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: Hello and welcome to the macro viewpoint from HSBC Global Research, our weekly podcast featuring the views of leading HSBC analysts on the outlook for the global economy and markets.
Speaker: I'm Piers Butler and I'm joined by Chris Brown-Humes.
Speaker: Hi Piers, coming up on this week's programme Liz Martin, senior UK economist, talks us through the recent raft of data releases in the UK and what they could mean for the upcoming Bank of England meeting.
Speaker: The UK has also announced a new trade agreement with Australia.
Speaker: We get the details from Shanela Rajanayagam, trade economist.
Speaker: And we look at how the pandemic can accelerate financial inclusion in emerging markets with global economist James Pomeroy and analyst Henry Ward.
Speaker: This podcast was recorded on Thursday, the 17th of June 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Here in the UK, the Bank of England is set to meet on Thursday, the 24th of June.
Speaker: And given the recent strong economic data, could it take a more hawkish tone?
Speaker: Let's speak to Liz Martins, senior UK economist.
Speaker: So, Liz, we've had some quite strong economic data out of the UK.
Speaker: Can you recap us on that first?
Speaker: Sure.
Speaker: Yeah.
Speaker: So first of all, we have the labour market release for April and that showed the headline rates of unemployment coming down for a fourth consecutive month to 4.7%.
Speaker: But it also showed stronger than expected pay growth.
Speaker: So total and regular pay both up 4%.
Speaker: 5.6% in the three months to April compared with the same period of last year.
Speaker: And of course, there's some composition effects in that there's some base effects, because of course, April 2020 was a very weak month.
Speaker: But even allowing for that, this was a surprise to economists and upside surprise and it
Speaker: It fits with all the anecdotal evidence we've had of supply shortages in the labour market.
Speaker: So that was the first thing.
Speaker: And then that was swiftly followed by a pretty punchy inflation release the day after.
Speaker: Now, this was for May and it showed CPI inflation jumping from 1.5% year on year to 2.1%.
Speaker: And for core inflation, we saw the biggest ever month on month increase for the month of May.
Speaker: And that took the headline year on year core inflation rate to 2.0%.
Speaker: So both of these, again, were above economists expectations and they were above the Bank of England's expectations.
Speaker: Now, the BOE meets next week.
Speaker: What are they going to make of this data?
Speaker: Yeah, I think it's building up to a increasingly hawkish picture for the Bank of England.
Speaker: And they're already among the more hawkish of the developed world central banks.
Speaker: Now, last month in May, at the May meeting, the chief economist, Andy Haldane,
Speaker: voted to reduce the QE target such that purchases end in August, not at the end of the year as currently planned.
Speaker: So the big question, I guess, for this meeting is whether any of his fellow members of the MPC look at this data and say, actually, he's right, this economy doesn't need any more additional stimulus, maybe we should be bringing purchases to an early close and votes with him.
Speaker: Now, that's not our forecast.
Speaker: We're looking for a 9-0 vote to keep the bank rate on hold and an 8-1 vote for the QE purchase target to remain unchanged as well, with Mr Haldane the only person voting to reduce that.
Speaker: But it will be interesting to see whether we're wrong on that and whether actually other hawkish members might emerge.
Speaker: What about interest rates, Liz?
Speaker: What's your outlook there from the Bank of England?
Speaker: But there's an increasing talk about rate rises here in the UK and globally as well.
Speaker: Now, the market is currently not expecting an interest rate rise until November 2022.
Speaker: We're not forecasting an interest rate rise either this year or next.
Speaker: But if this inflation pressure continues, if it doesn't fall away, if parts of it prove not to be transitory, then clearly the risks are rising.
Speaker: towards the BOE taking action.
Speaker: And as I said, it has been one of the more hawkish central banks worldwide.
Speaker: It's already going to end its QE programme at the end of the year.
Speaker: Naturally, people are starting to ask, well, what next?
Speaker: Well, let's see what happens next week.
Speaker: Liz, thank you very much for joining us.
Speaker: Thank you.
