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Executive Summary
The month of October saw the global economy struggling to deal with supply restrictions and rising prices, as a post-Covid recovery boom combined with specific supply shortages in numerous supply chains.
Why has China been under the spotlight this month in the global economy?
While China faced strong growth in the past couple of months despite the pandemic, there are major indicators now showing that the second largest economy may be heading for a slowdown and even a worst-case possibility of a larger crisis, which would certainly have ripple effects on the global economy.
Evergrande crisis persists: One of China’s largest real estate developers is still under more than $300bn of debt. While the faith of Evergrande still hangs in the balance other Chinese property developers have also warned that they are at risk of default such as Sinic Holdings who said they wont be able to pay up offshore bonds worth $250 million while China Properties Group, said it had defaulted on $226 million. Recently ratings agencies issued a fresh round of downgrades on Chinese property firms. The fear of default and the domino effect caused could be detrimental to the Chinese economy and in turn the global economy.
Chinas recent power shortage threatens the global economy: China’s energy crisis deepened in September whilst global prices of coal and oil soared. Power rationing is still in effect with many households and factories left with only intermittent power supply, therefore threatening global supply chains and creating further inflationary pressure as global economic growth rebounds. A few factors that have contributed to the shortage has been the flooding of China’s coal producing provinces, ineffective energy policies and a resurgence in demand for Chinese goods as the pandemic wanes.
China’s growth weakens in spite of exports performing strongly: China’s economy grew by only 4.9% in September, the slowest it has grown in a year and worst than what most analysts expected. Developments mentioned above such as the property and energy crisis may continue to dampen growth for the remainder of the year. Exports however performed strongly in September growing by an outstanding 28% with the country’s trade surplus reaching $68bn, the highest it has been since 2015.
How have inflationary pressures risen as economies continue to rebound?
Inflationary pressure have grown stronger over time as economies see strong recovery while bottle necks in global supply chains caused by the pandemic still persist, as well as a recent energy crisis which has resulted in fuel prices skyrocketing.
The IMF warns that the global economy is entering a phase of inflationary risk: The IMF cautioned countries this month in its World Economic Outlook to take early action and tighten monetary policy should inflationary pressures prove persistent. While the IMF forecasts inflation to rise this year and drop to pre pandemic levels after mid 2022 it warned Central Banks to be vigilant on inflation that may not be as temporary as expected.
Central banks have already begun raising interest rates: While the Federal Reserve signaled it might consider slowing down its asset purchasing program countries such as Norway, Brazil, Mexico, South Korea and New Zealand have already raised interest rates as inflation pressures rise due to both demand driven factors caused by post pandemic recovery as well as supply side factors such as recent bottle necks seen in global supply chains which has been exacerbated by rising energy prices.
Consumer prices in the US rise more than expected: Consumer prices in the US rose by 0.4% in September compared with the 0.3% Dow Jones estimate. On a year-on-year basis, prices increased by 5.4% versus the 5.3% estimate and just below a 30-year high. This increase was mainly attributed rising food and energy costs. The recent surge in prices makes investors question the Fed’s stance on inflation only being transitionary.
How have commodities been performing?
Oil prices hit a 3 year high:
Oil prices rose to a peak of just below US$86 per barrel on the 25th of October after rising across the month starting from roughly US$78 a barrel at the beginning of the month. The rise was attributed to stronger fuel demand as economies picked up and global supply remained tight.
Gold prices rise:
Gold prices rose from US$1752.29 an ounce at the beginning of the month to $1808.80 an ounce by the 25th of October. The increase in prices has mainly been attributed to growing inflation concerns which has been driving some investor towards safer assets.
Top 5
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China's real estate crisis could threaten growth into 2022. Beijing's undeterred
China's growth is seriously slowing down as the country lurches from one economic threat to another. And while some of the biggest pain points appear to be easing, an unfolding crisis in real estate is emerging as one of Beijing's toughest challenges in the coming year.
Goldman Sachs says oil prices could be higher for much longer
Oil prices could stay at higher levels in the years to come as demand rebounds while supply remains tight, according to Goldman Sachs. Goldman Sachs’ base case is for Brent to hit $90 per barrel by the end of the year.
China isn’t the only huge Asian economy with a coal shortage now
Most of India’s coal-fired power plants have critically low levels of coal inventory at a time when the economy is picking up and fueling electricity demand. A potential power crisis would likely have an immediate impact on India’s nascent economic recovery which is being led by industrial activity instead of services.
Southeast Asian economies will recover ‘much slower’ due to Covid: Asian Development Bank
The Asian Development Banks projects that Southeast Asian economies will recover at “a much slower pace” than previously thought due to recurring waves of Covid-19. The bank downgraded its economic growth projections for all Southeast Asian economies — except Singapore and the Philippines.
Compiled by: Emaad Rizwan
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.
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