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The Macro Viewpoint -- India’s digital drive, mixed global signals and a 12th UK rate rise
31 Plays2 years ago
Pranjul Bhandari discusses how tech-focused sectors can power India’s growth, Harriet Smith charts the latest data on the global economy and Liz Martins assesses what’s next in UK monetary policy as borrowing costs approach a 15-year high.
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Transcript
Introduction to HSBC Podcast Series
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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The following podcast was recorded for publication by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
India's Tech Sector and Economic Growth
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Hello, I'm Piers Butler in London.
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And I'm Aline Van Dyne in New York.
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Coming up on today's programme, we assess the potential for tech-focused sectors to power Indian growth in the next decade.
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We find out why there's good news and bad news when it comes to the global economy.
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And we assess the UK's tightening cycle with interest rates now at their highest level since 2008.
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We begin this week in India, where tech and digital industries are playing a more important role than ever and helping to drive the country's growth.
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But can they provide enough new jobs for a booming population?
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Pranjal Bhandari, Chief India Economist, is here to discuss.
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Pranjal, welcome to the podcast.
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Great to be here, Piers.
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Well, and I must say it's really great to get an economist on the podcast that's talking a sort of positive story.
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And we've had a lot of gloom and doom.
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So it's really nice to see this report that you've just published.
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And in this report, you talk about India's new growth drivers.
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So maybe let's kick off with that and tell us about what they are.
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Yeah,
Post-Pandemic Growth in India's High-Tech Exports
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sure.
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So a small part of India, which we call New India and which comprises of high-tech sectors, is growing rapidly and is raising growth.
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So now these high-tech sectors, they're basically made of two parts.
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One is India's high-tech exports.
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Now it's not just the exports of goods, but even more importantly, it's the exports of services.
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India today is not just exporting IT services, but it's also exporting R&D services, design services, professional consulting services.
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And this is one area which has really taken off after the pandemic.
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And then of course there's high-tech goods too.
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For instance, India is gaining global market share in the exports of mobile handsets, drugs and pharmaceutical products, automobile parts.
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The other part of the new India is the startup ecosystem.
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India has a digital infrastructure and a lot of small startups have plugged into that and are providing real economy solutions to a lot of problems.
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So give us a sense of scale.
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I mean, in your report, you talk about the fact that these growth drivers could help the size of the economy more than double over the next
GDP Growth and Economic Reforms in India
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10 years.
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Yeah, that's right.
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So on the eve of the pandemic, India's overall GDP growth was 6%.
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And on the back of new India, we think it could be 6.5% over the next 10 years.
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Now with this, the India's economy size
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would double from about $3.5 trillion now to around $7.5 trillion in the next 10 years.
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And I think that's quite impressive because that would make India the third largest economy in the world right after the US and China.
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It would also help the Indian economy graduate from a lower middle income country to an upper middle income country.
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Now, importantly, in order to achieve this positive scenario, there are some important conditions to be met.
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Can you summarize what those are?
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Yes, absolutely.
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Some very important conditions have to be met.
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I think the first one is a continuous flow of reforms.
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We've had a lot of reforms in the last couple of years.
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For example, the goods and services tax reform, a new digital infrastructure.
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But we shouldn't get complacent with just that.
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We need a new wave of reforms.
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from tax reforms to a new tariff structure, which is more trade-friendly, to power sector reforms, judicial reforms, and a climate change framework that can help India navigate in this very volatile period.
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Then we need private capex to rise as well.
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It's been sluggish over the last decade.
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Hopefully, things are getting better.
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Balance sheets are in a better place.
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So we see it go up.
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But it'll be very important that private sector capex really does rise.
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And then there's education reforms.
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You know, the education standards and employability standards have taken a setback in the pandemic period, and India really needs some corrective measures there.
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So all of these things have to go right for India to get to its high growth dreams.
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Now, doubling over the economy sounds just huge, but ironically, and this refers to some of the work you've done before, the population growth in India really requires a very significant amount of job creation.
