Sunday, January 16

China’s stagflation risk rises as growth slows: eco week is coming


China’s inflation risks are mounting as new Covid-19 outbreaks are clouding prospects for economic growth, turning the attention back to policy makers as top Communist Party leaders gather for a crucial political meeting this week.

Sunday’s trade data will provide clues as to the strength of global demand and whether it can continue to underpin the recovery as domestic drivers weaken. Exports probably grew at a double-digit rate in October, albeit at a slightly slower rate than in September, due to a higher comparison base than last year. Import growth likely accelerated due to higher prices and seasonal demand.

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This is followed by inflation data on Wednesday, which will show another rise in factory prices to a new 26-year high and a rebound in costs for consumers. More companies are starting to pass on higher raw material costs to customers, while vegetable prices have recently skyrocketed due to bad weather.

The data comes in the context of a high-profile meeting of the Communist Party’s Central Decision-Making Committee from Monday to Thursday, in which President Xi Jinping could lay the groundwork for extending his term as leader. Although no economic plans are expected from the plenary sessions, analysts will be on the lookout for any signs of future policy.

China’s economy has slowed dramatically in recent months as efforts to slow down the real estate market hit industries ranging from construction to raw materials. On top of that, a power shortage has forced factories to cut production, while strict measures to curb virus outbreaks have curbed spending. Prime Minister Li Keqiang said last week that the economy was facing “further downward pressure” and that policies should be adjusted to provide specific support to areas in need.

Credit data to be released this week is expected to show a slight pickup in aggregate financing in October from the same period last year, a sign that the credit slowdown is bottoming out. The central bank recently told banks to ease some of the excessive restrictions on lending to the real estate sector.

What Bloomberg Economics Says …

“The credit expansion probably cooled off, which is typical of the beginning of the fourth quarter. Political efforts to speed up mortgage lending and dampen the real estate sector may have helped avoid a more pronounced slowdown. ”

Elsewhere, central banks in Mexico and Romania are expected to raise interest rates again, while their counterparts in Thailand, Serbia and Peru are likely to keep borrowing costs unchanged. Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde are among dozens of policy makers scheduled to speak.

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Investors will be waiting for the latest data on prices for consumers and producers. The figures will be analyzed in the ongoing debate on inflation and whether recent cost increases in industries will last or recede as the pandemic waves fade.

Several Fed policy makers will also speak publicly, after the US central bank announced Wednesday that it would begin this month to reduce its bond purchases, instituted to support the economy during the Covid-19 outbreaks. Fed Chairman Powell will offer remarks at a joint Fed, ECB and Bank of Canada diversity conference. Fed officials Mary Daly, Neel Kashkari and John Williams will also appear at the events, among others.

Asia

The Bank of Japan publishes on Monday a summary of views from its recent meeting that could shed more light on its views on the trajectory of the economy, as Japanese Prime Minister Fumio Kishida reflects on the details of a package of encouragement this month. Salary data released on Tuesday will likely show continued wage weakness that the new prime minister has highlighted as an economic policy weakness in recent years.

Employment figures for South Korea come to light Wednesday, a key piece of data as the central bank considers another interest rate hike.

The employment figures outside Australia may further encourage investors to see previous rate hikes in Australia after market pressure led the central bank to abandon its target of yield control.

The Philippines releases third-quarter GDP data on Tuesday, Thailand sets interest rates on Wednesday and Malaysia reports its GDP figures on Friday.

Europe, Middle East, Africa

After two highly successful weeks that saw the government budget and the Bank of England decision, the focus in the UK will be on Thursday’s growth data. That will give the first official glimpse of the extent of the slowdown in the economy in the third quarter. Economists predict that production growth will slow to 1.5% from the previous quarter.

Gross domestic product readings are also expected for Russia, Poland and Saudi Arabia, with economists watching the latest to see if the non-oil recovery gained momentum in the three months through September.

ECB President Lagarde is among several euro zone central bankers to speak this week, with officials increasingly divided on how quickly monetary policy should respond to stubbornly high inflation. New economic forecasts from the European Commission to be released on Thursday may shed additional light on when price pressures will ease.

Romania’s central bank is expected to raise its benchmark rate for the second meeting in a row to control high inflation in a decade. Serbia, meanwhile, will likely hold firm.

South African Finance Minister Enoch Godongwana will present his first medium-term budget on Thursday. A windfall of income from rising commodity prices and changes in the way GDP is calculated is likely to lead to an improvement in key fiscal metrics. Godongwana will also indicate whether a highly speculated basic income grant will be introduced.

On the same day, Rwanda’s central bank will likely keep its key interest rate at a record low of 4.5% to support economic growth while fighting deflation.

Latin America

Three of the region’s large economies report inflation data for October this week. In Chile, most analysts expect an acceleration from the 5.3% impression in September, which exceeded forecasts for the third month. Traders see year-end inflation of 5.8%, well above the 3% target.

On Tuesday, Mexico reports consumer price figures for the entire month and fortnightly, two days before Banxico’s rate-setting meeting. The leading figure is over 6% and market expectations see it close to 6.5% by the end of the year.

In Brazil, most analysts predict that inflation, forecast for Wednesday, rose in October from the 10.25% result in September. The country’s key rate stands at 7.75% and the central bank has indicated that an increase to 9.25% is available for its December meeting.

Mexico’s central bank is forecast to raise its key rate on Thursday by a quarter point for the fourth time in a row to 5% with inflation well above its 3% target.

Peru’s central bank can be expected to continue tightening on Thursday, raising the key rate by at least half a point to 2% after consumer prices rose in October.

© 2021 Bloomberg


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