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US economic growth hits a speed bump – Industry roundup: 26 April

US economic growth slows more than expected in Q1

Forecasts on the timing and speed of interest rate cuts by the Federal Reserve are likely to be further adjusted after data suggested US economic growth was the slowest for nearly two years in the first three months of 2024.

Gross domestic product (GDP) in Q1 increased at a 1.6% annualised rate, below most economists’ forecasts, the government’s initial estimate showed. The US economy’s main growth engine of personal spending rose at a slower-than-forecast 2.5% as consumers became more cautious. In addition, the first-quarter core inflation measure accelerated to 3.7%.

The Q1 estimated figure was down sharply from the 3.4% annual rate in the fourth quarter of 2023, according to data released by the Bureau of Economic Analysis. The deceleration reflected weakening household and government spending. Exports also slowed at the beginning of the year, dragging down growth.

“Growth is slowing, but clearly the economy is still on a solid path,” commented Ben Ayers, senior economist at US insurer Nationwide, which recently scrapped its recession forecast for the year. “We’ve had very strong job growth that’s fuelling higher incomes, giving people the money to go out and spend. But that’s also kept inflation high, so honestly a little bit of cooling is good news.”

Earlier this week, a top economist suggested that the US is navigating a ”bifurcated” economy; a phenomenon that has only been seen twice previously. Nancy Lazar, chief global economist for investment bank Piper Sandler, told Fox Business Networrkr that the current economic backdrop is ”very difficult” and ”very unusual”, having occurred only during the energy crisis in 1978-79 and the 2008 global economic crisis.

”You have those that are benefiting from higher interest rates. You have those that are suffering from higher interest rates, those that can pay for these higher prices, and those that are really getting squeezed,” Lazar said.

”At the end of the day, the interest rate structure had to go higher for longer, and in turn, eventually, you did have a recession, and that's how you eventually crushed the excesses and inflation,” she said. 

Lazar forecasts a 53% odds of a recession, but she emphasised that ”we need a recession” to tackle the inflation problem. She said large businesses have been riding high on interest income, favourable financial conditions from locking in low-cost debt, surging stock rallies, and hefty government support.

Four years since the pandemic recession, the US economic recovery has proved far stronger than anticipated. Unemployment at 3.8% is in the longest stretch of near-record low jobless rates since 1970 and wages are rising.

With spending by consumers, businesses and governments strong, concerns had been growing that iFederal Reserve may have to be even more aggressive in its efforts to slow the economy.

The central bank has already raised interest rates 11 times in the past two years, making it more expensive for families and businesses to borrow money and slowed growth in some parts of the economy, including home sales.


Japan keeps rates on hold and maintains bond buying

The Bank of Japan (BOJ) has kept its short-term rates steady as expected, maintaining its short-term interest rate target at a range of 0-0.1%, which was set just a month ago when it made a historical exit from its massive stimulus programme.

The bank also confirmed that it will keep buying government bonds based on guidance decided in March, although it removed a reference to the amount of government bonds it has roughly committed to buying each month.

Tokyo’s headline inflation rate for April came in at 1.8%, slowing from 2.6% in March. Tokyo inflation data is regarded as a leading indicator of nationwide trends. Core inflation in Japanese capital — which strips out prices of fresh food — sharply fell to 1.6% from March’s 2.4%, missing expectations of 2.2% from economists polled by Reuters.

The yen (JPY) touched fresh lows following the decision, falling to 156 against the US dollar.

At a press conference BOJ Governor Kazuo Ueda said: ”As for our future monetary policy guidance, it will depend on economic and price developments at the time. We will scrutinise the economy, prices and their risks, and set short-term rates at each policy meeting.

”If underlying inflation moves in line with our forecasts, we could adjust the degree of monetary easing. If the economy and prices overshoot, that could also be a reason to change policy.”

Commenting on the yen’s recent weakness, he said ”Monetary policy does not directly target currency rates. But exchange-rate volatility could have a significant impact on the economy and prices. If yen moves have an effect on the economy and prices that is hard to ignore, it could be a reason to adjust policy.

”In gauging underlying inflation, we won't look at single data. We will look at various indicators and economic factors behind the price moves such as the output gap and inflation expectations.”

