The world, and global financial markets, are turning on every permutation of the economic growth outlook, and change in sentiment about in China and other Asian emerging markets at the moment.
Not even the Federal Reserve is immune. China and what’s happening in the emerging markets was concerning enough for the FOMC to note that one reason for holding rates steady in September was because of “conditions abroad”.
That’s a theme noted Fed watcher Jon Hilsenrath highlighted in his piece in the Wall Street Journal last week, suggesting the Fed had given up on rate hikes in 2015 largely because of events offshore.
“Their hope now is that a healthy domestic economy can withstand slowing overseas economies and turbulent financial markets and keep growing at a fast enough pace to modestly reduce unemployment further,” Hilsenrath wrote.
Why the Fed, and markets, are so focussed on China and Asia is neatly summarised in a new note from Frederic Neumann, an HSBC economist in Hong Kong and colleague Rupali Sarkar.
Neumann and Sarkar said:
It turns out, not all too surprisingly, that Asia matters even more than ever before. All those headlines about the region’s wobbly economies notwithstanding, it’s still Asia that is holding up the roof in the global economy. And we don’t mean just in PPP terms – but in US dollar terms as well, which is what really matters when it comes to world trade.
Neumann and Sarkar say China is still the big driver of economic growth globally.
“Even with its growth decelerating, China looks set to add more to global dollar GDP than the United States next year. Add in the rest of emerging Asia, and the region comfortably tops the world in incremental demand,” they wrote.
They highlighted that talk of a global recession, which emerged again recently, was because the other regions in the global economy are looking “dire from a global perspective.”
They included a chart which shows the contribution to world GDP growth (in USD terms) by individual regions and said that “this is turning out to be the most challenging year since 2009”.
As Neumann and Sarkar say “Asia is at least still contributing positively to world demand”.
With that fact in mind it helps explain why the focus, outside timing of the Fed’s first rate hike, seems almost exclusively directed toward China and emerging markets at the moment.
If the East were to skid off the rails, it’s everyone’s problem. Next, with Asia growing below trend, it’s hard to see global inflation picking up meaningfully. That means that monetary policy across the world should remain fairly accommodative. This, in turn, is good news for the East: while it now generates the lion’s share of world growth, its financial conditions are still powerfully influenced by central banks and capital markets in the West.
No wonder the Fed and markets are worried.