stagflation: Recession unlikely, but there will be a period that could resemble stagflation: Viktor Shvets, Macquarie Capital

Economic Times

28-04-2025

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The US will not be in recession but there will be a period that could resemble stagflation , said Viktor Shvets , head of global desk strategy at Macquarie Capital . In an interview with Himadri Buch and Nishanth Vasudevan, Shvets spoke about the Indian economy, the safe haven status of US assets and China, among other issues. Edited excerpts:There is nothing horribly unusual, but what people have got used to is that what we have experienced over the previous 40 or 50 years has very limited applicability and that applies to politics, societies, geopolitics, economics, trade, and markets . All the changes predate Trump 1.0 and Trump 2.0. The dividing line, from my perspective, was the global financial crisis around 2010. The world as we knew it over 40 years ago has ended. The questions are what the new world would look like? How long is it going to take us to get there, and how much volatility and disruption will we need to experience?The selling pretty much stopped, and India started to outperform again. What you've seen since September of last year is a recognition (among foreign investors) that India cannot grow at 8%, and even 7% might not be attainable unless it embarks on strong structural domestic reforms across sectors like agriculture and construction. India's appropriate, sustainable growth rate should be around 5.5%-6.5%. In nominal terms, India should be growing at 9-10%. At that point, it would still be delivering double the nominal growth rates that China can.Structurally, if it continues with reforms and steady performance, India has a very strong long-term story. But people need to recalibrate for now. Indian analysts are traditionally too bullish. They're constantly looking at 17-18% gross growth rates. If your normal GDP is 9-10%, there is no way in the world earnings per share can be at that level.None of it is about trade. It's about changing American society and the economy. The only way that can be done is by changing the world. People want to burn it down to rebuild. So, investors must embrace chaos.Donald Trump is basically channelling numerous grievances. Now, because the grievances are disparate, the policies that are emerging also don't have consistency. So when people look for a plan, there is no plan. So, stop looking for it.But there is an overarching goal, and that has nothing to do with the trade wars. There are three distinct branches in the Republican Party. One is technology titans such as Elon Musk, Marc Andreessen and Peter Thiel, who are globalists.The second branch, which is much larger numerically, are nationalists who are parochial and want to return US of the 1950s where one salary paid for the whole family and a country lived under God. They don't want legal or illegal immigration and are very suspicious of tech giants and billionaires.The third part is more traditional-Reagan Republican. Scott Bessent, JD Vance, Stephen Bannon and Stephen Miller are examples of that. They also want to reduce regulations. They want the private sector to play a more active role. So, those three camps don't agree on a lot of things. And so, when people say, is the US in favour of a strong or weak dollar? The answer is both. Is it in favour of free trade or tariffs? The answer is both. And so people are looking at all of those moves and asking, 'When would the chaos end?' The answer is it won't.The 1930s is the closest. That's when you had tariffs, deportations, border closures, strongmen coming to power, attacks on traditional systems, and cultural clashes. Some say the 1970s, but I disagree. In the 1970s, communism was fading, systems were being fine-tuned, and inequality was low, unlike today.If you don't know the basic policies, you can't predict recessions. The only thing one can argue is that uncertainty breeds lower growth and likely high inflation in the US and disinflation in the rest of the world. So that's pretty clear. Structurally, the US economy is very strong and can survive incompetence. But the US is facing almost existential institutional schism, collapse and erosion of institutional pillars. My personal view is that the US will not be in recession. But there will be a period that could resemble stagflation and probably would last for at least a year.Clearly, US risk premia are rising, like in the 30s and 70s because of the attacks on institutional pillars and chaotic economic policies. So, the demand for US dollar assets is diminishing. But, it doesn't mean the US dollar is no longer the top currency. There is no replacement for the US dollar. You know, the US CHIPS (Clearing House Interbank Payments System) is 30 times the size of Chinese CHIPS. Whatever China does in its own currency is puny. It's less in size than the state of Alabama. So, there is nothing else to play the role that the US dollar plays. But what it does mean is that it introduces a greater degree of uncertainty as to how you value global assets. Because you are now dealing with a much more volatile risk premia on the safest asset globally. So, for safety, the most obvious is gold. It's an insurance policy against the worst possible outcomes that the world could potentially suffer from.The Fed doesn't know. Jerome Powell lacks visibility on critical factors like tariffs, de-globalisation, and supply shocks, which is why he remains data-dependent. Ultimately, Powell must act based on incoming data, leaning towards growth or inflation. If the US doesn't shift massively in terms of real rates and inflation, the nominal neutral rate could be around 3% to 3.5%. If Powell doesn't cut interest rates, Donald Trump will blame him for any economic slowdown that occurs. If he does cut interest rates, he might be called another Arthur Burns, somebody who buckled in the 1970s and caused a deflationary period. No matter what he does, he can't win.Over the longer term, my top markets are the technology corridor- —Korea, Taiwan, and India. In the shorter-term trading sense, China will continue to trade up, primarily because there's less reason to argue why China's equity risk premium, adjusted for inflation, should be 7% while the US is less than 3.5%.China is replicating Japan's 1990s stagnation, with GDP growth struggling. China has over-invested, leading to high savings and disinflation. Structural reforms such as reallocation of money from central government to provincial governments, recapitalisation of the banks, rescuing the real estate sector, supporting social and welfare policies and raising productivity in agriculture are required. But there is no evidence that the government is willing to do that. That is why China has a high risk premium.