In the podcast below, I discuss some of the top news stories from the last few days including:
- World GDP growth forecast are being revised up for 2021. What could it mean for stock markets?
- China-US tensions are continuing to be frosty under President Biden.
- The Turkish Lira has fallen by 14% after the sacking of Turkey’s central bank chief. What does this show?
- Will the vaccine result in superior performance for the airlines in the next year?
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Fitch Ratings-London-17 March 2021: Global growth prospects are improving as fiscal support is stepped up sharply, economies adapt to social distancing and vaccination rollout gathers momentum, says Fitch Ratings in its latest Global Economic Outlook (GEO) released today.
We now expect global GDP to expand by 6.1% this year, revised up from 5.3% in our December 2020 GEO. GDP outturns were stronger than expected in 4Q20 – particularly in Europe and emerging markets (EM) – and world GDP declined by 3.4% in 2020 as a whole, compared to our previous forecast of a 3.7% decline. World GDP is now expected to be 2.5% higher in 2021 than in the pre-pandemic year of 2019.
“The pandemic is not over, but it is starting to look like we have entered the final phase of the economic crisis” said Brian Coulton, Chief Economist.
Fitch now forecasts US GDP growth at 6.2% in 2021 (revised up from 4.5%), China at 8.4% (from 8.0%) and the eurozone at 4.7% (unchanged). Growth in EM excluding China is forecast at 6.0% (up from 5.0%).
The main driver of our global forecast revision is the much larger-than-expected fiscal stimulus package recently passed in the US. The USD1.9 trillion price tag represents more than 2.5% of global GDP. Fiscal support had a powerful cushioning impact in 2020.
Further fiscal easing has also been announced in the UK, Italy, Japan, Germany and India, while the EU’s Next Generation EU recovery fund (NGEU) should provide a sizeable boost to eurozone growth in 2022. China is the only major economy that is starting to normalise macroeconomic policy settings, where the fiscal deficit is being scaled back and credit growth is slowing as the economic recovery matures.
Unemployment forecasts for the major economies have been cut but job market recoveries continue to lag. Leisure and transport (L&T) industries are labour-intensive and are still afflicted by social distancing. US employment is still 6.1% below pre-pandemic levels (compared to GDP which is 2.4% lower), while L&T accounts for more than one-third of furloughed workers in the EU.
Vaccine rollout has gained momentum, particularly in the UK and US. The eurozone has had a slower start but the programme should accelerate in 2Q21. It is still reasonable to assume that the health crisis will ease by mid-year, allowing social contact to start to recover. But immunisation delays or problems remain the key downside risk to the forecast.
Improving growth prospects, commodity price increases, and short-term supply constraints in some manufacturing sectors have renewed focus on inflation risks. US bond yields are up by 60bp this year.
The rate of headline US inflation could rise above 3% yoy in April but underlying inflation will increase much more gradually given labour market slack. The Fed is focused on unemployment, more tolerant of higher inflation and will remain patient. Core inflation will stay well below target in the eurozone and the ECB will continue to purchase assets through 2022.
Senior officials from the United States and China are meeting in person on Thursday for the first time since US President Joe Biden took office. But progress toward solving major economic sources of strain — including disputes over tech and trade — is unlikely.
US Secretary of State Tony Blinken and National Security Adviser Jake Sullivan will head into the two-day meeting with Chinese counterparts Wang Yi and Yang Jiechi in Anchorage, Alaska, carrying a lot of baggage.
Former President Donald Trump spent much of his term escalating tensions between the world’s two largest economies. He sparked a bitter trade war that the two sides have yet to completely unravel. And he punished some of China’s most prominent tech companies with crippling sanctions, largely over concerns that they pose a threat to US national security.
For now, it’s more likely that other political disputes will dominate the conversation in Anchorage, according to William Reinsch, a trade expert at the Center for Strategic and International Studies who served for 15 years as president of the National Foreign Trade Council.
The two countries have clashed recently over a number of issues, including Beijing’s crackdown on Hong Kong, a former British territory, and allegations of widespread human rights abuses in the western Chinese region of Xinjiang.
China is hoping the Alaska meeting will decouple politics from trade, and eventually lead to a rollback of US tariffs as well as its commitments to buy more US goods. America isn’t ready to make concessions.
“I don’t think it has sunk in yet the limited flexibility the president has in light of the sharp shift in US public opinion against China and strong demands in Congress from both parties for a hard line on China,” Reinsch told CNN Business. “So trade and technology remain issues, but the other issues, particularly human rights, right now are higher on the list.
“Washington may have already ensured that geopolitics will be the focus at the meeting. Earlier this week, the US government sanctioned two dozen Chinese and Hong Kong officials after Beijing further restricted the ability of people in the city to freely elect their leaders.
Blinken also criticized China in a meeting with his counterparts in Tokyo on Tuesday, where he accused Beijing of threatening regional stability.Neither side has indicated that they see Anchorage as a place for meaningful change in their relationship, either.
The Biden administration has stressed that the summit is “a one-off meeting” that is “very much intended as an initial discussion.” And Beijing has said it does not have “high expectations” for the event. “Downplaying hopes for the meeting reflects domestic politics — on the US side, Biden wants to avoid appearing to be too soft with Beijing — but also the broader state of the relationship,” wrote Eurasia Group analysts in a research note last week.
