Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we find out why emerging markets face a tough second half of the year.
Speaker: We look at whether the dollar's recent strength can continue.
Speaker: and we assess the UN's latest population projections and what they could mean for the global economy.
Speaker: This podcast was recorded on Thursday, the 14th of July, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Chris Hare.
Speaker: And I'm Aline Van Dyne.
Speaker: Pressure is mounting on the global economy as it battles high inflation and slowing growth.
Speaker: And with central banks, including the Fed,
Speaker: turning more hawkish, the outlook for emerging markets appears challenging.
Speaker: Murat Olgan, Global Head of Emerging Markets Research, joins us now.
Speaker: So Murat, can you begin by reminding us how emerging market assets have performed so far this year?
Speaker: There has been no letter for emerging market financial assets.
Speaker: The second quarter was worse than the first in terms of market performance based on some measures.
Speaker: And the first quarter was already more severe in over a decade, bar the start of the pandemic.
Speaker: In April, we argued for caution, but we weren't expecting the performance to be this bad, even though the investment backdrop was in a state of flux.
Speaker: So emerging markets seeming that already a big worry about stagflation, but now there is an additional concern, the risk of an outright global recession.
Speaker: And just on those recession concerns, what challenges are emerging markets facing?
Speaker: At the moment, we only see partial recession in major economies, perhaps more on the trade side versus resilient services.
Speaker: And in many parts of the world, activity is still respectable, supported by a surge in spending as the economies have reopened.
Speaker: However, EM financial conditions have tightened dramatically to record levels since the global financial crisis based on our measures.
Speaker: The Fed's twin tightening in terms of higher cost of funding and withdrawal of liquidity is biting, inhibiting financial flows to EM and risking a sharp slowdown.
Speaker: The only upside may come from a steady recovery in China, although it seems like the cycles have diverged given China's zero tolerance strategy towards COVID-19.
Speaker: Murat, what's the story with inflation today?
Speaker: Now, weaker activity should, in theory, bring inflation down.
Speaker: But this is a pretty qualified proposition when it comes to EM inflation.
Speaker: Inflation is not a mean reverting phenomenon and responds to policy.
Speaker: As a matter of fact, what we see big spike in inflation is actually rents, expectations, services and services are quite sticky.
Speaker: So we believe the debate about EM inflation will move quickly from has it peaked question to more like is it falling towards target quickly and close enough?
Speaker: We think inflation inertia and persistence will rule in the second half.
Speaker: The sacrifice from growth to bring inflation down to target has increased substantially since the global financial crisis based on our analysis.
Speaker: That's because of deglobalization trends, various supply-side disruptions and shocks, and also loss of productivity and efficiency gains.
Speaker: So how are you viewing EM assets going forward?
Speaker: Now, clearly this is a very challenging environment for emerging markets.
Speaker: Even though asset prices have been cheapening for more than a year, it's difficult to argue that it's stress levels to cover all these risks surrounding the growth inflation trade-off both for EM and DM.
Speaker: So this environment still warrants continued caution.
Speaker: And we think the bounce backs will probably only tactical and opportunities to be rare.
Speaker: They will be mostly supported by a very favorable technical picture in terms of depressed investor sentiment, high cash levels and low positioning of institutional investors as reflected in our latest HSBC EM sentiment survey.
Speaker: Murat, thanks very much.
Speaker: Thank you.
Speaker: Let's move to the currency markets now, where our team have just published their latest monthly outlook.
Speaker: Paul Mackel, Global Head of FX Research, can talk us through the highlights.
Speaker: So, Paul, you've favoured the dollar for nearly a year.
Speaker: Remind us why that is.
Speaker: Well, we've been emphasising two forces coming together.
Speaker: The first is what's happening with global growth or has been happening with global growth.
Speaker: Generally, it's peaked in the second quarter of last year and has been slowing since.
Speaker: And
Speaker: Consistent with that, normally the US dollar tends to do better as do other counter-cyclical currencies.
Speaker: So it's no surprise that the dollar actually has a tailwind from that perspective.
Speaker: The second component to our framework, very much associated with the Fed.
Speaker: The Fed has been very hawkish as we all know, and as that yield support has been rising more so than elsewhere, that too has been central to underpinning the dollar versus many different currencies.
Speaker: So this is clearly a strong outlook for the dollar.
Speaker: What sort of pushback have you had to that view?
Speaker: The type of resistance that we're coming across, it's typical ones that the market is already heavily positioned in favor of the US dollar or a strong dollar.
Speaker: It's very overvalued.
Speaker: Or a US slowdown could cause an abrupt change in the outlook for the US dollar for the worse.
Speaker: And we've been pushing back against those points for quite some time.
Speaker: In particular, the idea about overvaluation.
Speaker: Yes, the dollar is overvalued.
Speaker: We don't disagree with that.
Speaker: However, that can last a lot longer than many people may think.
Speaker: Going back to the early 2000s, the dollar was facing this type of level of overvaluation, but that was very much driven by the weakness of European currencies.
Speaker: And to an extent, history is repeating yet again.
Speaker: Eurodollar has hit parity for the first time in 20 years.
Speaker: What are your thoughts there?
Speaker: Well, we're not surprised.
Speaker: A couple of months ago, we've been building the case that the exchange rate would hit parity, if not even trade a little bit below it.
