Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: Thanks for listening, and now onto today's show.
Speaker: The following podcast was recorded for publication on the 2nd of March 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Hello, I'm Aline Van Dyne in New York.
Speaker: And I'm Peter Stegall in London.
Speaker: Coming up this week, China's key decision makers gather this month to set out their main economic and policy goals for the year ahead.
Speaker: We look at what investors should be watching out for at the National People's Congress.
Speaker: We find out why UK Chancellor Jeremy Hunt may have more room to manoeuvre when he presents his budget later in March.
Speaker: And following a strong month for the dollar, we look at how the drivers behind the greenbacks rally have changed.
Speaker: And can the outperformance continue?
Speaker: So let's begin in China, where the National People's Congress is set to kick off on the 5th of March.
Speaker: Erin Zinn, China economist, has been looking at the key policy areas that Beijing is likely to focus on.
Speaker: Let's hear from her now.
Speaker: She caught up with Graham Mackay in Hong Kong.
Speaker: Erin, welcome to the podcast.
Speaker: Good to have you with us.
Speaker: Thank you for having me.
Speaker: So before we delve into the ins and outs of the NPC, just remind us what typically happens at this annual meeting and what observers will be looking out for.
Speaker: So the National People's Congress is going to be kicking off this weekend on Sunday specifically.
Speaker: And this is really important for China's policymaking.
Speaker: So there's a few things we're looking out for.
Speaker: First, there's going to be a leadership reshuffling.
Speaker: So the premier, vice premiers will get new leadership there.
Speaker: And then a lot of the key institutions like the PBOC, Ministry of Finance, some of these will also see new heads there.
Speaker: The second thing is that we're looking out for the key economic targets.
Speaker: So every year they tend to set a economic growth target.
Speaker: And thirdly, we'll see the setting of the general policy goals for this year.
Speaker: All right.
Speaker: Well, this is an economics podcast, so we'll start with that.
Speaker: It's all about growth in China in 2023.
Speaker: We certainly know that.
Speaker: But what sort of GDP target would you expect policymakers to be aiming for?
Speaker: And does that align with our own forecasts for Chinese growth this year?
Speaker: Yeah, so this year we're expecting the MPC to set a growth target of above 5%.
Speaker: Our own growth forecast is 5.6%, so very much in line there.
Speaker: And the thing is that by setting a growth target of above 5%, this really does signal that they want a pro-growth agenda.
Speaker: As you all know, last year China faced significant headwinds, GDP growth only reached 3%.
Speaker: So this year, it's really about getting that recovery solidified, allowing the economy to restart after the pandemic.
Speaker: Right.
Speaker: And how much of that is going to be down to policy support?
Speaker: And I guess part two of that question is what sort of policy support are we expecting?
Speaker: So fortunately for China, with the recovery, the high frequency data has been pretty positive so far.
Speaker: So some of the things like services recovery, that's been coming back.
Speaker: But there are still underlying points of stress, which means that the policy bankers still do need to provide that policy support to ensure above 5% growth this year.
Speaker: So if we think about the headwinds, you know, it's not just coming from the domestic side, like pressures in the labor market still need stabilization in the property market.
Speaker: But also from the external channel, global growth is seeing signs of slowing and that's feeding into China's weaker exports growth.
Speaker: So to ensure that stronger growth this year, we do really need that ongoing policy push.
Speaker: And where that's going to come from is really, we think it's going to come from fiscal policy.
Speaker: So this year, fiscal policy, we expect them to set a larger official budget deficit of about 3.2% of GDP.
Speaker: Last year, they had set a target of 2.8%.
Speaker: We also think that they're going to ramp up the special local government bond issuance quota.
Speaker: This is usually used for infrastructure investment.
Speaker: So last year they had a quota of 3.65 trillion RMB.
Speaker: We think that can be ramped up to 4 trillion.
Speaker: And this is really going to help support that policy push for growth to be a little bit more solid.
Speaker: Okay.
Speaker: And does that mean less of a task for the central bank, for the PBOC?
Speaker: No, it doesn't.
Speaker: I think that what's really important here is that monetary policy stays accommodative.
Speaker: We still get that credit growth being supportive for investment in China.
Speaker: And we think that total social financing growth is going to stay in the double digits this year.
Speaker: So for China, you know, because the inflationary pressures are still relatively benign, this does give the PBOC sufficient space to be accommodative here.
Speaker: We do think that this is going to come more from quantity-based tools, things like injecting liquidity through RRR cuts or providing more targeted support through relending quotas.
