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SPI Management Newsletter 14.04.2023

Chinese Exports Surge as Trade With Russia and Southeast Asia Jumps

China experienced a significant rebound in exports in March, with increased demand in Asia and Europe and improved supply chain conditions contributing to the recovery. A key factor in the strong performance was a substantial increase in Chinese exports to Russia, which more than doubled compared to the previous year, indicating a strengthening of economic ties between the two nations.

Data from China's customs bureau showed a 14.8% year-over-year increase in exports for March, reversing a 6.8% decline observed in the first two months of 2023. This exceeded the expected 7% contraction forecast by economists. Imports into China fell by 1.4% in March year-over-year, a smaller decrease than the 5% drop predicted by economists and the 10.2% decline observed in the first two months of the year.

The improved export figures can be attributed to a resurgence in domestic activity following the lifting of Covid restrictions and the deepening economic relationship between China and Russia. Chinese exports to Russia surged to a record $9 billion in March, with goods shipments totaling $24 billion in Q1 2023, an increase of 48% from the previous year. However, this still represents only 3% of China's total exports.

Some economists have adjusted their Q1 GDP growth forecasts for China to over 4%, up from the 2.9% observed in Q4 2022. Despite these improvements, concerns remain over the ability of trade to sustain China's economy through the end of the year, with potential challenges arising from geopolitical tensions and monetary tightening.

The World Trade Organization recently predicted a 1.7% increase in global goods trade for this year, a slower pace than the 2.7% growth observed in 2022. Analysts from Capital Economics suggest that China's export recovery could be short-lived, as they expect most developed economies to experience a recession this year. While certain sectors, like new energy vehicles, may continue to boost China's exports, others, such as housing-related products, could face headwinds from central bank rate increases in developed countries.

U.S. Inflation Drops to 5% in March

U.S. inflation experienced a decline in March, reaching its lowest point in nearly two years. However, underlying price pressures may still prompt the Federal Reserve to consider another interest-rate hike in May. The consumer price index (CPI) increased by 5% year-over-year in March, down from 6% in February, marking the smallest gain since May 2021.

Although core prices, which exclude volatile food and energy categories, rose by 5.6% year-over-year in March, the CPI increased only 0.1% month-over-month, compared to February's 0.4% rise. Lower prices for groceries, gasoline, medical care, and utilities, and higher prices for shelter, airline fares, and vehicle insurance were observed in March.

Despite a tight labor market and high inflation, the Fed has indicated a potential interest rate increase at their next meeting. The benchmark federal-funds rate is currently between 4.75% and 5%. Officials will monitor economic activity, lending conditions, and banking-system stress as they consider further rate adjustments in early May. The economy has shown recent signs of slowing, with more modest consumer spending and a cooling labor market.

Euro Reaches 12-Month High as Investors Expect More ECB Rate Hikes

The euro recently reached its highest level against the dollar in over a year, fueled by an improving eurozone economic outlook and expectations of further European Central Bank (ECB) rate increases. The euro rose 0.63% to $1.1067, hitting its highest level since early April 2022. The ECB is now seen as more hawkish, with improving economic conditions in Europe and a more stable energy market. Factory output in the eurozone increased at its fastest pace in six months in February, while business activity expanded at its quickest rate in 10 months. Improving economic conditions in Europe have contributed to the euro's strength.

Previously, concerns over soaring gas prices had sparked fears of a deep recession in Europe. However, a warmer than expected winter and a reopening of the Chinese economy following pandemic-induced lockdowns have boosted business activity and consumer confidence, fueling expectations of further interest rate increases. While eurozone inflation dropped to 6.9% in March, underlying price pressures excluding energy and food continued to rise to a new record of 5.7%. The euro's trajectory will depend on global inflationary pressures and central banks' responses to those pressures.

Adapted from WSJ, Reuters, CNBC, NYT, Forbes

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