“Neither the US nor China is willing to make concessions that the other believes is necessary to meaningfully relax tensions.”Human rights issues, meanwhile, may actually exacerbate some of the major economic pain points down the road.
The United States already cited concerns about Xinjiang in decisions last year to curtail imports fromthat region — an attempt to stop goods made with forced labor from entering the US market.
(Beijing has long defended its crackdown in Xinjiang as necessary to tackle extremism and terrorism. And contrary to accusations that it forces people there into labor camps, it claims that its facilities are voluntary “training centers” where people learn vocational skills, Chinese language and laws.)
“The Biden administration will link human rights issues to exports [and] sales of technology,” said Alex Capri, a research fellow at Hinrich Foundation and a visiting senior fellow at National University of Singapore. “Expect to see more export controls and sanctions against Chinese interests.
“Capri and others also say the United States will continue to do what it can to disentangle parts of its economy from China. He pointed to recent efforts from Biden to review US supply chains — a move widely seen as a bid to ensure that critical products and supplies are not beholden to Beijing.
“Biden’s ‘Build Back Better’ platform is actually a more coherent version of [Make America Great Again], when it comes to reshoring and ring-fencing strategic industries,” Capri told CNN Business, pointing to potential efforts to remove China from pharmaceutical, semiconductor, battery, rare earth and artificial intelligence supply chains as “just the beginning.”
Turkey’s currency has tumbled as much as 14% after President Recep Tayyip Erdogan sacked the country’s central bank governor over the weekend.
Naci Agbal had been credited as a key force in pulling the lira back from historic lows.
Mr Erdogan replaced him in a surprise move on Saturday, the third central bank governor exit in under two years.
Mr Agbal, appointed in November, had been raising interest rates to fight an inflation rate running above 15%.
The removal has shocked both local and foreign investors who had praised Turkey’s central bank’s recent monetary policy.
The lira was at one point the best performing emerging-market currency of 2021, having recovered almost a fifth from a low against the US dollar.
Last week, the Turkish currency rose strongly after Mr Agbal increased interest rates by 2 percentage points, double what economists expected.
Investors have been calling for tighter monetary policy in Turkey to tame its high inflation rate, as prices rise rapidly in the country.
There are now concerns that Mr Erdogan’s decision to install Sahap Kavcioglu in the role could erode the gains made during Mr Agbal’s short tenure.
Mr Kavcioglu is a little-known professor of banking and a former lawmaker from the ruling Justice and Development party. He is known to oppose high interest rates as a way of fighting inflation.
Turkey’s interest rate stands at 19% which has attracted foreign investors to park their cash in the currency.
In a statement on Sunday, the central bank said it “will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation”.
Jeffrey Halley, a senior market analyst at currency exchange firm OANDA argues that President Erdogan has his own brand of economics – Erdonomics.
“The base premise of Erdonomics is that higher interest rates cause higher inflation, a theory that flies in the face of conventional economic theory everywhere,” Mr Haley told the BBC.
Higher interest rates lead to higher costs of borrowing which deters consumers from over-spending, while encouraging people to save. However, the downside is often slower economic growth.
“Mr Agbal was widely respected for his attempts to stabilise inflation.”
Alan Joyce says many airlines and governments are likely to make it an official ‘condition of entry’
Hoping to someday travel overseas again? You’re going to have to roll up your sleeves. Qantas boss Alan Joyce has confirmed that international travel will likely only be accessible to people who have had the jab, suggesting that “vaccination passports” will soon become the new normal.
In an interview with the BBC on March 21, Joyce said that “governments are going to insist” that travellers provide proof of vaccination before being allowed to travel. Joyce added that he was aware of government-level talks about vaccination status becoming a globally recognised “condition of entry”.
However, he also indicated that even if proof of vaccination wasn’t adopted as a legal requirement, many airlines, including his, could take matters into their own hands and make vaccination part of the terms and conditions of purchasing a flight. “We have a duty of care to our passengers and to our crew, to say that everybody in that aircraft needs to be safe,” he said.
Joyce said research conducted by Qantas had revealed that more than 90 per cent of people surveyed said they would be prepared to accept vaccination as a condition of travel.
However, Joyce also said that Australia had set a very high bar for suppressing the spread of the virus, which might turn public opinion about reopening international borders. “Once we open up our international borders, we’re going to have virus circulating, and that’s going to be a big change for a lot of Australia, to find that acceptable,” he said. “We need to understand they can’t have zero risk with this virus.”
Of all the industries adversely affected by the threat of the virus, the travel sector has been one of the hardest hit. Worldwide, air travel fell by an average of 75.6 per cent in 2020, with some months recording reductions in passengers of more than 90 per cent. It’s estimated that the airline industry has lost more than $2.3 trillion in revenue since international travel was largely suspended last March. Reviving the travel and tourism economy has become a major focus for many recovery plans all over the world, and the rollout of vaccination programs is closely tied to these efforts.
While airlines and governments may insist on proof of vaccination, the WHO has said that it doesn’t agree with “the fact that a vaccinations passport should be a condition of travel,” adding that regardless of what the private sector introduces, a government-level mandate would likely be needed to make such conditions binding.
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