The FINANCIAL — A combination of addictive monetary stimulus from the US Federal Reserve and a Chinese economy seemingly able to expand at will led to substantial asset price gains in anticipation of a sustained global economic recovery, according to HSBC Group.
Yet many parts of the global economy are still in intensive care, the Fed is threatening to taper quantitative easing and Beijing is now much more focused on the quality than the quantity of growth. The Federal Reserve’s plans to taper QE before halting it in 2014 will be fulfilled only if the US economy offers a combination of lower unemployment, faster growth and stable inflation, according to HSBC Group.
The Fed’s own forecasts suggest this holy trinity may now be within reach, but our forecasts suggest otherwise. It may be that tapering is delayed and perhaps the Fed will not be able to withdraw easily from its unconventional monetary creation: like other policymakers, it has demonstrated a persistent ‘optimism bias’ in recent years.
Monetary uncertainty in the US is bad enough but, thanks to a slowing Chinese economy, the overall picture is even worse. Before the global financial crisis, China’s rapid economic growth was supported by export gains of 20 per cent to 30 per cent a year. Those gains are now a distant memory.
At first, Beijing responded with copious pump-priming measures but it has become increasingly clear that these offered only modest benefits: the marginal return on capital has declined while rapid credit growth has become a source of mounting concern, according to HSBC Group.
With Beijing’s new leadership now much more focused on the quality of growth, there is more focus on supply side reforms than demand-side pump-priming. But while this new focus should prepare the foundations for a period of solid economic expansion over the medium term, it has a short-term cost: supply side reforms are disruptive and thus likely to be associated with lower near-term growth. HSBC Group now expects Chinese GDP to increase by just 7.4 per cent this year and next.
Many emerging nations became unusually dependent on the combination of cheap American money and strong Chinese growth – so much so that domestic reforms were often delayed. Balance of payments positions deteriorated and, in some cases, the split between growth and inflation worsened, according to HSBC Group.
For the world economy, HSBC Group now expects growth of just 2 per cent this year and a modest 2.6 per cent in 2014. HSBC Group now expects 2.4 per cent growth in Brazil this year and 3 per cent in 2014, while its projection for India has been cut to 5.1 per cent, followed by 6.5 per cent.
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