”The BOJ pruned its statement today, but not necessarily bond purchases,” commented Frederic Neumann, Chief Asia Economist, HSBC, Hong Kong. ”While the official statement dropped a reference to monthly bond purchases, officials left the door open to continue with the current pace of intervention in the Japanese Government Bond (JGB) market. BOJ officials likely tried to drop a subtle hint that its balance sheet operations are subject to review, which reinforces its hawkish bias.

”At the same time, officials shied away from announcing bolder measures, likely because they would like to retain flexibility in their purchase operations. The recent spike in US yields makes it tricky for the BOJ to step away from its own JGB purchases, for any hint of a scale-back could lead to Japanese yields becoming a lot more volatile. With the Fed keepings its foot firmly on the break, the BOJ will need to retain the option of scaling up JGB purchases as needed to smoothen any impact of tighter US financial conditions on Japanese rates markets and the currency.”


South Korea’s Q1 economic growth beats all forecasts

South Korea’s economic growth in the first quarter of 2024 accelerated to a pace faster than the most optimistic forecasts, reducing the chance of a near-term interest-rate cut but offering belated relief to President Yoon Suk Yeol after an election setback two weeks ago that threatens his policy initiatives.

Gross domestic product advanced 1.3% in Q1 from the previous quarter, the Bank of Korea said, a figure well ahead of economists’ consensus for a 0.6% expansion. The highest estimate was 0.9%.

The economy grew 3.4% year on year, also beating the forecast of 2.5%.

The faster-than-expected expansion strengthens the view among policymakers that South Korea’s economy will grow more than 2% this year. Global demand for technology products such as semiconductors has been a key driver, while momentum is starting to broaden to other industries. Growth in exports accelerated to 8.3% in Q1 from 5.7% in the fourth quarter of 2023, according to Hyosung Kwon at Bloomberg Economics.

Construction investment returned to growth in Q1 after a 4.5% contraction in the previous quarter. The government said in February that it would accelerate the implementation of infrastructure projects and public-private partnerships to shore up the industry, where activity has been hurt by credit risks.

From the previous quarter, private consumption rose 0.8%, while government spending was up 0.7%. Exports in real terms increased 0.9%, as facilities investment fell 0.8%, according to the central banl.

Manufacturing output increased 1.2% from Q4 2023 with chemical products and transportation equipment leading the activity. Public works and building construction played a central role in boosting the construction industry that grew 4.8% in Q1, the Bank of Korea (BOK) said.

“The unexpectedly sharp rise in South Korea’s GDP in the first quarter shows the economy is more resilient than anticipated to the Bank of Korea’s restrictive stance. This could lead the BOK to re-consider its strategy to temper heated inflation — keeping rates high for longer and stepping up its hawkish talk,” said Hyosung Kwon, economist at Bloomberg Economics.

The BOK kept its policy settings unchanged two weeks ago, keeping its benchmark interest rate at 3.5%. The bank last increased rates in January 2023.


Bank Indonesia rate hike wrongfoots analysts

Indonesia's central bank has raised its benchmark interest rate by 25 basis points (bps) to 6.25% in a bid to shore up the weak rupiah (IDR).

”This interest rate increase is [meant] to strengthen the stability of the rupiah exchange rate from the impact of worsening global risks,” Bank Indonesia Governor Perry Warjiyo told reporters at a news conference.

Bank Indonesia defied expectations in raising its benchmark interest rate to a record high to help guide the currency below the psychological level of 16,000 against the dollar by year-end. The move had been predicted by only 11 of 41 economists surveyed by Bloomberg. The rest had expected no change.

Global uncertainty has flared up with the US dollar’s resurgence and conflict in the Middle East, requiring an “anticipatory, forward-looking, and pre-emptive” policy response, Warjiyo said to ensure inflation remains within the bank's 1.5-3.5% target range. It is currently at 3.05%.

At 6.25%, the seven-day reverse repurchase rate is at a level last seen in 2016. Economists said if the rupiah continued to slide, Bank Indonesia would likely tighten further.

However, the rate hike, paired with incentives to boost lenders’ liquidity to keep ramping up credit, risks impairing the effectiveness of the central bank’s policy tools, analysts added. The rupiah subsequently fell, along with many Asian currencies.

