A so-called “triple shock” of risks is looming over the global economy and threatens to derail the world’s recovery, according to a new report from analysts at HSBC released at the end of June.
“Only a few months ago synchronization was the big theme in the global economy – with all the major regions of the world growing together,” HSBC’s team, which comprises dozens of analysts, wrote to clients on June 29.
“Now, suddenly, the story is divergence, and in particular the divergence between a US economy that is accelerating (helped by hefty fiscal stimulus) and other parts of the world that are slowing,” they said.
“For now it all balances out,” the team added, before making clear that this balance could easily shift in the coming months, and warning that this is when things could go south.
Tightening financial conditions in the USA
As the world’s largest economy, and therefore the biggest single driving force in global growth, what happens in the US is very important for sustained prosperity around the world. That’s why HSBC identifies the possible tightening of financial conditions in the US as the first of it’s triple shock of risks.
Large US corporations have been broadly prepared for the hiking cycle the Federal Reserve has undertaken in the last three years as it begins to try and re-normalize monetary policy after a decade of crisis-era emergency measures. That has allowed them to make allowances for rising rates and other changes that come from the Fed’s rate hikes.
In emerging markets, however, the impact of the Fed’s tightening policy could be more significant.
“For many emerging economies, particularly those running current account deficits, their vulnerability to changing global financial conditions is already being exposed,” HSBC’s team wrote.
“Over the past three months there have been numerous changes to our policy rate forecasts for EM, in some cases even shifting from projections of reductions in policy rates to rate rises, most spectacularly in Argentina and Turkey, but more robust economies have also had to change tack.”
The countries that will be most impacted by further rate hikes from the Fed in the near future — it has said it is prepared to hike twice more in 2018— are, in HSBC’s words those with “external deficits, high USD-denominated corporate debt, high foreign participation in local bond markets and high refinancing needs are inevitably most exposed to any further US tightening.”
Rising oil prices
Long gone are the days of early 2016 when oil prices hit a rock bottom of less to $30 per barrel. Global oil prices are now hovering around $75 per barrel, thanks in large part to a coordinated program of supply controls from the oil-producing cartel OPEC.
If oil prices continue to rise, however, that may not be a good thing, according to HSBC’s analysis, which cites President Donald Trump’s reintroduction of sanctions against Iran as a factor in rising oil prices.
“President Trump’s decision to re-impose sanctions on Iran seems to have played a major role in the roughly USD10/barrel rise in the oil price since mid-March,” the note said. “If oil prices stay in the USD70-75/barrel range, this should be the least problematic of our three shocks for some countries.”
While most countries will be fine, there are a handful that could witness major economic consequences.
This is particularly true of those that have “faced meaningful currency depreciations and are also net importers of oil, the overall impact will ultimately be broader,” HSBC wrote.
“In India the impact of higher oil prices on broader inflation was specifically cited by the central bank when it raised rates in June, a little earlier than many expected.”
The rising spectre of a trade war
Trump’s escalating trade war with the rest of the world is making headlines all over the globe, and has dominated a large proportion of discourse in financial markets in recent weeks, and according to HSBC, presents the biggest risk to growth of all three of its shocks.
“Our final shock – trade wars – has the potential to inflict the most damage on the global economy,” the team wrote.
“The recent announcement of import tariffs on Chinese industrial goods, a raft of retaliatory measures by US allies – particularly Europe – in response to the previously-imposed US tariffs on steel and aluminum and a growing risk of US import tariffs on autos, takes the US trade actions to a new, more worrying stage,” they added.
If the trade war does not escalate further than its current level — which admittedly already encompasses tariffs on hundreds of billions dollars of goods — global growth shouldn’t be hit too hard, HSBC said. Problems will arise, it said if things go further.
“The overall impact on the global economy depends on how many tariffs come to fruition which could, in turn, depend on Senate intervention and/or whether President Trump reverses course or trading partners offer concessions,” HSBC noted. “But ‘protectionist contagion’ is also a risk with both Canada and the EU considering tariffs on third countries themselves.”
The bank concluded, “Even the tariffs already in the pipeline threaten to weaken an already slowing trade cycle but broader and more immediate impacts could come via weaker asset prices, sentiment and, particularly, investment spending given the uncertainties about global supply chains.”
HSBC strikes a mixed tone at the conclusion of its analysis, saying that while these three shocks present a major threat to global growth going forward, things should be “firm by post-crisis standards” in 2018.
“The risks are growing and these shocks will likely weigh on the global economy in the years that follow, not least in 2019 when our forecasts already point to slightly slower growth, even in the US,” it ends.
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