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Is this growth that you're talking about going to be sufficient to address this need?
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Well, perhaps not.
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So, you know, you may know that this year, India has become the most populous country in the world.
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And our sense is that in the next decade, it needs to create 70 million new jobs.
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Now, a 6.5% growth clip over the next decade can only get us about a third of these jobs.
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And India will have to work for stronger and higher growth if it really wants to create more jobs.
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And our sense is that with a growth clip of around 7.5%, that would be possible.
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But how do you get to 7.5%?
Digital Infrastructure and Low-Tech Manufacturing
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And here my sense is that so far we've been talking about new India, all the high tech things, but we have to also have a way to pull up old India.
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Old India mostly comprises of some sluggish sectors, for instance, the low tech manufacturing, for instance, agriculture.
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If we can have a way in which new India can influence and energize old India, we could actually get to seven and a half percent growth and create two thirds of the jobs that we need.
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Thankfully for the first time, I do see a ray of hope.
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The whole digital infrastructure that we have right now can actually help startups provide a lot of solutions to low-tech manufacturing.
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For instance, pick up a bunch of low-tech manufacturing firms, provide them access to cheap inputs, to better export markets, to better credit access, and basically help small firms get the advantage of big firms by simulating scale.
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And I think if we can get that done,
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then we could hope for about a 7.5% growth too.
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Well, this sounds like a really exciting story.
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I'm sure we will have you back on the podcast to update us on it.
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But thank you for joining us today, Pranjal.
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Great to be here.
Global Economic Challenges and Central Bank Policies
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So Pranjal is optimistic about India's longer term growth prospects, but let's return to the here and now with a look at the latest global economic data, which paints a rather mixed picture.
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Harriet Smith from our economics team is here to tell us what she makes of it all.
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So Harriet, let's start with areas of weakness.
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The global manufacturing sector is having a bit of a rough time, isn't it?
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Yes, aside from a few exceptions, manufacturing activity across the board looks bleak.
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The global manufacturing PMI has been weak and remained in contractual territory in April as demand remained soft, particularly in Europe.
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Additionally, the slowdown in April was led by a downturn in manufacturing activity in mainland China as the impact of COVID-19 reopening faded.
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With goods demand soft, coupled with supply chain disruptions lessening, firms have seen their inventory levels build back.
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However, this is potentially good news from an inflationary point of view.
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This is putting down the pressure on goods prices and along with a moderation and input price inflation, job of goods inflation has started to come down in most economies.
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Interesting.
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In terms of the activity level, though, the picture is much stronger in the services side of the economy, right?
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That's right.
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While manufacturing activity stands weak in much of the world, the services side of the economy remains remarkably strong.
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This divergence is clear in the latest PMI data for April, where the global composite PMI increased for another month, driven by the services sector, which saw higher new orders and an expansion in output.
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As a result, with demand for services strong, supported by tight labour markets, price pressures on this side of the economy are not subsiding as policymakers may want them to.
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So unlike goods inflation, services inflation keeps grinding higher in several economies.
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So what do these mixed signals mean in terms of the policy outlook?
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So it does create a challenging backdrop for monetary policy decisions.
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Although we have seen some encouraging signs on input prices and the pricing surveys, inflation is too high and remains a big challenge for policymakers.
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There are plenty of risks to consider too.
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Higher rates are being felt in economies and banking sector risks need to be considered.
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So yes, there are a lot of mixed signals and it's a complicated picture.
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Harriet, thank you so much for the update.
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I'm Harold van der Linden.
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And I'm Fred Newman.
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And you can find us under the banyan tree.
00:09:20
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Join us weekly where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
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Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
00:09:40
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Enjoy the rest of your podcasts and we'll see you under the banyan tree.
00:09:45
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We finish here in the UK where the Bank of England has raised bank rate by 25 basis points, taking it to 4.5%.
00:09:53
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So after 12 consecutive rate rises, is that the tightening cycle over with?
00:09:57
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Let's speak to Liz Martins, senior UK economist.
