Weekly: Literal and metaphorical smog

Human-generated smog, literal and metaphorical, is characterising the global economic and markets outlook.
Taimur Baig , Radhika Rao20 Sep 2019
  • The market is well-supplied with oil, but spill-over from Saudi drone attacks could be grave
  • Data from China disappointed this week, suggesting more policy easing in the pipeline
  • There remains considerable uncertainty about the direction of US monetary policy
Photo credit: AFP Photo

Haze around Singapore, Middle-East, UK, and US outlook

This week brought major developments that unfortunately muddled the global economic and political outlook. But first, a few observations on climate. From our vantage point in Singapore, an unpleasant haze has enveloped the city state, with smoke from fires in nearby islands causing air pollution to rise sharply. The toxicity of carbon dioxide and carbon monoxide emission attributable to human activities (from burning of fossil fuels to setting forests and fields on fire to create clearing) is well known. Lately, scientists have been establishing vividly the far-reaching implication of such toxicity.

In particular, recent findings on the impact of airborne pollution on children are striking. According to an NBER working paper, early childhood exposure to pollution significantly impacts later life outcomes https://www.nber.org/papers/w19571. Also, a 2015 study on the impact of air pollution on school children in Barcelona shows that sustained exposure to high levels of pollution is associated with a smaller increase in cognitive development over a 12-month period among 7- to 10-year-old children.

Grown-ups suffer widespread consequences as well, ranging from lower productivity of those who work outdoors to a general decline in the quality of life. While debate over climate change continues, tackling air pollution has become a globally accepted imperative, and as China’s experience over the past decade shows, strong action can improve air quality quickly, with major positive outcomes on human health and happiness.

Moving on from one human-generated smog (literal) to another (metaphorical), the drone attacks on Saudi Arabia’s oil facilities last weekend were dramatic and consequential, but it is not at all clear what they will amount to as far as global oil supply, Iran’s antagonism with Saudi Arabia and US, and the state of the civil war raging in Yemen is concerned. In this note, we present some estimates on the impact of a sustained upside to oil price on key Asian economies in our coverage.

Just when it seemed like data from China were stabilising, this week’s releases did not help those looking for a turnaround. The latest batch of data (industrial production, fixed asset investment, retail sales, and auto sales) reinforces our view that growth will probably weaken more this quarter and increase the likelihood of further policy easing before 2019 is over. Leading indicators showed mixed signals. Caixin manufacturing PMI increased to 50.4 in August from 49.9 previous month. But trends on the supply and demand side diverged, with rising output but falling new orders. Notably, new export orders slid deeper into contractionary territory.

Staying on with China, we remain concerned about the outlook for hard currency credit, especially given the widening of spreads in the past month or so. China’s structural slowdown and a decline in profitability have induced financial stresses A coming wall of maturities for distressed credit is likely to stir rollover concerns. 2020 could thus mark High Noon for Chinese defaults, surpassing previous high. Without state support, monetary easing alone is unlikely to narrow Chinese credit spreads broadly. Click here for our detailed note.

So much was going on this week that Brexit matters took somewhat of a backseat, but lack of clarity continues to characterise the outlook. PM Boris Johnson’s visit with European leaders underwhelmed, but the idea of an Irish backstop with support from Northern Ireland’s Democratic Unionists Party made some progress. EU has ratcheted up pressure on PM Johnson to come with a concrete, written plan to break the ongoing deadlock by September 30. The show continues.

Finally, despite a widely anticipated rate cut, there remains considerable uncertainty about the direction of US monetary policy. The FOMC decision was characterised by an unusual degree of dissent, while various idiosyncratic factors caused striking spike in funding costs. The policy rate cut was accompanied by commentary that appeared to reflect only mild concern about the outlook, which left the market dissatisfied. We think that this week’s steps to improve repo operations could be followed by a resumption of asset purchases in the coming months. As for the outlook, short of a major re-escalation in trade war, Chair Powell may find it hard to build the case for another cut this year. Read our note here.

To read the full report, click here to Download the PDF.

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Radhika Rao

Economist – India, Thailand & Eurozone

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