The IDR remains vulnerable in the face of an unclear Federal Reserve rate path and elevated geopolitical tensions, coupled with corporate dollar demand for dividends and debt payments.


Ecuador considers new debt-for-nature swaps

Ecuador is reported to be considering new debt-for-nature swaps; one to channel funds into the Amazon rainforest and another for a giant ocean protection zone backed by Hollywood star Leonardo DiCaprio, according to insiders.

The South American country is looking to take advantage of the record US$1.6 billion debt swap it structured for its Galapagos Islands last May when, with support from the Inter-American Development Bank (IDB) and the U. Development Finance Corporation (DFC), Ecuador completed a debt conversion that will allow the country to allocate resources for long-term marine conservation in the Galápagos Islands to promote greater sustainability and improve the quality of life of Ecuadorians.

At the time, it marked the largest debt-for-nature conversion completed in the world and it was reported that the debt purchase with cheaper financing would generate lifetime savings of more than US$1.126 billion

While Ecuador’s government is now focused on combating drug-fuelled organised crime and securing a new deal with the International Monetary Fund (IMF), sources said officials have been working with multilateral development banks and conservation groups for months on at least two possible debt swaps in hopes of closing another major initiative this year.

The first would be linked to the protection of parts of the Amazon rainforest, widely considered the most important natural ecosystem in the world. The second option refers to the financing of an innovative Marine Protected Area that Ecuador has created along its entire 2,237 km Pacific continental coast.

Ecuador will probably need to focus on one for now, a person familiar with the plans said, given the time and effort required to structure such debt swaps.

In a debt-for-nature swap, a country's government bonds or loans are purchased and replaced with new ones that pay a lower interest rate, as long as the government commits to spend some of the money saved on conservation.

Typically, a development bank backs the deal with a ”credit guarantee” or ”risk insurance”, which protects buyers of the new bonds if the country is unable to pay the money back. Ecuador, considered one of the world's 17 “megadiverse” countries, also has one of the worst deforestation rates in Latin America according to the environmental arm of the United Nations.


BII and Citi launch US$100 million facility to boost trade finance in Africa

British International Investment (BII), the UK’s development finance institution and impact investor, has partnered with Citi to launch a US$100 million risk-sharing facility.

This initiative aims to bolster the trade finance availability for small- to medium-sized enterprises (SMEs) and corporates in frontier and emerging African markets. The agreement was signed during the World Bank’s Spring Meetings in Washington and seeks to enhance the business prospects of enterprises that are currently constrained by financial limitations.

The programme will mitigate the acute foreign currency shortage in these regions by augmenting the trade finance liquidity through Citi’s widespread network of commercial banks. The arrangement enables financial institutions to extend more substantial support to African companies importing essential commodities such as wheat, fertiliser, rice, and sugar.

The BII and Citi collaboration will assist local businesses in accessing finance to import economically valuable goods, including transportation, critical equipment, and machinery. This support is regarded as crucial for fostering the growth of manufacturing sectors in various African nations such as Benin, Cameroon, Côte d’Ivoire, Rwanda, Tanzania, Uganda, and Zambia.

The need for this funding has become more pressing as local enterprises face difficulties in securing necessary imports. These challenges are the result of high inflation, escalating interest rates, and rising commodity prices following the Covid-19 pandemic and the Russia-Ukraine conflict. 

Consequently, the trade finance gap in Africa has widened significantly, increasing by about a third since the pandemic began, from US$81 billion in 2019 to US$120 billion in 2023.

The newly introduced facility capitalises on BII’s expertise in the African continent and is set to enhance Citi’s engagement with over 200 local banks, enabling them to support ambitious companies in accessing the finance needed in less accessible markets.


Standard Chartered joins Visa B2B Connect for cross-border payments

Standard Chartered is participating in Visa B2B Connect, a network facilitating efficient, account-to-account cross-border payments for corporate clients.

Initially available to Standard’s Singapore clients, the service will soon be expanded to include more entities. This addition aims to quicken and reduce the cost of business-to-business (B2B) transactions globally.

