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WITH world manufacturing hitting a high note, one wonders what could possibly spoil the otherwise positive global growth story
“We have a positive outlook on the US economy which is good for emerging markets and global growth, as evidenced by the trend of purchasing managers’ indices (PMI) and export figures,’’ said Danny Wong, the CEO of Areca Capital. Factories across Europe and much of Asia posted another month of solid growth in March, rounding off a strong quarter for manufacturers.
China’s official manufacturing index expanded at the fastest pace in nearly five years. Surveys also showed encouraging growth in Europe, Japan, India and much of emerging Asia. The official Chinese purchasing managers’ index (PMI) rose to 51.8 in March from 51.6, thanks to a month-long construction boom.
That was the strongest reading since April 2012, though a private survey focusing on smaller companies suggested a more cautious outlook, according to a Reuters report.
The report pointed out that in the eurozone, IHS Markit’s final manufacturing PMI rose to its nearly six-year high of 56.2 in March, far above the 50 mark that separates growth from contraction.
The PMI, based on five major gauges – new orders, inventory levels, production, supplier deliveries and the employment environment, is an indicator of the health of the manufacturing sector. “Key risks would be US policies, geopolitics of the eurozone and the US Fed’s aggressiveness in rate hikes and shrinking of its balance sheet,’’ said Wong of Areca Capital.
After it started raising interest rates from financial crisis lows, the US Fed is preparing to unwind the US$4.52 trillion bonds that it holds in its balance sheet.
That huge amount was a result of its bond buying programme under a plan called quantitative easing to inject money into an economy that had been devastated by the financial crisis. Market players would be keenly watching the timing and way in which the balance sheet would be unwound, as any wrong move could have a huge impact on stock and bond markets.
US trade policies in focus “US trade policies is a concern as President Donald Trump has signed executive orders directing the US Commerce Department and US Trade Representative to do a study on trade policies and practices of 16 countries with which the US has the largest trade deficits.
“This raises the risk of protectionism and trade conflict especially with China, which has the largest trade surplus with the US,’’ according to Suhaimi Illias, the group chief economist of Maybank Investment Bank.
“Trump’s trade policies remain unclear. He has not chalked up any positive performance to date (and would have obviously liked to chalk up with his recent meeting with Chinese President Xi Jinping).
But what came out was that both developed an ‘outstanding’ relationship while Trump called for China to ‘level the playing field’ for American workers, accordint to an AP report, quoting Secretary of State Rex Tillerson.
Some US$347bil of the US$502bil trade deficit registered by the US last year was with China.
“If a trade war breaks out between the US and China, there will likely be some collateral damage especially in the regional emerging markets economies for which China is a major trading partner. While the financial situation of the regional emerging markets economies has improved significantly since the Asian financial crisis, those with weaker external positions could see their financial stability tested,’’ said Nor Zahidi Alias, the chief economist of Malaysian Rating Corp.
Another factor that needs watching is US rate normalisation. “In an already tensionfilled world, there is risk of overreaction to the Fed’s rate moves. A significant correction in the global bond market could affect investment decisions and cause currency volatility and liquidity problems, especially in emerging markets economies,’’ said Zahidi.
Also on watch is the prospect of the Fed’s ongoing normalization via interest rate hikes being supplanted by the reduction of its balance sheet, noted Suhaimi.
“This may result in tighter monetary and financial conditions in the US, affecting the US itself and global growth,’’ Suhaimi added.
In fact, the pace and related effects on global liquidity of the US’ efforts to normalise interest rates, is seen as the primary risk for global equities markets, said Thomas Yong, the CEO of Fortress Capital.
The Trump administration “hitting more bumps” on infrastructure and tax cut plans will be another concern, especially following its failure to push through the healthcare reforms.
Political risk in Europe also needs to be monitored.
“France’s highly contentious presidential elections are just around the corner. If the totally unexpected happens (like in the US), and the proEuropean candidate does not win, the European Union (EU) could be in trouble.
“Will the EU break up Will too much attention be focused on European politics rather than trying to fix the European economy’’ asked Zahidi.
France and the Netherlands were founding members of the EU, but France has been described as the “real motor” behind European integration. “A surprise early German elections and (populist contender) Marine Le Pen winning the second round of the French presidential elections are major risks,’’ said Chris Eng, head of research at Etiqa Insurance & Takaful.
Apart from these factors, lower expenditure by governments would also pose a risk, said Vincent Khoo, head of research of UOBKayHian.
Columnist Yap Leng Kuen prays for a better world.
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