By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Managing global divergence appears to be the IMF’s biggest challenge, if not worry, going by the release of the World Economic Outlook aptly subtitled, “Managing Divergent Recoveries“. To be sure, the aggregated growth assessment is upbeat. Global GDP contraction for 2020 (at 3.3%) was not as bad as the 4.4% drop expected earlier.
Crucially, 2021 outlook has been raised to 6.0% growth (up 0.8%-pts from Oct WEO) and 2022 revised up +0.2%-pts at 4.4%. But the a grim reality is that this masks widening divergence in global recovery as highlighted by a; 1.2%-pts upgrade to 2021 GDP for Advanced Economies to 5.1% which is in sharp contrast to a 0.6%-pts downgrade to 4.3% for low-income economies.
But divergences run deeper and wider. Even within developed economies, the +3.3%-pts upgrade to 6.4% for 2021 US growth is starkly at odds with EZ’s 0.8%-pt downgrade to 4.4%.
In Asia, this divergence is glaring in China’s 2021 GDP upgrade of 0.2%-pts to 8.4% but a 1.3%-pt cut to 4.9% for ASEAN-5 GDP; the latter reflecting struggles to get vaccinations up to speed.
The divergences that the IMF rightly frets pertain to inequalities accentuated by affluence, to cushion/withstand pandemic pain, and access (to vaccines, healthcare, cheap funding, etc).
Arguably, the greatest divergence of all may be that between markets and the real economy; the former surging to new records while the latter struggles below pre-Covid levels.
Ahead of FOMC Minutes though, markets are poised for a downplay of divergence; between long-end UST yields (getting away/too far ahead) and the Fed’s “lower for longer” assurance within its new flexible average inflation targeting framework that allows for “running hot”.
UST yields have pulled back, with 10Y sliding below 1.7% to 1.66%. Corresponding USD slip has allowing EUR (AUD) over mid-1.18 (mid-0.76) and USD/SGD, USD/JPY dips below 1.34, 110.
The bigger picture for FX markets, getting past FOMC Minutes, may be whether USD and UST yield divergence, accentuated by US (and rest of the world) recovery divergences, will endure.
RBI’s “Forced” Hold
Bottom-line: The RBI is expected to be be on hold today. But this is a forced, rather than desired hold; in which a plethora of policy challenges continue to confront the RBI. This is because the RBI’s growth-stability dilemma; between the desire to ease and the necessity to refrain from, continue to linger as respite from inflation proves shallow.
First on growth, a worrying resurgence of COVID-19 to record levels, resulting in renewed restrictions, which threatens to dim the prospects of unfettered rebound in 2021. What’s even more worrying is that this interim setback in India’s growth recovery could exacerbate the unevenness of the recovery.
That being the case, the RBI would have desired the option to ease policy; or at least have more unconstrained options on the table.
However, with the policy rate already at 4.00%, and inflation back up above 5%, negative real rates compel the RBI to be more restrained.
Especially in the context of; i) rapid rise/volatility in UST yields alongside; ii) loftier oil prices, suggesting that the confluence of deteriorating C/A position and eroding real yields could make for potentially destabilising capital flows.
As such, the RBI will be very mindful, almost forced, not to cut rates excessively; lest it inadvertently leads to unleashing wider macro-stability risks.
Essentially an uncomfortable hold compelled by the policy dilemma. But that said, bond market and liquidity measures as required remain on the table as the RBI straddles rupee/macro stability and accommodation.
Source: Mizuho Bank Ltd