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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from economists and strategists across the globe.
Speaker: Coming up this week, we assess the path for U.S. monetary policy as the Fed ramps up its tightening cycle.
Speaker: We explore the latest stresses in China's property market.
Speaker: And we examine the potential economic impact of gas rationing in the Eurozone as Russia cuts supply even further.
Speaker: This podcast was recorded on Thursday the 28th of July 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm P.S.
Speaker: Modeler.
Speaker: And I'm Aline Van Dyne.
Speaker: We begin this week in the U.S., where the Federal Reserve has just held its latest policy meeting, the second in a row where the discussions followed a higher than expected inflation number.
Speaker: Let's speak to Ryan Wang, U.S. economist, who joins us from New York.
Speaker: So, Ryan, as expected, the Fed raised rates by another 75 basis points.
Speaker: What was the main reasoning behind this?
Speaker: Hi, Eileen.
Speaker: That's right.
Speaker: The FOMC raised rates by 75 basis points for a second consecutive meeting.
Speaker: And that takes the policy rate up to nearly two and a half percent.
Speaker: That is pretty much right on top of the policymakers estimate for the longer term neutral federal funds rate.
Speaker: And the reason why the Fed is continuing to tighten monetary policy relates to inflation.
Speaker: Inflation is still running well above the Fed's 2 percent target.
Speaker: And Powell actually began his press conference the same way as he did in June, by emphasizing the committee's number one focus is going to be about containing inflation expectations and making sure that inflation starts to head lower.
Speaker: We haven't seen that in the data yet.
Speaker: And so that's the reason for the continued upward movement in policy rates.
Speaker: What's next is another 75 basis points in September on the cards.
Speaker: Well, this was interesting.
Speaker: Powell said that the Fed would no longer be providing the explicit near-term guidance that it did on the way up to this neutral rate of 2.5%.
Speaker: Going forward, it's going to be a meeting-by-meeting approach.
Speaker: It's going to depend on the economic data.
Speaker: And so Powell said that it was possible that
Speaker: that we get another unusually large increase at the September meeting, essentially implying that another 75 basis points could be on the table, but it will depend on what happens to inflation and importantly, what happens to economic activity over the next several months.
Speaker: Any further highlights in terms of economic activity, in terms of what Powell may have focused on?
Speaker: Well, as the press conference went on, it became increasingly clear that the FOMC is becoming attentive to downside risks to growth.
Speaker: And specifically, Powell mentioned a few sectors of the economy that are already showing some slowdown.
Speaker: He mentioned slower growth in consumer spending, weakness in the housing market,
Speaker: and highlighted that business fixed investment may have already started to decline.
Speaker: Are those the key data points to watch in the coming weeks and months?
Speaker: Well, it's going to be important to watch what happens to growth and activity, and it's also going to be important to see what's going on with the labor market.
Speaker: There's been some divergences in what the labor market data are saying.
Speaker: Businesses may be becoming less confident about the economic outlook, and that may be reducing their hiring needs.
Speaker: And also in the wage data, we've seen very rapid wage growth over the past year, and we want to watch carefully to see whether that's slowing down.
Speaker: That could set the stage for inflation pressures to eventually ease.
Speaker: And so that's what I would focus on, inflation and the job market.
Speaker: Ryan, thanks for the update, and we'll all be watching this very closely.
Speaker: Thanks, Aline.
Speaker: We head to China now, where the property market has been in the headlines again.
Speaker: This week, some homeowners refused to make their mortgage payments, adding pressure to an already vulnerable housing market.
Speaker: Jing Liu, Chief Economist for Greater China, can give us the details.
Speaker: Jing Liu, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So Jing, why are homeowners not paying their mortgages in China?
Speaker: And do we see this as the start of a mortgage crisis?
Speaker: Well, in the recent news coverage, the mortgage boycotts,
Speaker: is actually more about unwillingness to pay.
Speaker: And that is because the home buyers don't see the certainty when they can receive the homes they have purchased.
Speaker: So they try to rush for some kind of urgency such that the government can come up with a solution.
Speaker: We don't think this is the start of the Chinese mortgage crisis.
Speaker: Compared to the U.S., Chinese housing market is quite different.
Speaker: To start with, Chinese mortgage underwriting actually
Speaker: has been quite stringent.
Speaker: In particular, we have seen the down payment requirement is fairly high, 30% for the first home, 50% for the second or the third home.
Speaker: So in that case, mortgage has long been the safest asset on BEG's balance sheet.
Speaker: As of the first quarter, the non-performing loan ratio is only 0.3%.
Speaker: And for the second reason, you know, in U.S., a lot of people believe that over-securitization contributed to the crisis contingent to the financial system.
Speaker: In China, the securitization is still in the nascent stage.
Speaker: Only 6% of the mortgages are securitized.
Speaker: So in that sense, there's a much little risk in terms of a contingent to the financial system.
Speaker: Nevertheless, when it comes to property, it has a lot to do with confidence.
Speaker: So are banks and financial regulators concerned?
Speaker: Yeah, they start to be concerned given the unexpected turn of mortgage boycott and reportedly some of the suppliers to the distressed developers also joined the loan strike.
Speaker: So they are keenly monitoring the situation in terms of the asset quality, as well as whether that has shaken the
Speaker: the demand for a loan in the real economy.
Speaker: What are the solutions that could be brought to end this housing market saga?
Speaker: And do some solutions bring this issue of moral hazard?
Speaker: Right.
Speaker: So the housing market turmoil has lasted for a while.
Speaker: And we have seen quite some measures rolled out, but more like a piecemeal.