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Liz, welcome to the podcast.
00:10:02
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Thank you.
00:10:03
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So Liz, Bank of England decision very much as expected.
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No panic.
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Everything OK?
00:10:08
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Yeah, exactly.
00:10:09
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So we were expecting a 7-2 vote for a 25 basis point rate rise to 4.5% and that is exactly what we got.
00:10:15
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So two dissenters who wanted not to raise bank rate at all.
00:10:20
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But yeah, no panic.
00:10:21
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Even though we'd had, you know, that higher than expected inflation release, higher than expected wage growth, none of the hawks said they were overly worried or not to the point of voting for a bigger move anyway.
00:10:30
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So all very much in line with expectations.
00:10:33
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But interestingly, when you read into the detail, there are some pretty big revisions to their forecasts.
00:10:38
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Well, the biggest revision on record, in fact, to their GDP forecast, because, of course, they were forecasting a recession, as in fact were we earlier this year.
00:10:47
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And they've revised it away because, you know, as we've pointed out, all the indicators are now suggesting the economy is re-accelerating, not decelerating, as you might expect.
00:10:57
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So a big upward revision to growth across all three years of the
00:11:01
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forecast period and a consequent or related upward revision to inflation as well.
00:11:07
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Now, they're still seeing inflation below their 2% target throughout the forecast period or once it's come back down next year, but it's higher than maybe what they were previously forecasting.
00:11:19
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And you introduced this notion of skew, which is getting maybe a little bit more technical, but maybe explain that in plain English.
00:11:26
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What is that meant to say?
00:11:28
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Sure.
00:11:28
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So the BOE produces these two different sets of forecasts.
00:11:31
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One is the modal forecast, which is the one that gets all the attention.
00:11:34
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And that is essentially what they consider to be the most likely outcome.
00:11:38
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And that is where they say inflation dropping below their target and staying well below it throughout the forecast.
00:11:45
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forecast period.
00:11:47
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But they also have the mean forecast and that is the average of a range of outcomes.
00:11:52
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So it includes all the risks, both upside and downside.
00:11:55
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And the mean forecast is considerably higher than the mode.
00:11:58
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And that's what we mean by skew, simply the difference between the mean, which includes all the possible scenarios and the mode, which is the most likely.
00:12:06
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So what they're saying is
00:12:08
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our forecast is for inflation to be below target, but there is a disproportionate risk that it will be higher.
00:12:15
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And on that basis, it will actually be quite close to target.
00:12:19
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So what that's saying is maybe we're a bit more hawkish than our headline inflation forecast might at first appear.
00:12:26
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Interesting.
00:12:27
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So we've had the Fed, we've had the ECB, and now we've had the UK.
00:12:31
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What's the overall outlook for rates and how are the different central banks diverging in terms of the messages they're putting out?
00:12:38
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Yeah, so actually we've got the same forecast here for all three of those, which is one further 25 basis point rise in June.
00:12:45
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For the Fed, you know, they kind of said we think we're close to or maybe even at the end of the tightening cycle.
00:12:53
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Whereas the ECB and the Bank of England have both signalled that they have more to do yet.
00:12:59
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So I'd say, you know, for the Fed, the risk is that they don't even go in June.
00:13:02
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For the ECB and the Bank of England, the risk is that they go in June and then potentially even go again beyond that, because, you know, I think core inflation pressure may be still a bit tighter here than over there in the US.
00:13:14
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And of course, we've done less tightening.
00:13:16
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Indeed.
00:13:17
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Liz, thank you very much for joining us today.
00:13:19
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Thank you.
00:13:21
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That brings us to the end of another podcast.
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Thanks to our guests, Pranjal Bhandari, Harriet Smith and Liz Martins.
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From all of us here, thanks for listening.
00:13:31
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We'll be back again next week.
00:13:51
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:13:55
Speaker
We hope you enjoyed the discussion.
00:13:57
Speaker
Make sure you're subscribed to stay up to date with new episodes.