HomeOtherCan the world get rid of "stagflation-like" in 2023?

Can the world get rid of “stagflation-like” in 2023?

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In 2022, global inflation will go up, the economy will go down, and the market will go down. Affected by the spillover of geopolitical conflicts, commodities such as energy and raw materials rose, and the unprecedented domestic demand in Europe and the United States was stimulated. Inflation in major economies in the world, except China, continued to rise; the Fed and other major overseas central banks turned aggressive to tightening policies, and overseas economies began to slow down. Stock markets in various countries The bond market, commodity market all fell, and the foreign exchange market fluctuated violently. The yen fell below 150 against the dollar in the intraday session, hitting a new low since 1990; the exchange rates of the pound and the euro against the dollar were close to parity.

Overseas markets experienced a stagflation-like market, with stocks and bonds killing both. The Federal Reserve and other major overseas central banks have turned to radical interest rate hikes successively, leading to a tightening of the financial environment and pressure on financial assets such as the stock market and the bond market; due to the Fed’s aggressive rate hikes and the strengthening of the U.S. dollar, it has a strong spillover effect on the world, and non-U.S. currencies have fluctuated violently In order to curb inflation and stabilize exchange rates, some economies passively turned to aggressive interest rate hikes, which will inevitably produce a demand-deflation effect.

Can the world get rid of “stagflation-like”?

In 2023, the possibility of global continuation of similar stagflation is high, mainly because the prices of global energy, raw materials and other commodities continue to remain high. To maintain profitability, companies must either expand demand beyond expectations, or they can only raise prices, but not all companies will increase prices. It needs to look at the market competitiveness of the goods and services provided by the enterprise and the price elasticity of demand.

The outlook for the global economy is softening. Recent data show that the global sales of electronic products and cartons have slowed down, the shipping index has declined, the foreign trade of China and South Korea has slowed down, the U.S. debt curve has seriously inverted, the manufacturing PMI index of major economies has continued to slow down, and the U.S. real estate has continued to decline. The outlook for the global economy is slowing. High inflation, tightening financial environment, geopolitical conflicts and epidemic disruption are expected to be dragging factors for global demand this year. The United States is facing high inflation, the decline of stimulus policies, the Fed’s aggressive tightening lagging behind, and the weakening of the wealth effect. The economic outlook has slowed down. The European Central Bank is aggressively raising interest rates and overseas demand is slowing down. The European economy is facing a greater risk of a hard landing; the economic recovery of emerging economies is facing inflationary pressures, tightening financial conditions, slowing overseas demand pressures, and epidemic disturbances. At the same time, Europe and the United States maintain high interest rates , It also restricts domestic demand expansion policies in some emerging economies.

Compared with the previous low inflation, this round of high inflation is mainly caused by the imbalance of supply and demand structure. There are demand-driven factors. In response to the impact of the epidemic, countries have introduced large-scale demand stimulus policies. The combination of policies stimulated a strong rebound in short-term demand; however, inflation was more impacted by the supply side. Due to the disturbance of the epidemic and geopolitical conflicts, global logistics and industrial chain supply chains were interrupted, global supply bottlenecks became prominent, and commodity prices such as energy and raw materials rose sharply. At one time, shipping costs soared, a box was hard to find, and natural gas prices soared; labor and real estate market supply and demand distortions pushed wages and rental prices higher.

Since 2022, global inflation has continued to rise and have had a wide-ranging impact. Residents’ savings have been consumed rapidly, low- and middle-income groups’ expenditure budgets have shrunk, and consumer confidence has been sluggish. Afterwards, the policy focus of the Federal Reserve and other central banks has shifted to “inflation control”. In July 2022, the European Central Bank officially turned to aggressive interest rate hikes to control inflation. Due to the tightening of the financial environment, the recovery of the supply chain industry chain, the decline in prices of energy and other commodities, and the slowdown in demand, inflation in most economies in the world has shown a trend of peaking and falling. Considering the high base and the continued slowdown in demand, it is expected that the Inflation is expected to moderate. However, it is still difficult to completely eliminate inflationary pressure in 2023, mainly due to the two headwinds of high commodity prices such as energy and sticky service prices.

On the one hand, it is not realistic for commodity prices such as energy and raw materials to return to normal year levels. The main reason is that the global epidemic’s restrictions on people’s travel and other economic activities are expected to be further weakened, driving energy spending; geopolitical conflicts, protectionism, trade policies, extreme weather, etc. will still cause disturbances to the supply of energy and raw materials; prices of energy, food and other commodities will remain high , global inflation will continue to face pressure; inflation in Europe and the United States is closely related to energy, and Europe continues to be plagued by energy and food crises; inflation in some emerging economies is not only affected by commodity prices such as energy and raw materials, but the depreciation of their currencies may also increase the risk of imported inflation.

On the other hand, service prices are sticky. Affected by the unblocking of overseas epidemic prevention, the epidemic’s restrictions on global economic activities have weakened, and residents’ consumption has gradually shifted from goods to services. Coupled with structural problems in the labor market, wages in the service industry have increased relatively rapidly, driving up service prices; as of November 2022, the United States, the euro zone The service price index increased by 6.8% (excluding energy) and 4.2% year-on-year respectively, both hitting highs in more than 30 years; and service prices are relatively sticky due to housing contracts and rigid salary increases in the service industry.

