Expect US to get back on strong growth path from Q4: Morgan Stanley
The US CPI for August came in at 5.3 percent, a tad below street expectations. Chetan Ahya, analyst at Morgan Stanley, spoke to CNBC-TV18 on what the key takeaways are from this number and the inflation outlook.
The US CPI for August came in at 5.3 percent, a tad below street expectations. Chetan Ahya, analyst at Morgan Stanley, spoke to CNBC-TV18 on what the key takeaways are from this number and the inflation outlook.
Ahya said, “That part of the slowdown in the third quarter that you have seen in the US is because of supply side factors like autos spending being affected, because of production being held back. So it is not really as much of a fundamental strength in the demand that has really tapered off as much in the third quarter, as it appears from the tracking estimates, which is somewhere around 3 percent quarter-on-quarter. Initially, we started with around 6-6.50 percent run rate in the third quarter. So there has been a big negative surprise, but it has been because of the supply side factors. At the same time, we have seen a big rise in the COVID cases and that has also had some natural impact on services spending, and the GDP growth. But we are already expecting numbers to look up and August, we think was a low point in the US. We are expecting the fourth quarter to see a quarter-on-quarter rise of 6.7 percent. So, US should get back to its strong growth path from the fourth quarter.”
On tapering, he said, “We are not expecting any change in the Fed path. We were already highlighting that the Fed will make the announcement in December this year and that still remains our base case.”
A burst of data out of China showed businesses grappling with the impact of localised lockdowns following sporadic COVID-19 outbreaks, supply bottlenecks and high raw materials costs. Retail sales grew at the slowest pace since August 2020 and missed analysts’ expectations, while industrial output also rose at a weaker pace from July, underscoring recent signs of slackening economic momentum in China and adding to expectations that Beijing will offer more stimulus over the coming months.
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On Chinese economy, Ahya said, “In China, as well, August was a bad month because of the rise in COVID cases, and they had implemented restrictions in a number of cities. So, you could see that in the Seven City Traffic data, it had tapered off quite meaningfully in the month of August and so that has been one factor that has weighed on retail sales. But in general, even looking at the broader numbers like industrial production, GDP growth, overall, we are seeing a slowdown in China for sure. That has been because, they have been implementing tightening of monetary and fiscal policies in the preceding 12 months, under the assumption that whenever you get strength in exports, you get improvement in private investment, and they can pull back on the public spending as well as the property spending. So they have been doing the tightening.”
He added, “Now unfortunately, what has happened is that COVID related implications on consumption growth meant that the overall growth outcome has not been great. So we think that the policymakers realise that -they have already moved on the path of easing of monetary policy and we are expecting them to start issuing more local government bonds to increase infrastructure spending. So fiscal easing will also join in now, so for China we think the low points have been achieved in the month of August and you should see fourth quarter onwards sequential growth improving in China.”
On steel production in China, he said, “We are seeing a demand slowdown because they were cutting back on infrastructure spending. In the trailing numbers, you have seen the weakness in domestic demand for steel and other commodities. At the same time, they are implementing this tightening of production supply on steel and other commodities like aluminium because they are trying to control pollution and the environmentally negative impacting industries.”
On Chinese regulatory action, Ahya said, “The reason why the China government is doing this because there has been a significant rise in income and wealth inequality in China. If you recall, I had put out a paper in the context of the US that the US also is facing this challenge of rising income inequality and then you sort of go into the reasons as to why this is happening. It is happening because of three factors- globalisation, increasing penetration in technology, and Titans. So trade, tech and titans have been the reason why we have seen this rise in global inequality in the US and in China. What has been surprising is that Chinese government has actually started to move in even ahead of the US in addressing these issues, and taking these measures. And so, we don't think these regulatory actions are going away, they will probably continue.”
On India’s GDP growth, Ahya said, “So for this calendar year, in 2021, we are expecting GDP growth to be at 9.50 percent, so very close to double-digit and I think, from an India perspective, it looks like all the drivers are now in place and India is sort of, going to have an environment which is very different from what it has had over the last 6-7 years.”
(Edited by : Dipika)
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