Asian economies remain well positioned for growth despite rising energy, commodity prices: Standard Chartered chair

• China, other Asian economies should remain resilient, even as commodity and energy prices rise sharply, Jose Vinals says
• Asia to remain ‘fastest driving economic area in the world’, Vinals says

Asian economies, particularly China, are well positioned to weather the effects of sharp rises in energy and commodity costs following Russia’s invasion of Ukraine, according to Jose Vinals, Standard Chartered’s chairman.

European economies are likely to feel greater pressure because of the triple whammy of sanctions on Russia, a disruption of household confidence and higher oil and energy prices as they are more dependent on Russian oil and gas, Vinals said.

Without minimising the current challenge, Vinals said he is not “agonising about Asia”. Beyond the short-term uncertainties, the region should remain “the most dynamic economic area in the world over the medium and long term”, he said.

As a major importer of oil and commodities, rising prices may be reflected more in the producer price index in China, for example, rather than overall economic growth, Vinals said. China imports about 70 per cent of its oil and is the world’s largest consumer of industrial metals.

“The fact that the Chinese authorities have set a 5.5 per cent growth target for this year – and the importance of this year politically – means monetary and fiscal policy are going to be further countercyclical in order to get to get as close as possible to 5.5 per cent,” Vinals said. “I think China has enough policy room to manoeuvre, enough power on the monetary and the fiscal front to be doing well.”

The price of Brent crude oil topped US$100 for the first time since 2014 following Russian’s invasion of Ukraine in late February, with oil prices rising more than 21 per cent in the month since the war began.

Other commodities, including wheat and aluminium, have also seen sharp price jumps since the invasion as investors fear supply chain disruptions associated with the war and a slew of sanctions placed on hundreds of Russian oligarchs and businesses.

For example, nickel trading on the London Metal Exchange was suspended for more than a week this month as prices surged to more than US$100,000 a tonne, threatening billions of dollars in margin calls on producers and brokers who bet against the market. Nickel is a major component in the manufacturing of stainless steel and batteries for electric vehicles.

The surge in commodity and energy prices comes against the backdrop of many Western economies facing stagflationary pressures as inflation has topped levels not seen in three decades as economies restart from the coronavirus pandemic.

That means many central banks from the Bank of England to the US Federal Reserve are struggling with how to balance increasing interest rates to control inflation whilst avoiding short-circuiting the economic recovery.

“In terms of inflation, central banks will be faced with more difficult choices because of the stagflationary tilt,” Vinals said. “As the Fed and the ECB [European Central Bank] increase interest rates to control inflation, growth will unavoidably be impacted.”

Last week, Fed chairman Jerome Powell indicated the central bank was prepared to raise rates by 50 basis points at a time to combat inflation, which was near 8 per cent in the US in February.

The Fed raised interest rates by 25 basis points this month, the first increase in more than three years, and has given guidance it could aggressively raise rates six more times this year.

“Inflationary pressures are rising as a result of oil and energy prices, as well as other commodities more generally. This is also taking purchasing power out of consumers. The world events are hitting confidence, which is postponing durables consumption and investment,” Vinals said.

“Unavoidably, this has taken some steam from the growth prospects. That doesn’t mean that the global economy is going into a recession unless we think of an extreme scenario,” Vinals said. “What it means is that growth is going to be lower this year than originally envisaged. Of course, we will know more precisely the true size of the impact as time advances and what happens with the war. The longer the war lasts, the more impactful will all this be.”

Standard Chartered was predicting the global economy would grow by 4.4 per cent this year before the Ukraine invasion. If there is not an immediate ceasefire, global growth could fall below 3 per cent, Vinals said.

“Global growth is going to be lower. How much it does will ultimately depend on the evolution of the military conflict,” Vinals said. “While Europe will be most affected there is more resilience in other parts of the world, the United States and Asia, in particular.”

Author: Chad Bray, SCMP