Speaker: And this is really going to help provide ample liquidity for credit growth to be sustained.
Speaker: And on the targeted side, it does also feed into kind of their longer term goals of having sustainable longer term growth through new growth drivers, things like green development and manufacturing upgrading.
Speaker: All right, Erin, thank you very much for joining us.
Speaker: Thank you for having me.
Speaker: Turning now to the UK, where there's been some better economic news for the Chancellor ahead of the 15th March budget, as well as significant steps forward in discussions with the EU about Northern Ireland post-Brexit.
Speaker: We're joined by Liz Martins, Senior Economist.
Speaker: Liz, welcome.
Speaker: Thank you.
Speaker: So Liz, ahead of the budget, the mood music on the UK economy has improved a bit.
Speaker: What's behind that?
Speaker: Well, I think everybody's coming to 2023 in better spirits.
Speaker: I think part of that is because of expectations that inflation is turning around, gas prices have come down.
Speaker: People are thinking that maybe there's not too much more to run in terms of central bank tightening cycles.
Speaker: And that seems to have translated into better company sentiment, but even a rise in consumer confidence as well, which is pretty remarkable given that inflation is still very high.
Speaker: Fab.
Speaker: So looking ahead to the budget on the 15th of March, the Chancellor now seems to have a bit more room for manoeuvre.
Speaker: What's behind that and how do you think he's going to use that?
Speaker: Yeah, that's right.
Speaker: So this better economic performance is translating into stronger tax revenues for the Chancellor.
Speaker: And at the same time, because gas prices have come down lower, the cost of subsidising household energy bills has fallen as well.
Speaker: So we think when the Chancellor comes to make his decisions for the budget, the Office of Budget Responsibility will present him with a forecast for borrowing next year, which is 25 to 30 billion pounds lower
Speaker: than what they expected just a few short months ago, which as you say, gives him a little bit more headroom.
Speaker: So I mean, that's quite a large amount to play with compared with the predictions from three months ago.
Speaker: And what do you think he's going to do with the extra space that that creates?
Speaker: So the title of our note is save a little, spend a little.
Speaker: And I think that that sums it up, really.
Speaker: He will want to reduce borrowing, you know, and add to the impression that the public finances are in safe hands.
Speaker: But at the same time, there'll be plenty of government departments, civil servants, trade unions, charities lining up with demands for any extra money there might be.
Speaker: So we think he will spend a little.
Speaker: And some of the things we've talked about in this note are public sector pay rises, possibly freezing energy prices where they are, household bills, rather than allowing them to rise in April.
Speaker: And the other thing is fuel duty, which unless he cancels the planned rises, would rise by RPI.
Speaker: plus the 5p VAT cut, which is due to expire in March.
Speaker: And we don't think they'll allow that to happen.
Speaker: So therefore, fuel duty to be frozen.
Speaker: So is this good news a one-off or is it going to keep on coming?
Speaker: Well, I think it's good news for this year and it will persist into next year.
Speaker: But beyond that, the Office of Budget Responsibility has said actually they think they were too optimistic when they made the forecast back in November.
Speaker: So they're looking to downgrade medium term growth, a potential growth.
Speaker: And that will make it harder, I think, for the Chancellor and
Speaker: to meet his target of reducing borrowing to under 3% of GDP.
Speaker: And that's even without any loosening, you know, even just on the current plans, it starts to look a bit harder.
Speaker: So no, unfortunately, the good news doesn't look set to last, at least in the OBR's view.
Speaker: We're talking about good news.
Speaker: It's also been a big week for the UK in terms of its relationship with the EU post Brexit.
Speaker: What makes this week's announcement of an agreement so significant?
Speaker: Well, I think there's three key advantages of this deal, if, of course, and it is a big if, the Democratic Unionist Party accept it.
Speaker: The first is that it restores that devolved government in Northern Ireland, which is much better for political stability, of course, in the region.
Speaker: The second, of course, is that, you know, it plays very well with the US.
Speaker: The US has been putting pressure on the UK to resolve these
Speaker: outstanding issues with Northern Ireland.
Speaker: And the third, of course, is our relations with the EU.
Speaker: Now, I think in terms of the trade between Great Britain and Northern Ireland, that's pretty small, it's not going to move the dial.
Speaker: And nothing changes with our trade with the EU per se, but we're in a much more cooperative position here, whereby, you
Speaker: You know, the UK doesn't have a bill on the table that's designed to override EU law.
Speaker: And on its side, the EU isn't taking the UK to court.
Speaker: So generally much more cooperative relations.