Speaker: And we still think that the downward pressure on the euro and other European currencies, including sterling, can persist in the quarters to come.
Speaker: They're facing a very difficult growth and inflation mix.
Speaker: We also know that the geopolitical angle is not helpful at all with the Russia-Ukraine war.
Speaker: And it's a very kind of different setup in terms of how we're thinking about the Fed, the dollar, and a weak global growth cycle that's benefiting that currency.
Speaker: The others, mainly in Europe, have a lot more to lose.
Speaker: Paul, thanks for the update.
Speaker: Thank you very much.
Speaker: Demographics is a key theme for us here at Global Research.
Speaker: And this week, the UN released its updated forecasts, which show how the world's population is expected to evolve over the rest of the century.
Speaker: James Pomeroy, global economist, is here to give us the key takeaways.
Speaker: So, James, what do the UN's latest figures say about global population growth?
Speaker: So the UN's new forecasts paint a much more downbeat view in terms of the world's population.
Speaker: Back in 2019, the UN's assumptions weren't expecting the world's population to peak at all during the course of this century, whereas now they're looking at that global population to peak in the 2080s.
Speaker: So a bit of a bring forward in terms of that peak.
Speaker: Now, why is that?
Speaker: It's because of lower fertility rate assumptions.
Speaker: So the UN has seen people have fewer children during the course of the pandemic.
Speaker: but also expecting that that number doesn't pick back up as quickly as maybe they would have done in the past.
Speaker: So that lower fertility rate assumption is meaning obviously fewer children being born, not just today, but in the coming years.
Speaker: And that in itself acts as a means by which we start to see
Speaker: the world's population grow less quickly, and then eventually we start to see it peak.
Speaker: How do the UN's figures compare to your forecasts?
Speaker: So the UN publishes this central case, which has the world's population peaking in the 2080s, but they also have a low fertility assumption.
Speaker: So what if fertility rates run at a much lower rate going forwards?
Speaker: And in those assumptions, the world's population peaks in the 2050s.
Speaker: And we've done some analysis previously where we think this is more likely that the world's population will peak sooner, such as in the 2050s, because of people having fewer children.
Speaker: And we think that a lot of things during the pandemic to do with higher cost of buying homes, but also to do with social changes, people have
Speaker: children later, a greater sort of focus on things such as environmental issues, all of these various social shifts, meaning that people opt to have children either later or have smaller families.
Speaker: And all of this together will mean a lower global fertility rate.
Speaker: It will mean a faster turn in the world's population and the world's population could peak much, much sooner than many people are expecting.
Speaker: And what caught your eye at a country level?
Speaker: Some of the data and the revisions are really, really striking in terms of the revisions around fertility rates in particular.
Speaker: The two that really jump out to me, notably Korea, where the fertility rate has dropped below 0.9.
Speaker: And that's so substantial that it means if nothing changes between here and over the course of the next generation, the Korean population would drop by 60%.
Speaker: Now, this is not a city state or a small economy.
Speaker: This is an economy of more than 50 million people.
Speaker: we could see a substantial drop in the population there.
Speaker: This is a level of birth rate that we just didn't think was plausible, really, in a larger economy.
Speaker: There's another couple of good examples in the UAE, where the UN are expecting now a much bigger population by both 2050 and 2100 due to more favourable migration flows.
Speaker: But also Hong Kong is an interesting case where there's been a real turn in the population estimates to be much lower.
Speaker: That's largely because of much lower fertility rate assumptions there.
Speaker: because of what's happened in the past few years, but also some of these adjustments made more broadly.
Speaker: And quite simply, there's not expected to be enough inward migration to offset that.
Speaker: So the UN now expecting that Hong Kong's population starts to fall quite quickly in the coming years, which they weren't a few years ago.
Speaker: And James, why does all this matter for economies?
Speaker: Well, Demographics Act is a really important bedrock for a lot of
Speaker: economic assumptions.
Speaker: So when we think about growth potential, we want to look at the number of workers, the number of consumers.
Speaker: We need to think about fiscal balances and the ratio of workers to pensioners, to school children in the economy.
Speaker: All of these things are really, really important.
Speaker: But also we have to think about a lot of the near-term challenges facing the global economy around labour markets and whether we're going to have enough workers to
Speaker: In many economies, we have to think about some of the debt challenges that economies are facing in the aftermath of the pandemic.
Speaker: And of course, what all of this means for those potential growth rates.
Speaker: And so these rapid changes that we're seeing in terms of global populations are really, really important in framing those discussions.
Speaker: And if we do see these lower fertility rates, we do see a slower pace of population growth, or we start to see populations starting to shrink.
Speaker: That's going to mean slower potential growth.
Speaker: It's going to be more challenging fiscal situations and it could have an impact on labour market dynamics too.
Speaker: So demographics data are always important.
Speaker: In a period like today where they're changing very, very quickly and we're seeing such substantial shifts in the shapes of populations, they're even more important than ever.
Speaker: James, thanks very much for your time.
Speaker: Thank you very much.
Speaker: So that's it for today.
Speaker: Thank you to Murat Olgan, Paul Mackle and James Pomeroy for talking to us.
Speaker: And Chris, thank you for stepping in to co-host.
Speaker: My pleasure, Aline.
Speaker: And thanks to you all for listening to the podcast.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
