1 00:00:06,110 --> 00:00:08,978 Speaker 1: Welcome to COI Time, a podcast series on markets and 2 00:00:08,978 --> 00:00:12,590 Speaker 1: economies from DBS Group Research. I'm Tebek, chief economist, welcoming 3 00:00:12,590 --> 00:00:17,500 Speaker 1: you to our 163rd episode. Today, it's just yours truly, 4 00:00:17,629 --> 00:00:20,229 Speaker 1: sharing with you my impressions from my recent travels to 5 00:00:20,229 --> 00:00:21,079 Speaker 1: Washington DC. 6 00:00:21,809 --> 00:00:25,049 Speaker 1: The IMF World Bank annual meetings, which was held there 7 00:00:25,379 --> 00:00:29,299 Speaker 1: last week, was marked by, in my view, a distinct contrast. 8 00:00:29,379 --> 00:00:32,529 Speaker 1: So let's explore that contrast a bit. On one hand, 9 00:00:32,740 --> 00:00:36,388 Speaker 1: you had the published material, including that from the IMF's 10 00:00:36,389 --> 00:00:41,340 Speaker 1: flagship publication World Economic Outlook, that contained a considerable amount 11 00:00:41,340 --> 00:00:42,778 Speaker 1: of concern about the outlook. 12 00:00:43,330 --> 00:00:46,369 Speaker 1: You shouldn't be surprised by the list of the concerns, uh, 13 00:00:46,409 --> 00:00:50,729 Speaker 1: increasingly difficult environment for trade, policy uncertainty emanating mostly out 14 00:00:50,729 --> 00:00:55,279 Speaker 1: of the US debt overhang in industrial economies, stretch valuation 15 00:00:55,279 --> 00:00:58,689 Speaker 1: of many equity markets, AI bubble, and if it bursts. 16 00:00:59,409 --> 00:01:03,049 Speaker 1: These risks clearly informed a rather subdued outlook for the 17 00:01:03,049 --> 00:01:07,649 Speaker 1: medium term, even though the IMF revised up 2025 growth 18 00:01:07,650 --> 00:01:11,970 Speaker 1: forecasts marginally. Now, where's the contrast? The contrast came not 19 00:01:11,970 --> 00:01:14,410 Speaker 1: from the published material, but from the communication, the oral 20 00:01:14,410 --> 00:01:19,129 Speaker 1: communication of the management of the multilateral institutions. There was 21 00:01:19,129 --> 00:01:21,930 Speaker 1: a sigh of relief that the worst fears around the 22 00:01:21,930 --> 00:01:25,099 Speaker 1: collapse of trade and supply chain breakdown had not materialized. 23 00:01:25,290 --> 00:01:25,690 Speaker 1: In fact, 24 00:01:26,209 --> 00:01:31,010 Speaker 1: Despite much foreboding about trade, export and import-related activities actually 25 00:01:31,010 --> 00:01:33,809 Speaker 1: have been moving along pretty steadily. There was also some 26 00:01:33,809 --> 00:01:37,080 Speaker 1: recognition given to the global systems of payments and finance, 27 00:01:37,370 --> 00:01:39,860 Speaker 1: which seem to have been switched to the uncertainty spike 28 00:01:39,860 --> 00:01:42,160 Speaker 1: during April rather well. 29 00:01:43,089 --> 00:01:46,610 Speaker 1: From the assortment of seminars and meetings with officials from governments, 30 00:01:46,769 --> 00:01:51,319 Speaker 1: multilateral institutions, and think tanks, we found elements of resilience. 31 00:01:51,690 --> 00:01:54,690 Speaker 1: We also saw some concerns, so we did leave the 32 00:01:54,690 --> 00:01:58,120 Speaker 1: meetings with a degree of discomfort that some risks may 33 00:01:58,120 --> 00:02:01,809 Speaker 1: be being treated a bit too sanguinely by both policymakers 34 00:02:01,809 --> 00:02:05,480 Speaker 1: and markets, but by and large, that point about some 35 00:02:05,480 --> 00:02:08,130 Speaker 1: sigh of relief, I think it's worth exploring. So let's 36 00:02:08,130 --> 00:02:09,699 Speaker 1: think about the drivers of resilience. 