The system operates through application programming interface (API) connectivity between Standard Chartered and the Visa B2B Connect network. This direct connection to Visa enables transactions to bypass multiple intermediaries, cutting both costs and delays. 

Leveraging Visa’s extensive network, Visa B2B Connect provides clear timeframes and costs through a single connection to all network members, enhancing predictability and cost-efficiency. These features are designed to support corporates of all sizes seeking efficient, secure cross-border payment solutions.

Philip Panaino, Global Head of Cash at Standard Chartered, said, “We are delighted to build on our existing partnership with Visa to deliver this innovative and future-ready cross border payment network offering to our clients. We will join as a participant bank and as Visa’s new settlement partner for a set of currencies.”


Emirates NBD completes PoC for digitally native trade documents

United Arab Emirates (UAE) bank Emirates NBD has teamed with a trade finance platform and two fintechs on a proof-of-concept (PoC) for a transaction involving digitally native trade documents with the application of participants' digital identity.

The PoC was carried out with DP World Trade Finance, Sweden’s Enigio and iBind and aimed to address the core issues effecting adoption of digitally native trade documents by replicating the traditional physical flow.

The digital documents needed to demonstrate their uniqueness/genuineness; establish ownership and authority; and have the ability to be transferred to a new owner.

”The PoC marks a pivotal moment in the evolution of digital trade finance, as it not only validates the digital trade documents such as an e-Bill of Lading, but also verifies and establishes the authority of the corporate entities involved in the end-to-end trade transaction,” says a statement.

The partners say that their work successfully demonstrates the creation, transmission, and authentication of digitally native trade documents. It also created a robust system for trusted digital identities and showed seamless integration into existing workflows.

Vishnu Purohit, group head, trade product management, Emirates NBD, said:”This innovative solution has demonstrated its potential to revolutionise digital trade, offering enhanced security, efficiency and trust. It is a pivotal step towards a more seamless and secure trade ecosystem, and we are excited about the possibilities it holds for the future of international trade.”


Crypto spot ETFs will launch in Hong Kong next week

The first wave of spot Bitcoin and Ether exchange-traded funds (ETFs) have been officially approved to start trading in Hong Kong from Wednesday 30 April.

Hong Kong’s financial regulator, the Securities and Futures Commission (SFC), announced the official approval of the first batch of spot Bitcoin and Ether ETFs two days ago, according to a press release.

The first batch of approved ETFs also include China Asset Management’s (ChinaAMC), HGI and asset manager Bosera International among the first issuers.

The ETFs will offer retail and institutional investors a safer and more convenient way to invest in the underlying digital assets under a regulated framework, according to Thomas Zhu, head of digital assets and head of family office business at ChinaAMC.

He wrote in the official announcement: “The in-kind feature also attracts coin holders by offering the ease of converting coins to fully regulated ETFs managed by professional fund managers and regulated custodians. With the growing adoption of ETFs in institutional asset allocation and retail trading in Hong Kong, we expect robust demand for our offerings.”


Mongolia signs climate finance deal to conserve grasslands

Mongolia’s government and a coalition of partners have signed a nature finance agreement aimed at protecting 144,000 square km of the East Asia country’s lands and waters, including the world’s last great tract of temperate grassland.

The agreement dubbed “Eternal Mongolia” will see a global donor-supported transition fund worth US$71 million combined with a government commitment to spend US$127 million on conservation over a 15-year period.

Participants say that it will be one of the largest climate finance agreements in Asia to date, dramatically expanding Mongolia’s National Protected Area network and providing a blueprint for other countries around the world.

Mongolia’s environment and tourism minister Bat-Erdene Bat-Ulzii said the country was already suffering from the effects of climate change. Temperatures have risen 2.25 degrees Celsius since the Second World War – more than anywhere else on earth – and there are more frequent and severe climate-induced disasters like harsh winters, droughts, and dust storms.

“We’ve just endured the worst dzud year (severe winter conditions) yet, with millions of livestock lost and people’s livelihoods ruined,” he said referring to a slow-onset but extreme kind of winter unique to Mongolia.

The Eternal Mongolia programme deploys the Project Finance for Permanence (PFP) model, which secures policy changes and funding and binds them together in a single agreement that ties the disbursement of funds to environmental and social goals.

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