Welcome to Copy Time, a podcast series on Markets and Economies from D BS Group Research. I'm the chief economist, welcoming you to our 138th episode and I will apologize in advance for the sound quality and the likely sirens of New York City, police cars and fire engines in the background. So here goes the animal meetings of the IMF and the World Bank held at Washington DC last week. We're characterized by relief over global economic resiliency. Juxtaposed by
heightened concerns about a variety of risks. There was an element of satisfaction among developed and emerging market. Government officials that the post pandemic rebounded. Inflation has largely abated and the short interest rate increase phase has come and gone without causing economic growth to stumble around the world.
This is a sharp departure from the case just two years ago when there was near panic about the stickiness of inflation and the likely spike in unemployment that would be caused by necessary monetary policy tightening. It has of course turned out to be quite different. Labor markets have barely loosened and asset markets are buoyant while goods inflation has disappeared considerably. China, a major source of commodity demand has been on
a slowing path. A contrast from the US economy which has been going strength to strength this opposing dynamic has offered a degree of balance to the global supply demand picture. A stable commodity price environment. Despite escalating warfare in the Middle East has also been a source of support global and ASEAN five growth is expected to remain stable between 24 and 25 in the ifs world economic outlook forecasts released during the meetings. Global real GDP is expected
to rise by 3.2% in both 2024 and 2025. While ASEAN five is expected to rise by about 4.5% in both years. Some slowing of China and India's economies could be also in store about 50 bips each from 4.8 and 7% respectively. But overall global consumption and investment would chug along as part of the IMF we think that it may be too early to declare victory over inflation or take comfort in the apparent resiliency from higher rates. Services inflation remain on the sticky side.
Strong growth may spill over onto or into higher prices and the tensions in the Middle East could reach a tipping point already in recent weeks. The overwhelming expectations of sustained rate cuts have begun to recede with a great deal of uncertainty building up over how many rate cuts are possible next year. One or two more strong jobs than birds and higher than expected. CP I prints could cause a sharp change in rates pricing for next year.
The recent rise in long term US, interest rates which has resulted in mortgage rates rising as well could be a harbinger for things to come. Higher rates could also materialize under Trump election presidency or Trump election victory, which could lead to the expectations of higher us fiscal deficit and erosion of fed independence. That plus Trump's tariff plans could lead to forming of the US D hurting some US D borrowing sovereigns, firms and households.
These risks will need to be assessed in light of the result of the November Us presidential elections. There was no shortage of concerns over the US ranging from an increasingly untenable fiscal position impact of higher tariffs on the rest of the world and to Americans and
a possible re acceleration and inflation. Under a no landing scenario, we even heard ideas akin to an eu style border carbon adjustment tax on imports being floated by some Trump loyalists while such things are less likely under a Harris presidency. No one that I met expects a meaningful improvement in the frictions, characterizing us, trade and commerce vis a vis the rest of the world.
There was however some degree of comfort with the US outlook among many actually given the strong state of asset markets, a buoyant investment environment commanding lead of the global A I race and sell corporate and household balance sheets. As has been the case lately, the meetings contained a great deal of discussion and presentations on geo economic fragmentation,
climate finance. And of course China from the so called excess capacity charges to the scale and effectiveness of the ongoing stimulus measures from the security environment, external, internal to the China plus one dynamic. The arguments were unfortunately largely binary. There is a great deal of group thing among DM economies about China and the thinking is largely about threats and risks rather than opportunities and gains from cooper operation.
We expect this polarization to persist with more tariffs and other restrictive measures in the pipeline. The key is to do the best given that inevitable and adverse dynamic. This is where opportunities for em are being seen. Supply chain relocation should help the likes of India, Mexico, Southeast Asia and a few other countries. Investments from Western MN CS as well as from Chinese companies are being spread more widely around the world.