37 00:02:10,538 --> 00:02:14,580 Speaker 1: Governments and companies have gotten used to a perma shock 38 00:02:14,580 --> 00:02:18,289 Speaker 1: environment over the past decade. From Trump 1.0 to the pandemic, 39 00:02:18,580 --> 00:02:22,339 Speaker 1: various armed conflicts and AI disruption, the notion of steady 40 00:02:22,339 --> 00:02:25,929 Speaker 1: state has more or less dissipated. Shocks are no longer shocking, 41 00:02:26,179 --> 00:02:31,059 Speaker 1: just materialization of tail risks already considered in scenario planning exercises. 42 00:02:31,720 --> 00:02:35,639 Speaker 1: Supply chains narrow and concentrated half a decade ago are 43 00:02:35,639 --> 00:02:39,470 Speaker 1: now more elaborate, slightly less efficient, but also more resilient. 44 00:02:39,758 --> 00:02:43,559 Speaker 1: Consumers dislike high cost of living, but they don't postpone 45 00:02:43,559 --> 00:02:47,679 Speaker 1: consumption readily when faced with some price or quantity supply 46 00:02:47,679 --> 00:02:51,880 Speaker 1: related uncertainty. Markets react to adverse developments with some risk aversion, 47 00:02:51,919 --> 00:02:56,389 Speaker 1: but not panic. Sell-offs are not seen as begetting more sell-offs. 48 00:02:56,820 --> 00:03:00,240 Speaker 1: Now, all this might sound a bit too sanguine given 49 00:03:00,240 --> 00:03:02,369 Speaker 1: the various stresses present in the global system of trade 50 00:03:02,369 --> 00:03:05,449 Speaker 1: and commerce, but the fact is that the spike in 51 00:03:05,449 --> 00:03:09,079 Speaker 1: tariffs and the plethora of trade restrictions imposed since April 52 00:03:09,369 --> 00:03:14,089 Speaker 1: have tested, but not defeated economies and markets. Capital flows, 53 00:03:14,210 --> 00:03:18,199 Speaker 1: be it portfolio direct investment related, have been dynamic, not stagnant. 54 00:03:18,500 --> 00:03:22,330 Speaker 1: Investors have reaped strong returns along a range of asset classes. 55 00:03:22,779 --> 00:03:26,330 Speaker 1: Financial conditions have eased currency and debt market generations have 56 00:03:26,330 --> 00:03:27,139 Speaker 1: been modest. 57 00:03:28,130 --> 00:03:32,089 Speaker 1: These developments give one room for optimism that even as 58 00:03:32,089 --> 00:03:35,419 Speaker 1: more shocks invariably materialize in the near term, the risk 59 00:03:35,419 --> 00:03:39,610 Speaker 1: of markets overshooting or economies stalling outright in response is 60 00:03:39,610 --> 00:03:43,130 Speaker 1: pretty low. Case in point is the sharp ratcheting up 61 00:03:43,130 --> 00:03:46,520 Speaker 1: of trade-related rhetoric between China and the US in recent weeks. 62 00:03:46,690 --> 00:03:50,250 Speaker 1: The general view remains that despite unwelcome developments, 63 00:03:50,850 --> 00:03:54,070 Speaker 1: Chances remain good that the two sides will continue to 64 00:03:54,070 --> 00:03:57,860 Speaker 1: talk and not inflict undue additional cost to doing business. 65 00:03:58,899 --> 00:04:02,740 Speaker 1: US economic outlook loomed above all during the annual meetings. 66 00:04:02,869 --> 00:04:05,350 Speaker 1: On the institutional side, threats on the independence of the 67 00:04:05,350 --> 00:04:08,630 Speaker 1: Federal Reserve are widely discussed. Given the repeated attacks on 68 00:04:08,630 --> 00:04:11,949 Speaker 1: the current FOMC officials, there are genuine questions about where 69 00:04:11,949 --> 00:04:15,149 Speaker 1: the Fed would go with decision making next year with 70 00:04:15,149 --> 00:04:18,669 Speaker 1: respect to setting on short-term interest rates, regulating non-banks with 71 00:04:18,670 --> 00:04:21,989 Speaker 1: stable coin issuance, and managing massive public debt overhang. 