China & Europe are sputtering when it comes to growth: JP Morgan’s Jahangir Aziz

The RBI’s policy stance will likely be influenced by whether the rise in agricultural prices spills over into core inflation. This could take some time, as it would require both the kharif and rabi crops to perform well, he said

Jahangir Aziz, Global Head of Emerging Markets Economics at JPMorgan said that there is an interesting contrast in the global economy with the US economy performing well, while China is facing challenges and the Euro area is struggling.

In an exclusive conversation with CNBC-TV18, Aziz shared insights on the Indian economy, and the possible impact of inflation on upcoming RBI policies, the US markets, Fed’s delayed rate cuts, stronger dollar among other issues of global significance. Edited excerpts:

Can you provide some insights into the current state of the global economy?

We are observing an interesting contrast in the global economy. The US economy is performing well, possibly to the point where it’s creating concerns for the markets. On the other hand, China’s economy is facing challenges and the Euro area is also struggling. These opposing trends are impacting markets in various ways.

Could you elaborate on how these trends are influencing the markets?

It appears that the markets are gradually realising the significance of this growth divergence. The US economy is progressing steadily with indicators like the Atlanta Fed’s recent estimate of a 5 percent growth rate in the third quarter. On the other hand, China is grappling with difficulties, and the Euro area’s economic indicators like industrial production are quite poor. This isn’t just about China’s slowdown; it’s also about the Euro area’s sluggishness. The result is that the US while doing well, is seeing its equity market affected due to a combination of factors like delayed rate cuts, a steeper yield curve, and a stronger dollar.

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It’s intriguing how the two largest economies, the US and China, are moving in opposite directions. What does this mean for the markets on a broader scale?

Indeed, the dynamics are quite unique. Despite the challenges posed by China’s situation and the Euro area’s economic struggles, emerging market economies, excluding China, are displaying remarkable resilience. Most country economists are even revising their growth forecasts upward for these economies. This suggests that a scenario is emerging where the US and emerging markets, excluding China, might fare well. However, it’s essential to note that the backdrop of sluggish growth in China and the Euro area is a significant concern.

Shifting our focus to the domestic front, there’s been talk about inflation in India, especially with agricultural prices on the rise. What’s your take on the situation and its potential impact on the RBI’s policies?

The rise in agricultural prices is noticeable, but it’s essential to look at both headline and core inflation. While headline inflation may have surprised, core inflation has actually decreased slightly from 5.4 percent to 5.2 percent. China’s export-driven deflation is playing a role in keeping global goods disinflation in check, including in India. The RBI’s stance will likely be influenced by whether the rise in agricultural prices spills over into core inflation. This could take some time, as it would require both the kharif and rabi crops to perform well. As a result, the RBI’s rate-cutting cycle might be delayed until around mid-2024.

Also Read: Exclusive: Finance Secretary says Inflation in India peaked in July at 7.44 percent

Moving beyond India, let’s talk about the Federal Reserve’s actions. With robust retail sales and industrial production, what’s your perspective on the possibility of rate hikes by the Fed?

The situation with the Fed is more complex. Although retail sales and industrial production in the US are performing strongly, the Fed isn’t likely to rush into rate hikes. They’ll probably maintain their current stance to allow time for the impacts of their previous rate hikes to be absorbed by the economy, financial markets and the banking sector.

There is a potential for rate hikes in 2024 if inflation remains high and non-farm payroll numbers continue to be strong. However, the Fed will exercise caution and avoid abrupt actions and all the markets to absorb the 500-basis points interest rate hike done till now he concluded.

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