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 World markets were upended last week by the first Chinese default on
a domestic bond and the prospect of more to come at the same time as
evidence mounted that growth in the world's second-largest economy
is slowing.
The upcoming Chinese data calendar is light but the picture seems
clear — growth in investment, retail sales and factory output have
all slumped to multi-year lows, suggesting a marked slowdown in the
first two months of the year.
Chinese premier Li Keqiang said the economy faced "severe
challenges" in 2014 and hinted Beijing would tolerate a slower
expansion while it pushes through reforms aimed at providing more
sustainable growth in future.
He also flagged the government will allow further debt defaults.
Chinese corporate debt has reached unprecedented levels.
Bank America Merrill Lynch has cut its first-quarter growth forecast
for China to 7.3 percent from 8.0 and is revising down its full-year
estimate too.
There may be a counter-response. Sources involved in internal policy
discussions told Reuters that the central bank was prepared to cut
bank reserves if growth slowed further, though they said action may
only happen in the second quarter.
The other motor of world growth — the United States — has a monetary
policy meeting to contend with.
The Federal Reserve could use its March 18-19 session to sketch out
its plan for eventual interest rate rises, in its formal statement
or in new chairman Janet Yellen's news conference.
The Fed has signaled the first rate rise is likely to come around
the middle of next year as long as the U.S. economy keeps healing,
but for now the vista is clouded by an unusually harsh winter and
its effects on economic data.
Three top Fed officials said on Wednesday that the economic outlook
would have to change dramatically for it to alter the pace at which
it winds down its bond-buying program, a process which has cause
turmoil in emerging markets.
Thirty-two of 63 economists surveyed by Reuters forecast the Fed
would lift overnight rates in either the second or third quarter of
2015, while 14 saw a rate hike coming earlier.
RUSSIA AND THE WEST
With Crimeans expected to vote to join Russia in a referendum, U.S.
and European Union sanctions on Moscow are set to be imposed.
The EU has drawn up a list of 120-130 senior Russian officials who
could be subjected to travel bans and asset freezes. One EU official
said it contained the names of generals and others from the top
echelons of Russia's military and political establishment.
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That will do nothing to help Russia's already struggling economy
and, while it probably cannot afford to disrupt its supply of gas to
Europe, it could well retaliate in ways that will damage the West.
"Obviously Russia will not back down so it all points to an
escalation," said Viktor Szabo, a fund manager at Aberdeen Asset
Management.
Politically this story dwarfs all others in the world but
economically, some perspective is required.
Scott Anderson, chief economist at Bank of the West in San
Francisco, noted that on a purchasing power parity basis China has
15 percent of global GDP, Russia has 3.0 percent and Ukraine 0.4.
But in sum, Anderson said, "the downside risks to the U.S. and
global economy from emerging markets should not be taken lightly".
The UK's annual budget, on Wednesday, is always a big set piece but
there has been an unusual dearth of leaks and speculation in
advance, indicative perhaps of a steady-as-she-goes approach by
finance minister George Osborne rather than a grab for votes.
Having put so much political capital into reducing the deficit, to
switch tack now at a time that the economy is recovering strongly
could be costly.
While the deficit has come down it is forecast to be about 7 percent
of gross domestic product in the current fiscal year, still much
larger than in other big economies in the European Union.
"With his current fiscal plans on track, the chancellor seems
unlikely to set out material new austerity measures," said Nick
Bate, economist at Bank America Merrill Lynch.
"But at the same time, despite a general election being just over a
year away, there seems little scope for significant fiscal
loosening, given that the deficit remains so large."
(Editing by Susan Fenton)
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