72 00:04:22,920 --> 00:04:26,549 Speaker 1: The final one, the massive public debt overhang, is really 73 00:04:26,549 --> 00:04:28,980 Speaker 1: the job of the US Treasury, but the line has 74 00:04:28,980 --> 00:04:33,469 Speaker 1: blurred this year with various Trump administration officials publicly musing 75 00:04:33,470 --> 00:04:36,309 Speaker 1: about the amount of savings that would be incurred if 76 00:04:36,309 --> 00:04:41,299 Speaker 1: the Fed cuts rates by, say, 150, 250 basis points. 77 00:04:41,470 --> 00:04:43,470 Speaker 1: A former Fed official noted to us that this is 78 00:04:43,470 --> 00:04:47,390 Speaker 1: the ultimate illustration of fiscal dominance, and even the discussions 79 00:04:47,390 --> 00:04:50,790 Speaker 1: on monetary policy are fully influenced by what's happening at 80 00:04:50,790 --> 00:04:51,589 Speaker 1: the debt level. 81 00:04:52,260 --> 00:04:56,859 Speaker 1: We heard from IMF officials that US labor productivity growth 82 00:04:56,859 --> 00:05:01,619 Speaker 1: has been impressive in the post-pandemic period. Adoption of technology, dynamic, 83 00:05:01,859 --> 00:05:05,899 Speaker 1: will remunerated job market, some improvement in infrastructure, and tightened 84 00:05:05,899 --> 00:05:09,179 Speaker 1: immigration have helped. Although it is not yet clear if 85 00:05:09,178 --> 00:05:13,660 Speaker 1: this bump would last. AI related disruption informs hiring sentiments, 86 00:05:13,820 --> 00:05:16,260 Speaker 1: but consumers don't seem to be worried about jobs or 87 00:05:16,260 --> 00:05:18,540 Speaker 1: income sufficiently to curtail consumption. 88 00:05:19,190 --> 00:05:22,329 Speaker 1: The US economy looks poised to keep growing at around 2%, 89 00:05:22,540 --> 00:05:26,940 Speaker 1: helped by resilient consumption and robust investment. On the investment matter, 90 00:05:27,350 --> 00:05:29,220 Speaker 1: there was an interesting observation made by some is that 91 00:05:29,220 --> 00:05:31,219 Speaker 1: there may be an exaggerated sense of the impact of 92 00:05:31,220 --> 00:05:34,859 Speaker 1: the AI-related spending. The fact is that investment has been 93 00:05:34,859 --> 00:05:38,619 Speaker 1: getting a lot of support Biden era stimulus, the forthcoming 94 00:05:38,619 --> 00:05:41,250 Speaker 1: tax relief under the big beautiful bill, all of these 95 00:05:41,250 --> 00:05:44,539 Speaker 1: are making fixed capital formation in the US very well supported, 96 00:05:44,579 --> 00:05:47,140 Speaker 1: and it's a general thing, not just related to AI. 97 00:05:48,178 --> 00:05:52,859 Speaker 1: Resiliency of the US economy, notwithstanding, the questions related to 98 00:05:52,859 --> 00:05:56,899 Speaker 1: fiscal sustainability lingered during the meetings. Industrial economy debt is 99 00:05:56,899 --> 00:06:00,459 Speaker 1: strikingly high, but the US numbers are truly worrisome. The 100 00:06:00,459 --> 00:06:03,179 Speaker 1: tariff-related revenue spikes so far this year is more than 101 00:06:03,178 --> 00:06:06,980 Speaker 1: offset by tax cuts and spending rigidities, with no realistic 102 00:06:06,980 --> 00:06:09,459 Speaker 1: policy agenda on the table to bring down the outstanding 103 00:06:09,459 --> 00:06:12,380 Speaker 1: debt burden. Forcing the Fed to cut a lot would 104 00:06:12,380 --> 00:06:14,980 Speaker 1: steepen the yield curve, which may in turn force the 105 00:06:14,980 --> 00:06:17,049 Speaker 1: Fed and Treasury to engage in financial repression. 