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, a roundup of our key reports published over the past week by our team of economists and strategists.
Speaker: Coming up today, with growth slowing and inflation rising, we look at the challenges ahead for policymakers as they start to rein in ultra-loose monetary policy.
Speaker: We hear why investors might need to learn to live with lower bond yields.
Speaker: And we find out what's behind power shortages in China and what they mean for the economy.
Speaker: This podcast is recorded on Thursday, the 30th of September 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm Mary Watkins.
Speaker: And I'm Chris Brown-Hulmes.
Speaker: First up this week, we're going to discuss the economic outlook for the rest of the year and beyond.
Speaker: Janet Henry is our global chief economist, and she joins me now.
Speaker: Janet, one of the main points you make in the report is that the era of ultra-loose monetary policy is coming to an end.
Speaker: Why do you think central banks are confident enough to start withdrawing stimulus now?
Speaker: Well, in some of the emerging economies, they've been raising interest rates for some time.
Speaker: But over the course of the last couple of months, we have seen amongst the advanced economies a significant move towards ending these ultra loose monetary conditions.
Speaker: Norway's central bank is the first in the G10 to actually raise interest rates.
Speaker: But by the end of the year, New Zealand probably will.
Speaker: And then in early 2022, we think the Bank of England will.
Speaker: But for other central banks, it's really about starting to slow down or even halt the asset purchases.
Speaker: It's going to take a severe setback to stop the Fed starting to taper its asset purchases in November, it would appear.
Speaker: But you say, why are they confident?
Speaker: I think central banks are admitting they're not super confident about the outlook.
Speaker: They can't be.
Speaker: We've seen growth slow down over the course of the last few months in a number of places, but we've also seen inflation continue to surprise on the upside.
Speaker: And there's huge uncertainty regarding inflation.
Speaker: So central banks are balancing up the risks.
Speaker: Some see the need to move preemptively.
Speaker: They'd rather take the risk of slowing down growth, particularly if they've got other ammunition to draw on.
Speaker: Others are willing to sit through, look through this inflation rise that we're seeing on the transitory side and decide whether the timing is appropriate to move on rates.
Speaker: But yes, we are seeing the beginning of the end of ultra loose monetary conditions.
Speaker: As you highlight, global inflation is rising.
Speaker: Do you think this is a temporary or a longer lasting phenomenon?
Speaker: Well, it's too soon to say, and this is something that we set out previously in our creation of inflation piece.
Speaker: We know that some of the factors that are actually contributing to the slowdown in growth that we've seen over the course of the last few months are still COVID related.
Speaker: So restrictions that are in place have hampered.
Speaker: some of these supply chain bottlenecks that have been coming through, whereas in other economies that continue to reopen, demand is still fairly robust, but actually confidence is now being affected by higher prices.
Speaker: It's not just fears about the pandemic that are coming through.
Speaker: And I think this is why it is so difficult for central banks to be confident about the inflation outlook.
Speaker: Yes, it is still rising.
Speaker: We're probably getting close to the peaks.
Speaker: But the question is, how long is it going to take to come down, particularly with a lot of these energy related factors that are coming through, for instance, in parts of Europe?
Speaker: So, yes, inflation remains sticky for some time.
Speaker: But by late 2022, it does start to come back down.
Speaker: But we admit that there are many risks to the upside and to the downside that could actually force central banks to readjust some of their communication.
Speaker: And it's not just monetary stimulus that's being reined in.
Speaker: Fiscal stimulus is also being pulled back.
Speaker: Yes, that's right, Chris.
Speaker: Again, in some of the emerging economies, they have already seen all of their fiscal boosts that they were going to see.
Speaker: And amongst the advanced economies, it's really only the UK that specifically set out a real fiscal consolidation, the beginning of which we'll see in late 2022.
Speaker: But when we look at the US and the eurozone, it's also going to be something of a fiscal fade.
Speaker: Obviously in the US there's a lot of discussion at the moment regarding the couple of infrastructure plans that are up for debate then.
