China’s economic slowdown is not spreading to other economies, says ABN AMRO MeesPierson in response to the turmoil in global financial markets on Monday. Decelerating Chinese growth and falling commodity prices need not be feared as heralds of worldwide deflation.
Ben Steinebach, Head of Investment Strategy at ABN AMRO, explains. “Markets are overreacting to the situation in China and the sizable outflow of funds from emerging markets. Market jitters are partly based on economic factors. Disappointing macro data is fuelling unease among investors who have already been worrying for some time, in particular about the prospect of higher interest rates in the US.
Positive fundamentals, ABN AMRO MeesPierson observes, are being ignored at the moment. The financial market sentiment indicator for China, for example, recently ticked up. Moreover, recent macro data from developed markets is still encouraging. European industry is gaining strength. Both in the eurozone and the US ,corporate earnings in Q2 were generally better than expected. All this signals a cyclical upturn in these regions. Besides, the US Federal Reserve (Fed) has been very clear in stating that it will be raising interest rates in 2015, and will be focused on not causing ripples in financial markets when it makes its move.
Uncertainty to ease gradually
The uncertainty caused by the situation in China will persist for some time yet, ABN AMRO MeesPierson expects. Markets will continue to price in all kinds of risks until they see clear evidence that China’s economy is stabilising. On top of that, investors will have to be convinced that fears of a further depreciation of the yuan are unfounded. Meanwhile, it will take time for the policy measures of the Chinese authorities to feed through to the real economy. As expected, the People’s Bank of China cut its key interest rate on Tuesday afternoon, and lowered the reserve requirement ratio for banks.
“We have not changed our outlook,” says Ben Steinebach. “We remain convinced that Chinese policymakers will succeed in steering their economy onto a stable, sustainable growth path, and that a hard landing of the Chinese economy can be prevented. We do, however, acknowledge that in the short term developed markets will be under increased pressure. Recent events lead us to the conclusion that for the time being, the West will be taking over from the East as the engine of global economic growth.”