106 00:06:17,700 --> 00:06:21,459 Speaker 1: With this backdrop, investors seem increasingly prone to hedging their 107 00:06:21,459 --> 00:06:24,260 Speaker 1: exposure to US debt and US dollar. 108 00:06:25,170 --> 00:06:29,488 Speaker 1: On prices, the US seems likely to be characterized by 109 00:06:29,488 --> 00:06:32,529 Speaker 1: around 3% inflation for the time being. Half a decade 110 00:06:32,529 --> 00:06:36,040 Speaker 1: of above target inflation is yet to dent Fed credibility, 111 00:06:36,290 --> 00:06:38,769 Speaker 1: but this is not something that one should take for granted. 112 00:06:39,290 --> 00:06:42,409 Speaker 1: Service sector inflation going forward is likely to be pushed 113 00:06:42,410 --> 00:06:46,019 Speaker 1: up by labor shortage. Energy inflation may become an issue 114 00:06:46,019 --> 00:06:49,769 Speaker 1: given the spiking electricity demand from AI data centers. Lack 115 00:06:49,769 --> 00:06:52,409 Speaker 1: of fiscal adjustment and record high stock prices will not 116 00:06:52,410 --> 00:06:56,169 Speaker 1: have price expectations either. Put it all together, the Fed's 117 00:06:56,170 --> 00:07:00,040 Speaker 1: capacity to engineer a major rate cut cycles seems highly problematic. 118 00:07:00,649 --> 00:07:04,250 Speaker 1: We did not hear much about currency wars. While some 119 00:07:04,250 --> 00:07:07,049 Speaker 1: US government officials have asserted that a sharply weaker dollar 120 00:07:07,049 --> 00:07:08,970 Speaker 1: is essential to restore competitiveness. 121 00:07:09,410 --> 00:07:11,970 Speaker 1: This doesn't appear to be a dominant strain in the 122 00:07:11,970 --> 00:07:14,459 Speaker 1: administration presently. It can come later, but not right now 123 00:07:14,459 --> 00:07:17,799 Speaker 1: at least. If US economic growth remains in the 2% 124 00:07:17,799 --> 00:07:20,760 Speaker 1: range and the stock market does not undergo a sharp correction, 125 00:07:20,940 --> 00:07:24,040 Speaker 1: the imminent currency market dynamic may well be one of 126 00:07:24,040 --> 00:07:27,959 Speaker 1: the US dollar strength, upending the US dollar weak narrative 127 00:07:27,959 --> 00:07:30,000 Speaker 1: that has persisted for most of this year. 128 00:07:31,049 --> 00:07:34,970 Speaker 1: We left Washington not with a relaxed outlook, but with 129 00:07:34,970 --> 00:07:39,410 Speaker 1: some conviction that heightened and sustained geopolitical uncertainty did not 130 00:07:39,410 --> 00:07:43,369 Speaker 1: derail the global economy. The foundations of trade and commerce 131 00:07:43,369 --> 00:07:47,559 Speaker 1: are less fragile than fear. A worldwide stress test is underway. 132 00:07:47,850 --> 00:07:49,450 Speaker 1: The results are decent. 133 00:07:50,230 --> 00:07:52,989 Speaker 1: That really is for today. This podcast was produced by 134 00:07:52,989 --> 00:07:56,070 Speaker 1: Ken Delbridge at Sly Studios. Violet Lee and Daisy Sharma 135 00:07:56,070 --> 00:07:59,239 Speaker 1: provided additional assistance. Copy time is for information only and 136 00:07:59,239 --> 00:08:03,029 Speaker 1: does not constitute any investment advice. All 163 episodes of 137 00:08:03,029 --> 00:08:05,950 Speaker 1: the series are available on YouTube and on all major 138 00:08:05,950 --> 00:08:10,059 Speaker 1: podcast platforms, including Apple and Spotify. For our research content 139 00:08:10,059 --> 00:08:12,250 Speaker 1: and webinars, you can find them all by Googling DBS 140 00:08:12,250 --> 00:08:14,549 Speaker 1: Research Library. Have a great day.