Worst impact of global monetary policy tightening could still be ahead: StanChart global research head

THE full cumulative impact of monetary policy tightening moves by central banks on the global economy is still unknown, and its worst ramifications could still be ahead, said Standard Chartered’s global head of research Eric Robertsen on Wednesday (Jan 18).

While terminals may show that credit spreads are narrowing, he cautioned that these indicators usually reflect only a benchmark of companies and there are many borrowers that are left out of these indices.

“I worry that this cumulative impact of monetary tightening is actually doing structural damage to the economy in a way that we may see a number of companies and individuals forced to declare proverbial bankruptcy,” said Robertsen, who is also the bank’s chief strategist, at a media roundtable.

Tightening monetary conditions and the restriction on liquidity also has a real impact on emerging markets and the ability for businesses there to gain access to capital, he added.

It will also take some time before the effects of these will be felt in the labour market, said the economist.

Citing the example of the dot-com bubble burst in 2000, he noted that unemployment rates in the United States only started to go up towards the end of that year and into early 2001 — close to a year after the Nasdaq peaked in March 2000.

“That’s my fear... that in the Western world, we haven’t really seen the impact of all this monetary tightening,” said Robertsen.

But it’s not all doom and gloom for 2023. Unlike last year, which saw unprecedented uncertainty that were mostly negative, the distribution of risks is more symmetric this year and there is potential for some positive surprises in addition to the negative, said Robertsen.

One bright spot is South-east Asia, which the bank forecasts will have a 5 per cent growth this year. While this is down from the 5.9 per cent growth recorded in 2022, “when you compare 5 per cent growth in Asean to zero growth in the G10, that gap is really important,” he said.

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Another silver lining is the potential for China to outperform expectations in the next 12 to 18 months. Robersten pointed out that the country is currently seeing very low inflation, and is not expected to see inflation increase dramatically even with an economic recovery, unlike the other global economies.

“Are there structural headwinds in China? Yes there are, but I do think that the net path of travel for China over the next two years is to a better economic place.”

On China’s overall outlook, he expects a period of stabilisation in the first quarter of this year, before the economic situation improves steadily from the second quarter, and for the pace of growth to pick up in the second half of the year.

Nevertheless, some downsides remain. China could fall into a liquidity trap — where consumers and businesses choose to hoard cash even when interest rates are very low — as consumer sentiments remain poor due to the country’s high youth unemployment rate.

Secondly, Robertsen noted that China’s recent economic policies have been targeted at supporting large companies, when it is the small and medium-sized enterprises which require help from the damage endured over the course of the pandemic.

“My fear is that even with the policy easing that we’ve seen in the last couple of months, whether its economic policies or Covid policies, that the response takes six, nine, 12 months to play out. Maybe we’re sitting here in a year’s time... and China’s economy looks better, but most of 2023 was a wasted year,” he said.