Speaker: And that could be very positive in terms of things like the Horizon Science Research Programme, but also cooperation on energy and defence.
Speaker: So I think, you know, not a game changer for the economy, but good news on various levels.
Speaker: So you wrote recently about potential upside risks for the UK economy, talking about what could go right.
Speaker: Is this another of those upside risks?
Speaker: Yeah, I think it is.
Speaker: I mean, we've already seen a remarkable improvement in the business investment picture, actually.
Speaker: And one of the reasons people always say business investment has been weak in the UK is because of Brexit uncertainty.
Speaker: So if we can put some of that to bed, then I think, yes, it is an upside risk for growth in 2023.
Speaker: Liz, thank you very much.
Speaker: Thank you.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Newman.
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Speaker: So Aline, what's been happening on your side of the Atlantic?
Speaker: Well, it's been a good few weeks for the dollar as it rallied throughout February.
Speaker: But what's interesting is that the drivers behind that rally appear to have changed.
Speaker: And that's what Dara Ma, head of FX strategy in the US, has been looking at.
Speaker: He joins me now to explain.
Speaker: Dara, welcome to the podcast.
Speaker: Thanks very much.
Speaker: Nice to be here.
Speaker: The dollar rallied quite a bit in February, but the tone may have shifted already in March.
Speaker: What's been driving this?
Speaker: Yeah, look, February was a good month for the dollar.
Speaker: What was curious to think about it was a shift in the narrative the market was offering for that dollar strength.
Speaker: Early in the year, it was let's buy the dollar because the U.S. economy is heading towards recession.
Speaker: So you buy a safe haven like the U.S. dollar.
Speaker: But then the economic data out of the U.S. began to get better, better than expected.
Speaker: And so what we then had was a market claiming we should be buying the dollar because U.S. economy is doing well and the Fed won't need to cut interest rates and these kind of arguments.
Speaker: And that supports the dollar.
Speaker: But just as we got to the end of the month, it did begin to look a little bit tired.
Speaker: And as you mentioned, March, perhaps at least so far, we're not very far in, is showing some signs of a reversal.
Speaker: So is this all about the U.S.?
Speaker: Well, I think that's the mistake perhaps people have been making is they are very U.S. fixated, which, of course, sounds logical when you're looking at the U.S. dollar.
Speaker: But this is this is all a relative story.
Speaker: And it is true that rate expectations for the U.S. have been going up, but they've been going up, for example, in in the eurozone as well.
Speaker: And
Speaker: and in some instances going up more quickly.
Speaker: And what that has done is that can create support for the euro relative to the US dollar.
Speaker: And I think perhaps there's been a belated acknowledgement of that dynamic in terms of what we're beginning to see so far in March.
Speaker: And another aspect, of course, is that this exceptionalism that people want to talk about in the US, that the US economy is doing great,
Speaker: You know, we've seen similar activity, upside surprises in Europe, a little bit in the UK.
Speaker: We saw with China data recently as well.
Speaker: So it's not like the US is the only one that can lay claim to this exceptionalism.
Speaker: And that's key in the relative world of currency markets.
Speaker: Dara, so what will matter to the markets in the coming weeks?
Speaker: Well, I've just told you, haven't I, that it's not just about the US.
Speaker: And now I'm going to say most likely it will be just about the US.
Speaker: to a large extent.
Speaker: There are key pinch points for the policy decision that will be at the FOMC at the tail end of this month.
Speaker: The first course will be the US employment report.
Speaker: We had a very strong report last month caught the market by surprise.
Speaker: So we'll all be curious where it lands this time around.
Speaker: And of course, inflation reading, CPI inflation in the US, we'll have that in the coming couple of weeks.
Speaker: Again, a key pinch point for the markets.
Speaker: All of that vital.
Speaker: But again, to take my earlier answer, I do think we need to spend a little bit of energy.
Speaker: We're going to have the ECB meeting.
Speaker: So that's obviously going to be a focus.
Speaker: And in general, we're also going to h ave a transition at the BOJ, the Bank of Japan,
Speaker: So, again, that will be a focus.
Speaker: And of course, the UK will be doing its spring budget and other aspects navigating towards its Bank of England meeting as well.
Speaker: So, US will be a key part of the narrative, but not the only part of the discussion, I hope.
Speaker: Dara, thank you so much for giving us this global perspective on the dollar.
Speaker: Thanks very much, Eileen.
Speaker: Nice to be here.
Speaker: So that's it for another edition of the podcast.
Speaker: Special thanks to our guests, Erin Sin, Liz Martins and Darren Marr.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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