Overall tight global financial environment

Central banks in Europe and the United States are nearing the end of raising interest rates, but they are not turning around, and the financial environment continues to be tight. At present, it is difficult for major European and American economies to control inflation in 2023. Inflation is generally higher than the 2.0% target. When inflation is firmly under control (inflation is convincingly approaching 2.0%), the central bank is expected to continue to push up interest rates And maintain restrictive levels for a longer period of time. It is foreseeable that European and American central banks will maintain high interest rates for most of 2023; as of now, the Fed’s balance sheet is 8.6 trillion US dollars, which is 1.9 times the peak of the last round of QE balance sheet, and the progress of the Fed’s balance sheet reduction in 2023 is expected to accelerate ( With reference to the progress of the previous round, it is estimated that the balance sheet will shrink by about 1.4 trillion U.S. dollars this year), that is, the Fed will continue to withdraw water from the market; European and American policies maintain high interest rates, and the expansion policy space of these economies is still restrained. On the whole, global high inflation is still difficult to subdue in 2023, interest rates remain high, and the financial environment is tight.

Bank of Japan to follow Europe and the United States to raise interest rates? After the European Central Bank turned to aggressive interest rate hikes in July 2022, the Bank of Japan tentatively raised the upper limit of the Japanese 10-year government bond yield by 25BP to 0.5% in December, which immediately triggered turmoil in Japanese stocks, bonds, and foreign exchange, and spilled over to European and American bond markets . The main reason for the market panic is that investors are worried about the policy shift of the Bank of Japan, the depletion of cheap yen, the sharp reduction of cross-border arbitrage transactions, the sell-off of European and American bond markets, pushing up global interest rates, and further tightening of the financial environment; The shift is superimposed on the global economic slowdown, and Japan’s economic outlook is facing deterioration; the Bank of Japan’s policy shift may cause the Japanese bond market to repeat the “British Debt Dilemma”. In particular, the Japanese government’s debt ratio is the highest in the world. The collapse of the central bank’s reputation will also have a serious impact on the stock market. Although there is still upward pressure on inflation in Japan, it is moderate compared with Europe and the United States. Overall, from the perspective of maintaining Japan’s financial stability and lowering long-term interest rates to support economic recovery, the Bank of Japan is expected to continue the ultra-loose monetary policy environment.

Global Market Outlook

In 2022, the financial environment will tighten, the economic outlook will slow down, geopolitical conflicts, and short-term disturbances caused by the epidemic led to a general decline in global financial assets last year. The stock market, bond market, and commodity market fell simultaneously, reflecting the tightening trend of the global financial environment. In 2023, the policies of major overseas central banks such as the Federal Reserve are coming to an end. However, due to the resilience of inflation, the policies of major overseas central banks still do not have the conditions for a substantial shift. For most of next year, the liquidity of the global market will continue to shrink, the economic slowdown will be more obvious, and the outlook for corporate profits will be negative. The environment facing the global market is not friendly due to the short-term environment and the uncertainty of geopolitical conflicts; investors’ strategies are more defensive and they are waiting for the political and economic situation to become clearer in the second half of the year.

It is worth mentioning that since 2008, two rounds of unconventional ultra-loose policies in Europe and the United States have caused the global debt snowball to grow bigger and bigger. From a macro perspective, the global economy is slowing down, corporate profitability is declining, private sector credit qualifications are declining, and the tightening of the financial environment has led to a rapid rise in borrowing costs. In this case, the global high debt stock will increase the pressure on structural refinancing. For example: the economic slowdown in some peripheral countries in Europe, the high debt pressure, and the rapid rise of interest rates may lead to a deterioration of the debt refinancing environment; some emerging economies with fragile fundamentals are also facing the pressure of debt risk exposure of a few economies. For some economies, a smooth transition in 2023 still requires greater efforts.

US stocks face headwinds. Although U.S. bond yields have fallen recently and investor sentiment in U.S. stocks has fallen to a trough, this may be a signal that U.S. stocks have bottomed out from historical experience. However, judging from the current situation, the environment facing US stocks is not easy. The financial environment is tight, demand is slowing down, and corporate profit prospects are weakening. ; At the same time, geopolitical conflicts and the European energy crisis have exacerbated the uncertainty of US inflation, economic and policy prospects. Under normal circumstances, the pressure on U.S. stocks in the first half of 2023 will be relatively high. In the second half of the year, as inflation falls and real estate continues to decline, the market’s expectations of economic recession and interest rate cuts will increase, which may help improve the financial environment.

U.S. debt faces a “stagflation-like” environment. Inflation continues to remain high, the financial environment is tight, and the economic outlook is slowing down; the article predicts that the Fed will raise interest rates twice in the first quarter, with a peak interest rate near 5.0%, and at least maintain high interest rates until the end of the third quarter; The pressure on liquidity in the U.S. bond market has increased due to the supply and supply of bonds. The high interest rate and high inflation environment may weaken the attractiveness of U.S. bond investment. However, considering that inflation has fallen from a high level, the Fed’s interest rate hike is ending, and the prospect of economic recession may attract some funds to bet on the Fed’s suspension of QT and interest rate cuts in the second half of next year, and the yield of U.S. bonds has fallen.

