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A staff member assembles a natural gas pipeline for a vehicle at the new energy factory of Zhengzhou Yutong Bus Co in central China’s Henan province on March 8. The economic releases capturing China activity in January and February showed a pickup in the manufacturing and services segments of the economy as well as an increase in retail sales. Photo: Xinhua
Opinion
Macroscope
by Kerry Craig
Macroscope
by Kerry Craig

Amid market turmoil, the global economy is not doing too badly

  • Economists have raised their expectations for first-quarter growth as data points to the resilience of the global economy and even a building of momentum
  • However, the outlook for growth is complicated given that central banks must now balance controlling inflation, the prospect of slowing growth and financial stability risks
Kerry Craig
Kerry Craig
Why you can trust SCMP
The shocks that have rippled across financial markets in the past few weeks have commanded almost the full attention of investors and market commentators, and rightly so. As the full impact of a year of successive and larger-than-normal interest rate increases from central banks establish themselves, the rates outlook will continue to dominate the financial market landscape and news headlines.

But many other things have happened in the background that would have normally garnered attention. Below are some trends that investors may have missed in last week’s deluge of headlines.

The first three months of the year are shaping up to be better for the economy but worse for markets.

Economists have actually raised their expectations for first-quarter economic growth. Much of the economic data received in the last few weeks has pointed squarely towards the resilience of the global economy and even a building of economic momentum.

This is in stark contrast to the stress that is building in global financial conditions, with growing talk of recession and parallels being drawn to the 2008 global financial crisis. According to Factset, the consensus view by economists for first-quarter growth for the United States, euro zone, Canada, China and Japan all rose when compared to January estimates.

An economy that is larger than three months ago is good news, especially given where things may be heading. Better growth in the first quarter creates some breathing room for those economies facing pressures from tighter credit conditions and a looming slowdown. Less good is the news is that central bankers have spent the last 12 months raising interest rates as they attempt to slow the economy to bring inflation to heel.

People walking in the main shopping area in Shanghai on March 14. Photo: Reuters
The economic releases capturing China activity in January and February showed a pickup in both the manufacturing and services segments of the economy and an increase in retail sales as consumption rebounds.
The consumption-driven boost to the economy was widely expected given the elevated levels of pent-up demand. With recovery under way, the question turns to how policymakers manage the growth transition in the rest of the economy to achieve a sustainable rate of expansion.

Corporate investment will be a key factor. The fixed-asset investment data was supportive, given that manufacturing and infrastructure investment are increasing year on year, while the pace of decline in real-estate investment has moderated.

The cut to banks’ reserve requirement ratio – the minimum amount they have to set aside for deposits – by the People’s Bank of China is a step towards supporting investment through the provision of credit and in lifting business confidence.

Given Asia’s importance to the global goods cycle, the region’s trade in goods is often cited as a barometer for the health of the global industry.

The export data is in contrast to the general improvement in business surveys, such as the purchasing managers’ index for manufacturing over January and February. Orders for exports from Taiwan continued to fall in February, even though the year-on-year decline was smaller than in January, while the trade data for South Korea for the first 20 days of the month was notably weaker. This suggests South Korea’s trade activity is slowing into the end of the quarter.

The mixed picture on trade for South Korea and Taiwan, and the potential headwinds for growth if demand from developed markets softens, means that domestic demand will be key to economic activity.

Taiwan exports to India keep rising as rest of world orders less

In recent months, some indicators of the health of the US housing market have improved.

Existing home sales jumped by 14.5 per cent month on month in February, somewhat congruous with the impact that higher mortgage rates should be having on the housing market and after the broader slowing last year.

This is not expected to persist, however, and is likely to relate to a softening in mortgage rates late last year which has since reversed. The recent stress in financial markets could translate to a tightening in credit availability, which would weigh on the housing market.

The official wrap-up on the first three months will not be known for a few weeks yet. Although the broad takeaway is that the economic momentum running into 2023 was stronger than anticipated, the outlook for growth is complicated given that central banks must now balance controlling inflation, the slowing growth outlook and additional pressure around financial stability risks.

Kerry Craig is a global market strategist at JP Morgan Asset Management

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