It remains to be seen if this relocation process would take place without a drop in productivity displayed by China's manufacturing stack. But the choices to do so have been made, no doubt about that. Authorization of the US dollar was another widely discussed. The surveys show that central banks are increasingly inclined to hold more gold and non US dollar assets. Fintech solutions make
deferred barter feasible under which countries running trade deficits. Vis A vis China can receive RMB for what they sell to China and send those RMB proceeds back through the import channel. This is not a theoretical construct. It is an increasingly deepening phenomenon, especially in the Middle East.
There are reasons for this US eu efforts to seize or freeze the assets of the central banks of Afghanistan and Russia along with the multitude of restrictions over Western payment systems like swift are adding impetus for many governments to reduce our reliance on the US dollar. There are already cases where central banks are repatriating their gold reserves custody from London, New York to their home jurisdictions.
Now reducing the reliance on the US dollar is akin to the de risking of supply chain strategy that is touted a great deal just like the pandemic, pushed companies to reconsider the efficiency, resiliency, trade off over loads of manufacturing. Similar considerations are at play with regard to the risks of holding us dollar assets. Alternatives like barter purchase and localization of gold holdings and adding Euro or RMB to reserves are somewhat second best options.
They have some associated frictions but they are now very much on the table. The extraordinary rise in US debt issuance adds to these considerations in many corners of the world. All right, I'm gonna switch gears a little bit and I want to talk about a specific chapter that was published by the IMF uh it was the um IMF Global Financial Stability Report or GFSR and it contained a very interesting chapter on the potential impact of A I and Ja I on capital markets.
The premise of the analysis was that A I and related breakthroughs have the potential to increase the efficiency of capital markets and that includes trading investment and asset allocation through assisted process automation and analysis of complex unstructured data. The report cited early evidence that these effects are already being felt in the financial sector. Financial firms are hiring a large number of A I talent developers are filing
for patterns and these are up sharply. While pricing patterns and trading dynamics already show changes in some markets. Consistent with the adoption of these new technologies, major gains from such a wave would materialize in the medium term for the time being. The typical short term use case for A I is extension of existing trends in the use of machine learning and other advanced analytical tools.
The IMF researchers argue in the report that A I may reduce financial stability risks by enabling superior risk management, deepening market liquidity and improving market monitoring, but it's not all good. There are some risks to consider. Firstly, um the risk is if trading strategies of A I models all respond to a shock in a similar manner, then that could create exaggerated price movements or market disruption.
Also, there could be further migration of market making and investments activities to hedge funds for priory trading firms and other non bank financial intermediaries, which could create a degree of opacity in the financial sector, firms and government should also take into cognizance the increase in operational risks as there are only a handful of
key third party A I service producers. There's also the risk that A I enabled bad actors could carry out cyber attacks and market manipulation with a far greater potency than anything we have seen. So far. Global regulators are working on creating a framework to address this. These risks considerations include calibration of circuit breakers and a
review of marketing practices. In case of rapid A I driven price moves as well as enhanced monitoring and data collection of the activity of large traders including non bad financial intermediaries. There will be an increased need to stay on top of dependency on data models and technological infrastructure firms should be expecting to regulators, expecting regulators to demand risk mapping covering internal external data, interconnections and interdependencies.
So in conclusion, the IMF meetings did not bring forth any new ambitious calls to action. Key cyclical and structural issues remain the same from sustainable growth to dealing with climate change, to issues like increasing the voice of developing
economies in the multilateral system remain on the sideline. The continuous erosion of a rules based free trade oriented global system is noted and those costs are highlighted but there is little in the power of the well meaning staff of the World Bank and IMF to push back against the trend in the coming meetings. More of the same can be expected and that's just about it. So that's it for today. Copy Time was produced by Ken Delbridge from Spy studios, Violet Lee and Daisy Shermer
provided additional assistance. This podcast is for information only and does not provide any trade recommendations. All 138 episodes of copy time are available on youtube as well as on all major platforms of podcasts including Apple and Spotify. As for our research publications and webinars. You can find them all by Googling D BS Research Library. Have a great day.