Speaker: Even if they go in in full, which seems very unlikely, that's still going to be a much slower pace of fiscal stimulus than we've had over the course of the last 18 months.
Speaker: And in Europe, there is the Next Generation Fund, which is going to be significantly important over the next couple of years.
Speaker: But it's still going to be less of a stimulus that we've been used to.
Speaker: And then, of course, we have China, where we may see some targeted fiscal measures coming through.
Speaker: You mentioned China there.
Speaker: How concerned are you by what's happening in China?
Speaker: Well, China was one of the countries that actually halted its fiscal stimulus quite early.
Speaker: We must remember that by late 2020, China was already back above pre-pandemic levels of activity.
Speaker: And in particular, they then reverted back to trying to de-risk the economy and to certainly rein in the property sector.
Speaker: And now we are seeing some of the consequences for that.
Speaker: And the short term risks are that growth doesn't revive from the latest restrictions as quickly as had been anticipated.
Speaker: And already we were looking for a bit more fiscal stimulus regarding the infrastructure side.
Speaker: We've also seen at the margin some monetary easing starting to happen.
Speaker: But we do look for some improvement in activity.
Speaker: But we need to remember
Speaker: Even our growth forecast for China in 2022 and 2023, we're not looking for it to get back to 6% to 7% kind of growth rates.
Speaker: So it's going to be a very different world for some of the emerging economies in a world where China perhaps isn't growing as quickly.
Speaker: And of course, the Fed is tapering.
Speaker: Janet, thanks very much indeed for giving us that summary.
Speaker: Thank you, Chris.
Speaker: Here at Global Research, we have a particular focus on nine key themes.
Speaker: One of those is that bond yields will stay lower for longer.
Speaker: Stephen Major, Global Head of Fixed Income, is here with an update.
Speaker: So, Steve, you've had this lower for longer theme for about a decade.
Speaker: Are you saying in this report that investors are still in denial about this theme and that they should learn to live with it?
Speaker: Well, we are saying that because our view is quite deep seated and based on longer term fundamental drivers.
Speaker: And we're thinking that because of this denial of the evidence, it creates a technical overlay that continues to make those yields stay low because people are constantly trying to push them higher.
Speaker: Everyone's got the same position.
Speaker: I think the evidence is quite clear and we can see the convergence of various bond markets, including the US, Germany and the UK, onto Japanese levels.
Speaker: Japan has had two decades of zero rates.
Speaker: Lower for longer is business as usual for them.
Speaker: Can you remind us what those drivers of lower bond yields are?
Speaker: Well, it's the debt overhang, demographics, disruptive technology, the inequality for wealth and income, the central bank balance sheets, which have got huge, and then finally, the heightened uncertainty.
Speaker: There are more, but we pick those as being quite significant.
Speaker: A lot of people might be surprised at you coming out with this report at a time when so many people are concerned.
Speaker: about rising inflation.
Speaker: And there's so much talk about tighter monetary policy.
Speaker: Well, that's part of the story here, really.
Speaker: There's a denial.
Speaker: that it's happening when you can see from the yields that it has.
Speaker: Yields in the US today are right in the middle of where they've been all year.
Speaker: For me, they're still nearer to the 1% level than 2%.
Speaker: The denial, I think, is sort of cyclically based.
Speaker: People are looking at all the data points and when the market moves 10 basis points, they tend to follow it.
Speaker: Even in the first quarter of this year, when yields went up 75 basis points, we didn't change our mind.
Speaker: The point is, if you're going to change a view that is long term and fundamentally based on structural drivers, by definition, it's very hard to change it quickly because they don't turn around overnight.
Speaker: Is Japan the market you'd point to most of all as demonstrating the key factors here?
Speaker: Well, it gives us some lessons.
Speaker: I don't want to say everywhere has gone full on Japan, but let's just say that there are some lessons.
Speaker: And I gave you a list.