Speaker: So in our view, centrally initiated or at least centrally
Speaker: supported solution is much needed.
Speaker: And ideally, that will come in a format of some sort of a bailout plan.
Speaker: And the idea is to basically inject liquidity to the distressed developers.
Speaker: But the ultimate goal is not to save the developers, but rather to stabilize the confidence, to turn the expectation around by, you know, finishing up all the incomplete projects and try to deliver that to the market.
Speaker: And if that happens, I think, you know, overall, the housing market expectation can improve and that could help stabilize the situation.
Speaker: And of course, the bailout plan is usually controversial and people may worry about why saving those developers and will that contribute to their moral hazard.
Speaker: And we believe, you know, this will come with a huge cost to the developers and usually
Speaker: you know, it could require the control rights when government intervenes directly.
Speaker: So that could contain the moral hazard quite a bit.
Speaker: And as for the homebuyers, actually in China, without a national framework of bankruptcy for the individuals, the cost of walking away from mortgages is quite high.
Speaker: So we don't think that's a problem for the homebuyers to start with.
Speaker: Jingmini, thanks for that update.
Speaker: My pleasure.
Speaker: Thank you.
Speaker: This week, Russia cut its gas flows to Europe again, threatening the continent's supplies ahead of the winter and raising the prospect of energy rationing.
Speaker: Our European economics team have been assessing the potential implications and Fabio Balboni, senior European economist, is here to talk us through the findings.
Speaker: So Fabio, quite a lot of headlines around whether or not Russian gas will or won't be flowing into Europe.
Speaker: Just update us on the latest.
Speaker: Well, the main issue here is the Nord Stream 1 pipeline that is one of the biggest source of Russian gas into Europe and particularly relevant for Germany.
Speaker: And there were some concerns on that pipeline after the maintenance period, which meant that flows were down to zero starting from the 10th of July.
Speaker: And there were some concerns that that flow might not have been restored even after the maintenance period.
Speaker: So there was a partial relief on the 21st of July because actually the flow of gas was at least partially restored.
Speaker: So not quite to 100 percent of the flow that we usually see in that pipeline, but back to 40 percent, which was the level that we've had for a few weeks before the maintenance period.
Speaker: But that relief was actually quite short lived.
Speaker: because on the 27th of July, so just a few days later, then Gazprom announced a further reduction of the flow of gas through that pipeline down to 20% of the usual level, citing some issues, particularly with technical issues related to turbine.
Speaker: that would not have been delivered, although the European Commission and the German government said actually that those turbines had been delivered.
Speaker: So clearly there's still quite a lot of uncertainty regarding the flow of gas through that crucial pipeline into Europe.
Speaker: And Fabio, Europe already is dealing with much higher gas prices and energy prices more generally, and that's already clearly having an effect.
Speaker: But this particular issue around the supply of gas, there are concerns or even plans for gas rationing, right?
Speaker: Yeah.
Speaker: Yeah, absolutely.
Speaker: In fact, the European Commission recently issued a paper to reduce the gas consumption in Europe by 15% and asking countries to abide to those targets or do on a voluntary basis.
Speaker: And this week, the European Council agreed on those targets, albeit with several exceptions, depending on how well countries are plugged in
Speaker: to the European network, the relative dependence on Russian gas.
Speaker: But basically, Brussels is preparing for winter without Russian gas, and the 15% gas reduction would indeed prepare Europe to that scenario.
Speaker: Obviously, this is a worst case scenario.
Speaker: At the moment, there is some gas flowing into Europe.
Speaker: But even at those levels, it would be probably hard for European countries to be able to refill their storage facility for gas.
Speaker: And therefore, even at those level, some possible Russian might be involved.
Speaker: Given this backdrop, what is the actual economic effect now?
Speaker: And what are the risks if indeed there are no further gas supplies from Russia?
Speaker: Well, we'll be looking at different scenarios here for the Eurozone as a whole, and specifically for Germany.
Speaker: Obviously, Germany here is the country that could potentially suffer more, given its reliance on gas directly from Russia.
Speaker: So we've looked at several scenarios in terms of the flow of gas into Germany through the Nord Stream 1.
Speaker: And overall, we estimate that if there was a reduction, a permanent reduction to 20% percent,
Speaker: of the flow through Nord Stream 1 that could have a significant negative impact in terms of GDP and a quite elevated impact in terms of inflation as well, particularly as Germany could trigger GDP.
Speaker: the phase two of their emergency plan, which would allow energy providers to pass on the higher cost to their consumers, so firms and households.
Speaker: And if there was a zero flow scenario, then gas rationing would become almost inevitable at some point through the winter.
Speaker: And we've looked at that scenario more broadly in Europe.
Speaker: And in that particular scenario, our estimates as that the hit to the GDP level of the Eurozone could be around two and a half percentage point, particularly over Q4 this year and Q1 next year.
Speaker: And as I said, Germany would probably be hit hardest among the big four.
Speaker: We estimate an impact of up to GDP.
Speaker: three percentage point and of the big four, France would be the least hit with an impact of just less than two percentage point due to their lower reliance of Russian gas.
Speaker: But of course, with a bit of a question mark there as well, because France relies on not a lot of nuclear power and also nuclear power generation has had some issues this year due to maintenance in many of the power generators in France.
Speaker: Fabio, thanks for the update.
Speaker: And this clearly is an issue we will be watching closely in the coming weeks and months.
Speaker: Thank you very much.
Speaker: So that's it for today.
Speaker: Thank you to our guests, Ryan Wang, Jing Liu and Fabio Balboni for talking to us.
Speaker: And thanks to all of you 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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