Charting Global Cross-Currents

Asia’s economic backdrop remains more positive than in much of the rest of the world, providing an important tailwind for risk assets in the region. China and Thailand will likely be among the few major economies to witness accelerating growth this year, with India’s also expected to be solid, and inflationary pressures in most Asian countries remain relatively benign. Moreover, most of Asia’s regional central banks have concluded or are close to concluding their (more modest) monetary policy hiking cycles, and we believe some central banks might ease before the end of the year, as China has begun to do. We expect Asia’s GDP growth to accelerate year-over-year in 2023 as China’s growth comes back, even amid an uneven recovery. This contrasts with recessionary concerns in the US and other developed economies.

The question for many market participants is still whether or when the US will enter a recession, and how severe a slowdown or contraction might be. Inflation continues to slow and labor market data remains strong, if cooler than the white-hot levels observed in January and February. And despite its June pause, the Fed hasn’t taken the possibility of further rate hikes off the table for this year. Tightening lending standards as a result of the regional banking crisis combined with monetary policy lags are enough to augur for a recession in the second half of the year, and concerns regarding the ultimate “plateau” level of inflation (and its potential stickiness) and uncertainty about Fed moves continue to weigh on markets.

Europe had the good fortune of a warmer-than-expected winter this year, but the issue of energy independence isn’t going away as the Ukraine War wears on and tensions with Russia remain high. Moreover, while the EU at first appeared to have dodged a recession, revised figures show a contraction in the first quarter, with declines in Germany and Ireland wiping out gains elsewhere. While the high inflation that dampened consumer spending has dropped sharply in recent months, the European Central Bank has signaled that its hiking cycle may not be over. As in the US, concerns about inflation and rate hikes will likely weigh on European markets in the second half.

China’s uneven recovery looks set to pick up again and has many global beneficiaries, with emerging markets first in line. While developed market economies face uncertainties about tightening monetary policy and its impact on economic activity and financial conditions (as evidenced by the collapse of several US regional banks and Credit Suisse), emerging markets are poised for a rise in economic growth. This could spur the widest growth premium between emerging and developed markets in a decade. The bulk of EM trade is with other emerging markets, and while many local Asian economies – notably India – will be the primary beneficiaries of China’s growth, a number of economies and industrial sectors across the Middle East, Africa, and Latin America will also benefit from increased trade with China.