Speaker: Quite a few of those apply to Japan.
Speaker: And I think it's quite important that we look and see what's happened there in the industry in which we're working in and in the markets, because I think that we can get some pointers from that.
Speaker: What needs to happen for you to be wrong?
Speaker: Well, I've said already that one data point isn't going to do it.
Speaker: And our central premise here is that it's very difficult for rates to rise to levels of the previous cycle, which coincide with longer run equilibrium, as currently indicated by central banks.
Speaker: So in the case of the Fed, their longer run equilibrium is two and a half,
Speaker: We think if the Fed was to start hiking, they're unlikely to get anywhere near there.
Speaker: So for us to be wrong, it's still very early to say.
Speaker: We suggest the market response to early rate hikes would probably be lower yields.
Speaker: because of the debt overhang, disruptive technology and demographics, etc.
Speaker: They all weigh down on future growth and they pressure the central banks to keep those rates low.
Speaker: Steve, thanks very much.
Speaker: Thank you.
Speaker: Last week, we heard about record gas prices in the UK and Europe.
Speaker: This week, we're looking at power shortages hitting parts of China.
Speaker: Xu Hongbin is our chief China economist, and he joins us from Hong Kong.
Speaker: So, Hongbin, can you remind us, what brought about these power shortages?
Speaker: There are mainly two reasons.
Speaker: Firstly, the government has tried to push reduction in coal since late last year in order to meet environmental targets.
Speaker: So the reduction in the coal output has pushed up the coal price.
Speaker: caused the coal shortage for the coal-fired power generator.
Speaker: The second factor is the demand side.
Speaker: Export turned out to be stronger than expected.
Speaker: And as a result, industrial production has been growing stronger than expected.
Speaker: That's really pull up the demand for electricity.
Speaker: So we end up with this shortage in at least one third of China currently.
Speaker: What sort of impact is this having on the economy?
Speaker: The power shortage is going to mainly affect the production side and not so much the consumer spending side because the authorities always give a power supply priority to the household sector.
Speaker: But for the production side, particularly for the energy intensive sectors, the local government has been specifically targeted at those five to six kind of energy intensive sectors.
Speaker: That already caused some disruption in terms of the production activities.
Speaker: So we put all this together in our base case scenario.
Speaker: If the power shortage is going to last, let's say, for another month or another couple of months, we think that the power shortage probably is going to cut down the headline GDP growth rate by 0.4% points for the fourth quarter of this year.
Speaker: What action is the central government taking to try and fix this?
Speaker: Two things they can do.
Speaker: Firstly, they can resume some coal mining activities.
Speaker: In fact, they are already doing that.
Speaker: And secondly, they can also try to make some kind of adjustment in terms of electricity price, particularly for the industrial electricity price.
Speaker: That will give the power generator a bit of incentive to increase the output.
Speaker: So essentially, you're saying the government is treading a fine line between sustaining growth on one hand and fulfilling its decarbonisation targets on the other.
Speaker: Definitely, there is going to be a dedicated balancing act going forward.
Speaker: I think currently, some local government, in order to meet these annual environmental targets, they take this rather brutal kind of action of cutting the power supply.
Speaker: I don't think this is what the central authorities like to see.
Speaker: So as a result, I think we should see some kind of adjustment in terms of the annual environmental target.
Speaker: Given local government, some leeways could be more selectively targeting the energy intensive sector, but at the same time to make sure that the majority of normal activities do continue.
Speaker: And yes, I think over time, when they make this kind of green target, they also need to be careful in terms of balance with the changing economic structure and all the electricity demand, as well as maintain stable economical and job growth.
Speaker: Hongbin, thanks very much for your time.
Speaker: My pleasure.
Speaker: So that's it for today's programme.
Speaker: Thank you to our guests, Janet Henry, Steve Major and Xu Hongbin.
Speaker: From all of us on the team, thanks for listening.
Speaker: Please join us next week for another edition of the Macro Viewpoint.
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.
