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February 2, 2023

China reopens, Nasdaq soars again and Russia’s demographic challenge

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Nicolas Tremel
Arnaud Lieugaut
Karl-Philip Nilsson
Usama Karatella
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The Chinese reopening effect

China is reopening, and the International Monetary Fund is adjusting its global growth estimates accordingly.

The chart plots nations based on the IMF’s estimates for real GDP growth this year and the degree of its most recent estimate revision. Put another way. one axis shows whether a country is in recession or expansion; the other shows whether things have improved or deteriorated since the last IMF assessment in October.

China is making the biggest move on the chart, dragging the world economy with it, as it reverses the zero-Covid policy; the IMF’s estimate for world GDP growth was revised upwards to 2.9 percent for 2023.

The UK also stands out; as trade frictions from Brexit and higher interest rates bite, it’s now projected to be the only G7 economy in recession.

It’s also notable that emerging markets as a whole are expected to outpace their developed peers, whose growth rate the IMF projects at an anemic 1.2 percent.

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The Russian demographic pyramid

As Russia reportedly considers adding hundreds of thousands of men to the 300,000 mobilised to fight in Ukraine, it’s worth examining the demographic challenge the nation already faces.

This chart breaks down the Russian population by age and sex. The lingering effects of the post-Soviet transition are readily visible: fertility rates – which remain among the lowest in the world – plunged in the 1990s, as seen by the dearth of people in their 20s today. 

And the nation has long experienced high mortality rates from preventable causes, i.e. alcoholism: the male half of the pyramid shrinks rapidly after age 60. The nation is suffering a historic population decline.

Will the Ukraine war have a similar effect on future demographic pyramids? Between combat deaths, emigration to avoid conscription, and delays to family formation, it seems likely, depending on how long the war lasts. 

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A renewal of positive growth surprises in Europe

There has finally been a run of good news for European economies and markets. This week, eurozone GDP beat analysts’ estimates, and the International Monetary Fund said Europe had adapted to higher energy costs more quickly than expected. (Those energy costs also turned out to be less catastrophic than feared last summer.)

This chart is a “surprise clock” for the euro zone using data from Citigroup; economic surprises are on the x axis, and inflation surprises on the y axis. A surprise is defined as the divergence between published data and expectations.

The more unwelcome surprises – higher-than-expected inflation – have been steadily trending down for the past 12 months. (Analysts had constantly underestimated inflation in recent years.) 

But with economic growth surprises turning around strongly recently, we are in a bit of a sweet spot for investors as inflation recedes to more standard levels.

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Slowing US trend growth since the 1990s

The decade of Bill Clinton’s presidency and dot-com IPOs was a much healthier era for the US economy.

This chart measures “trend growth,” defined as the long-term, non-inflationary increase in GDP caused by an increase in a country's productive capacity. The trend rate of economic growth is the average sustainable rate of economic growth over time. 

This chart breaks down trend growth into four contributing components: labour quality, labour quantity, capital and “Total Factor Productivity” growth – the difference between output growth and growth of all factor inputs, usually labour and capital.

It’s notable that “labour quantity” has been much weaker since 1999. This is linked to demographic change, with fewer prime-age adults working and slower population growth.

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Thinking about where rates will be in 2025

This week, the Federal Reserve, European Central Bank and Bank of England all raised their key interest rate. We’re well into a tightening cycle globally, notable for central banks hiking in sync. 

But markets are expecting Europe and the US to be in very different places come 2025.

As our chart shows, for the ECB, the market anticipates that rates in two years’ time will be back where they were earlier this week. However, the US is expected to have a significantly lower key rate than it does today.

For the UK and EU, rates will have to stay higher for longer to restrain sticky inflation. Or so says the market.

For the US, this suggests that inflation will be more easily conquered – or that the Federal Reserve will be fighting a recession. Perhaps both.

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Nasdaq has its best start to a year in decades

It’s like a trip back to the golden era of the FAANG. Meta, the former Facebook, just posted its biggest intraday stock jump in a decade. Amazon is at a three-month high. 

The recent performance of tech stocks has pushed the Nasdaq 100 index to its best January in at least 20 years, as our chart shows. This followed a 33 percent decline in 2022. Dead-cat bounce, or a lasting sentiment shift?

Tech layoffs have been in the news, as we wrote last month, but the sector has tended to trade in tandem with perceptions of Federal Reserve policy. As Chairman Powell raised rates, tech stocks were trading at an interestingly low valuation by the end of 2022. This week, Powell said that the “disinflation process has started,” and a less hawkish Fed is being priced in.

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Stepping toward a higher US debt ceiling

It’s that time in the US political process again: Republicans and Democrats are tussling over the debt ceiling.

Total public debt has increased to USD31.38 trillion, approaching the statutory debt limit of USD31.4 billion, as our chart shows. 

If this ceiling is not raised and extraordinary measures are exhausted, the U.S. government is legally unable to borrow money to pay its financial obligations – requiring, in theory, a debt-payment default. 

This is, of course, highly improbable, and the debt limit is very likely to be increased again, adding a new “step” to our chart. 

But this theoretical prospect led to S&P’s first-ever downgrade of the US credit rating in 2011 – during a previous debt-ceiling showdown between the GOP and the Obama administration. 

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Reawakening demand for metals in China

This chart shows recent price trends for industrial metals. They are broadly benefiting from China’s reopening. 

Zinc, copper, nickel and aluminium are all up at least 12 percent over the past three months. 

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Brazil trade surplus is set to shrink

Santos is the busiest container port in Latin America, most famous for exporting coffee, sugar and soy across the world. (It’s also known for the football legend Pele, and his funeral took place in the city last month.)

The ebb and flow of shipments from Santos reflect trends in the global economy – and Brazil’s trade surplus (or deficit).

This chart shows how container flows at Santos are closely correlated with moves to the trade balance, 10 months in the future. Over the short term, we should expect a shrinking surplus in line with the weakening global economy. As the key Chinese market reopens after unwinding zero-Covid, there is scope for Brazil’s trade balance to improve in the medium term.

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