The outlook for the dollar is weaker, but the downside is limited. At the end of the Fed’s interest rate hike, the European Central Bank’s aggressive rate hike, and the slowdown in the U.S. economic outlook have put pressure on the U.S. dollar’s ​​outlook; The greenback remains supported amid uncertainty about the outlook that has spurred some safe-haven demand for the greenback.

China Economic Outlook

Looking forward to 2023, although the Chinese economy is facing the challenges of slowing external demand and expanding domestic demand, China continues to optimize epidemic prevention measures, prices are expected to remain moderate, and fiscal, monetary and other policies are coordinated and targeted. The Chinese economy is expected to become one of the few bright spots in the world , continue to be the main engine driving the recovery of the global economy, and the trend of the Chinese market is optimistic.

Economy – In 2022, China’s economy will be mainly dragged down by the epidemic, sluggish real estate, and domestic demand will be suppressed. However, last year, the economic market was basically stable, the economy did not fall into recession, prices remained moderate, the supply chain industry chain resumed smooth, and the job market was basically stable. The income of residents keeps growing; the economic impetus comes from the better-than-expected performance of foreign trade, and the timely introduction of a package of policy measures for bailout, supply and price stabilization, and steady growth in China. Investment in infrastructure and manufacturing plays a key role in promoting internal circulation and stabilizing the economy. In 2023, the country will continue to optimize housing measures, the epidemic will reduce economic restrictions, and economic activities will accelerate recovery. At the same time, the effects of a package of domestic real economy support, investment stabilization, property market stabilization, and consumption promotion will lag behind, and domestic domestic demand momentum will be obvious The recovery and the resilience of foreign trade will help offset the slowdown in demand from economies such as Europe and the United States.

Policies—Because China and Europe and the United States are in different economic cycles, domestic prices are generally moderate and controllable, the financial system is operating steadily, and domestic policies remain independent. From the perspective of the internal and external environment, the focus of domestic policy continues to be stable growth, and the strength of the domestic prudent monetary policy to support the real economy is expected to further increase. Based on the domestic economic recovery curve, the economic pressure in the first half of this year is relatively high, and it is expected that there will be a decline around the first quarter. Standards, interest rate cuts, optimize the debt structure of financial institutions, enhance credit capabilities, and guide financial institutions to reduce financing costs for the real economy. However, the recovery of domestic demand and the high inflation environment overseas have increased the prevention of potential inflationary pressures this year; as domestic policies need to take into account both internal and external balance, the monetary policy will continue to be stable, continue the combination of aggregate and structural tools, maintain a moderate growth in currency, and guide financial institutions Optimize the credit structure and increase support for weak links in the real economy, manufacturing, green development, and key infrastructure areas.

Financial market – The outlook for the domestic stock market in 2023 will turn optimistic. Positive factors in the stock market are gathering, the impact of the domestic epidemic is weakening, policy support for steady growth, the economy is recovering steadily, and corporate profit prospects are warming up; the macro policy environment is friendly, domestic fiscal and monetary policies are positive, and market liquidity is expected to remain reasonable and abundant; after a long period of Adjustment, domestic stock market valuation is low. The domestic financial industry is steadily advancing its opening up to the outside world. In the context of global uncertainty, the direction of the domestic economy and policies has been determined.

Exchange rate – The recent strengthening of the RMB against the US dollar is mainly due to the market’s more optimistic prospects for domestic economic recovery, the recent weakening of the US dollar, and the recent pick-up in market sentiment to attract capital inflows. The recent weakening of the U.S. dollar is mainly due to the end of the Fed’s interest rate hike, superimposed market concerns about the prospect of a U.S. economic recession, and the European Central Bank’s pursuit of interest rate hikes, etc., dragging down the U.S. dollar trend. In 2023, the RMB exchange rate will face a more friendly environment. From the perspective of the internal and external environment of the RMB, the RMB is expected to continue to operate near a reasonable and balanced level. This is mainly due to the continuous optimization of epidemic prevention measures in China, and the weakening of the impact of the epidemic on the economy. Coupled with a package of policy support, domestic The demand recovery trend is confirmed; China’s foreign trade is resilient, the attractiveness of RMB assets continues to increase, and the balance of payments is expected to maintain a basic balance; the RMB exchange rate is sufficiently flexible; and the end of the Fed’s interest rate hike, the US economy is slowing down, and Europe’s catch-up interest rate hikes will constrain the US dollar Stronger.

However, geopolitical conflicts, global economic slowdown, economic differentiation among countries, etc., the global economy and policy prospects still have great uncertainties, and the global foreign exchange market is still volatile.

(The author is a macro researcher at the Financial Market Department of China Everbright Bank. This article only represents the author’s point of view. Responsible editor email: Tao.feng@ftchinese.com)

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