significant market volatility in 2022. With China’s economy also under pressure, what challenges will investors face in 2023? Kishore Mahbubani and Credit Suisse’s own Nannette Hechler-Fayd’herbe and Zoltan Pozsar provided their perspectives at the China Investment Conference. How far could inflation go? Will the US enter a recession? Can China stimulate economic growth? Catch up with their insights here.
Speakers at the 13th Credit Suisse China Investment Conference discussed prospects for the global economy against a backdrop of high inflation, subdued global demand, and geopolitical tensions.
Rising inflation and escalating geopolitical tensions pose a significant threat to the world’s major economies unless they work together to tackle common challenges, according to speakers at the 13th Credit Suisse China Investment Conference (CIC).
Challenging conditions in major global economies
Opening this year’s CIC, Axel Lehmann, Chairman of the Board of Directors at Credit Suisse, said he sees China’s capacity for innovation as a long-term strength, noting that Credit Suisse expects the country will continue to lead the world in wealth creation despite the near-term macroeconomic challenges.
“The world and economic environment are changing rapidly, and adjusting to new realities is never easy. But many of us have experienced before that a time of change can also be a time of opportunity,” he said.
Although markets have priced in aggressive interest rate increases by central banks, the US could moderate rate hikes starting from this December. Credit Suisse’s current forecast is for a 50 basis point (bp) rate hike from the US Fed in December, followed by two 25-bp hikes in Q1 2023 to reach a terminal rate of 4.75-5.00%.
“Global economic growth is likely to continue to slow,” Nannette Hechler-Fayd’herbe, Credit Suisse’s Chief Investment Officer for EMEA and Global Head of Economics & Research said. “We believe there is growing potential downside for risk assets in the near term, and maintain our underweight position in equities, commodities, and emerging market currencies.”
“Tightening US monetary policy and a strong dollar also mean difficult times for emerging market currencies and could put pressure on their bonds, as capital flows back to the US.”
Tightening US monetary policy and a strong dollar also mean difficult times for emerging market currencies and could put pressure on their bonds, as capital flows back to the US.
Nannette Hechler-Fayd’herbe, Credit Suisse
The situation in Europe is also challenging, according to Hechler-Fayd’herbe, who said a recession is already underway on the continent. Credit Suisse predicts that the European economy will contract in real terms over the coming year.
In China, meanwhile, the speakers expected that higher US interest rates will also slow down the Chinese economy, although a stronger dollar could make exports from China more competitive.
Geopolitical tensions add to the challenges
While central banks redouble their efforts to tackle inflation, escalating geopolitical tensions arguably pose a greater threat to major economies.
For Kishore Mahbubani, Distinguished Fellow of the Asia Research Institute at the National University of Singapore and former President of the United Nations Security Council, short-term political tension is now overriding rational, long-term calculations.
In an interview at the CIC, Mahbubani noted that Trump-era tariffs on Chinese goods are still in place, hurting US consumers, despite having had little effect on China.
“Even though sensible economic policy [for the US] would be to lift the trade tariffs, it is politically impossible,” he said.
Even though sensible economic policy [for the US] would be to lift the trade tariffs, it is politically impossible.
Kishore Mahbubani, National University of Singapore
Surging global energy and food prices due to the conflict in Ukraine is another example of geopolitics getting in the way of economic pragmatism, according to Mahbubani, and rising tensions could also obstruct the fight against climate change.
“It's important for the United States to realize that if you want to get China's cooperation on important global issues – like climate change, inflation, or energy prices – then there must be trade-offs,” he said.
Power dynamics and the threat of ‘resource nationalism’
Zoltan Pozsar, Credit Suisse‘s Global Head of Short-Term Interest Rate Strategy, also sees great power conflicts as a major contributor to high inflation.
Previously subdued inflation had rested on the flow of low-cost labor, largely from developing to developed nations; cheap finished goods, primarily from China; and low energy costs, he noted.
Pozsar believes the world has now entered a period of “resource nationalism”, with Europe having very limited energy options, Russia’s FX reserves lying idle, and the US restricting technology exports to China.
On the energy front, he argues that the US decision to release millions of barrels from its strategic petroleum reserves to bring down energy prices is only a temporary fix. This makes rising energy costs inevitable unless massive amounts of green energy can be made available quickly or Russia’s oil and gas supplies are replaced.
“To understand the path of inflation from here, and to understand the path of interest rates, we need to stop pretending that this is a business cycle,” he said. “A big driver of inflation today is basically the return of great power conflict.”
To understand the path of inflation from here, and to understand the path of interest rates, we need to stop pretending that this is a business cycle. A big driver of inflation today is basically the return of great power conflict.
Zoltan Pozsar, Credit Suisse
The solution, according to Pozsar, is government-funded industrial projects aimed at ensuring economic self-sufficiency. These, too, could add to inflationary pressure as governments increase spending at the same time as central banks are trying to rein in prices.
“This basically involves rearming, reshoring, investing in inventories and commodities, and continuing with the energy transition,” he said. “Commodities and capital-intensive projects are not sensitive to interest rates. A commodity super-cycle is coming.”