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December
03
2021

The IMF Warning Of "Economic Collapse" Should Get Headlines
Michael Every

"Economic Collapse" you say?

The IMF are warning of “economic collapse”, which should get headlines. Not because the IMF have any kind of track record of being timely or right about anything, but because the Fund so rarely says anything negative for fear of being seen as precipitating the crises which the policies it imposes always end up creating anyway. Besides a total lack of surprise on first seeing the headline, my initial thought was “Yes, but where?” There are so many candidates as:

• Supply chain issues are being swept out to sea in lieu of having a rug large enough. (A ship outside a port is not at a port; a container dumped outside a port is not in a port – success!)

• Just about everyone at the Fed now says tapering needs to be accelerated and rate hikes happen far sooner than we had thought. On top of all the debt we added under Covid. The curve flattening we see speaks volumes on that.

• Janet Yellen says "I'm ready to retire the word transitory. I can agree that that hasn't been an apt description of what we're dealing with." What adjective is she thinking of instead as she pushes more stimulus for groups with the highest marginal propensity to consume without addressing supply-chain issues? Confusingly, Yellen also said the Fed should keep a close eye on rising wages to avoid a 70’s-style "wage-price spiral". THIS IS NOT HER JOB, and without wage gains there is no way to escape the economic paradigm she seems determined to shift…or is it OK to give people benefits, but not for them to earn that money?

Oil prices 

• The US government may see a shut down as soon as this evening, and perhaps even technical debt default, with just one senator now able to force this to happen.

• The Australian Financial Review plaintively asked yesterday how long the can can be kicked on the $7 trillion debt Chinese developers are carrying. Kaisa is now the new Evergrande, it seems, which I was being told repeatedly was a firm-specific “contained” issue a few months ago. It wasn’t. It isn’t. It cannot be given the scale of borrowing and the policy shift away from bubbles. But that doesn’t mean we are going to get a Chinese GFC – just a long growth slowdown, with real financial pain for some investors, and the likelihood surely being that foreign investors are near the top of that list?

• On which note, the race from both the US and the Chinese sides to stop offshore listings of Chinese firms continues apace – with Didi taking the lead in a move back to Hong Kong.

• Moreover, China is warning China-linked US businesses: you cannot ‘make a fortune in silence’, with Vice-foreign minister Xie Feng telling them to push the White House towards a ‘rational’ China policy and end ‘ideological’ conflicts over trade and tech. Many US firms of course will, and if you look at alleged Democratic attempts to drop human rights provisions on imports from Xinjiang in pending legislation, some US politicians are already receptive. However, this also risks making some other politicians warier of US business being in China, and there is an election in 2022. Or, as the WTA show, some firms may just act unilaterally.

• Turkey is slashing rates in the face of rising inflation – which only developed economies can, while not understanding “transitory”. As the lira collapses against the Dollar, Ankara seems to be sending the signal this FX metric does not matter. If it is wrong, the consequences will be painful: hyperinflation is mentioned in a far from unconnected economy. Yet if it is right, the message for the US ought to be clear: and Turkey is extremely important in geostrategic terms.

• The US warns Russia of “terrible consequences” if it moves on Ukraine, as Moscow says Ukraine’s possible move to retake Russian enclaves is a risk to it, giving both the US and Russia a casus belli - yet only one with a military force in place. Russia is also putting missiles on islands contested by Japan.

• The US and Iran are pessimistic about the 2015 nuclear deal, and Israel defiant, as Tehran negotiates how you should in the Middle East – as if you can walk away. By contrast, the US is negotiating like the 1980’s “Wilma, that bird stole my hairpiece!” tourists or European diplomats who think box-ticking stops deadly ticking boxes.) "I have to tell you, recent moves, recent rhetoric, don't give us a lot of cause for ... optimism," says Secretary of State Blinken, trying to keep a poker-face against Russia and Iran (and China) simultaneously, while holding a pair of 2s. (With three US aces not being used ‘because reasons’.)

• OPEC+ may have stuck to a looming output hike, but oil did not fall for long, and longer-term European electricity prices are back at record highs. Imagine if the Russia/Ukraine and Iran thing goes wrong.

• In France, Les Républicains voted for hard-right Ciotti in the first round of voting for their presidential candidate over the better-known ‘French sovereignty first’ Barnier: the victor wants a referendum ‘to stop mass immigration’, and to set up ‘a French Guantánamo bay’. If he wins, he will be competing against Le Pen, who needs no explanation, and newcomer Zemmour, who is literally running on a “they will not replace us” platform. And President Macron, who is hardly a cultural leftist of late, having just reintroduced Greek and Latin into schools. Of course, none of this has anything to do with ECB acronyms, so markets will blindly shrug it all off, (hard) right?

• Regardless, markets are already seeing lunatic volatility anyway, with hedge funds allegedly piling out, retail pundits piling in, and some funds almost certainly seeing year-to-date gains made via let’s-ignore-underlying-risks-and-buy-all-of-the-things strategies suddenly wiped out, leaving them only a few trading days between now and year end to ensure their books don’t close looking as ugly as the IMF’s description of the economic outlook. Expect Hail Mary trading in response?

Anyway, back to the IMF. "We may see economic collapse in some countries unless G20 creditors agree to accelerate debt restructurings and suspend debt service while the restructurings are being negotiated," IMF chief Kristalina Georgieva said in a blog, adding that it is critical private creditors also offer relief. Yet exhale: the Fund was ‘only’ talking about the outlook for very poor countries! Carry On Regardless while extolling the virtues of diversity and inclusion, please.

Remind me again – how did these very poor countries get so much debt without servicing ability in the first place? Why wasn’t the IMF advising capital controls and Hamiltonian-style growth models to prevent it? And why aren’t these countries allowed to tell their central banks to buy all their worthless assets at par to bail everyone out? After all, that’s what developed economies get to do!

On top of this we also have a US payrolls report today that may actually matter – and regular readers will know it’s rare that I say that. The expectation is 550K after 531K last month. Anything stronger or weaker and goodness knows where Powell, Yellen, curves, the Dollar, China, Turkey, Russia, and Iran, as well as Europe (and US tourists in it shouting “Wilma, that bird stole my hairpiece!”) will sit. Or slump.

Hey, but Happy Friday.

Michael Every is the Head of Financial Markets Research Asia-Pacific. Based in Hong Kong, he analyses the major developments in the Asia-Pacific region and contributes to the bank’s various economic research publications for internal and external customers and to the media.

Michael has nearly two decades of experience working as an Economist and Strategist. Before Rabobank, he was a Director at Silk Road Associates, a strategy consultancy based in Bangkok. Prior to this, he was Senior Economist and Fixed Income Strategist at the Royal Bank of Canada based in both London and Sydney. Michael was formerly also an Economist for Dun & Bradstreet in London, covering ASEAN. 

Michael holds a Masters degree in Economics (with distinction) from University College London and speaks Thai.

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