Speaker: Staying in the UK, details of a new trade deal with Australia were announced this week.
Speaker: Shanela Rajanagam, trade economist, is here to talk us through the key points.
Speaker: So Shanela, how significant a deal is this?
Speaker: Well Chris, this is the first major trade deal that the UK has struck outside of the European Union.
Speaker: So it goes beyond simply the rollover deals that it has done previously and this is a brand new trade agreement.
Speaker: However, it is rather small in economic terms.
Speaker: So UK-Australia trade is valued at around £14 billion at the moment.
Speaker: And according to UK government modelling, the deal should help to increase UK GDP by around 0.02% in the long run and help to increase Australian GDP by about 0.06% in the long term.
Speaker: So the economic gains are relatively small, but of course, that's not too unusual for free trade deals.
Speaker: The bigger benefit, of course, is that these are living agreements and they can kind of evolve as trade continues with the two partners to include further provisions to enhance that liberalisation.
Speaker: So what are the main elements of the deal?
Speaker: So the final text of the deal has not yet been published, but what we do have is the agreement in principle, and that looks to be fairly comprehensive.
Speaker: So Australia has committed to eliminate all tariffs on UK exports, including tariffs on Scotch whisky, on cars, on gin.
Speaker: For its part, the UK will also liberalise tariffs on nearly all Australian exports.
Speaker: However, one of the more controversial aspects of the deal is the amount of liberalisation offered by the British to Australian beef and sheep meat farmers.
Speaker: Now, the UK will gradually liberalise tariffs on those products over a period of 10 years.
Speaker: However, there will be some protections offered to British farmers in the form of safeguards and tariff rate quotas.
Speaker: Now, beyond goods trade, the deal also includes a number of provisions around services market access, around the mutual recognition of professional qualifications, around financial services and also mobility provisions for younger workers.
Speaker: And what will the UK be expecting this might lead to in terms of other trade agreements?
Speaker: So a key benefit of this deal is that it offers market diversification opportunities, not only for the UK, but also for Australian traders.
Speaker: Now, eventually, the UK will hope that this is a stepping stone to exceed to the CPTPP, which is the high standards trade deal in the Pacific Basin, which Australia is a member of.
Speaker: Now, the UK is also negotiating a trade deal with New Zealand, which again is a member of the CPTPP.
Speaker: So they could use this deal as a template for that.
Speaker: And in addition, it should just help to strengthen UK trade linkages with the broader Asia Pacific region.
Speaker: And finally, Shanela, what are the next steps for the UK-Australia deal before it comes into force?
Speaker: So both sides will have to work on the outstanding negotiating issues.
Speaker: They'll then have to finalise the text of the deal and have it signed.
Speaker: After that, they'll have to go through their own ratification procedures before the deal can actually take effect.
Speaker: Now, according to Australia, they are hoping to conclude the deal by November this year and then have it take effect in July next year.
Speaker: Thank you very much indeed for that summary, Shanela.
Speaker: Thanks, Chris.
Speaker: Digital finance is a key theme for us here at Global Research, and with the pandemic forcing people away from cash to digital payments, could emerging markets see greater levels of financial inclusion?
Speaker: James Bomeroy, global economist and Henry Ward analyst, have been looking at the issue, and they join us now.
Speaker: So James, if I can start with you, why are we writing about financial inclusion now?
Speaker: There's a couple of reasons, Chris.
Speaker: Firstly, is that during the course of the pandemic, the global economy has seen a digital shift.
Speaker: We've seen digital payments rise as a share of total transactions across the world, particularly in many parts of the emerging world where cash usage has been really, really high for quite some time.
Speaker: So it's a trend that's been accelerated, starting to think about digital payments more broadly.
Speaker: But also we can think about the potential upsides of seeing many more people across the emerging world being banked.
Speaker: Now, we're in an economic hole in 2021 and we need to grow back out of it.
Speaker: And anything that can help to lift potential growth could be a really, really good thing.
Speaker: And if we do see in the course of the coming years, more and more countries across the emerging world see more people have access to bank accounts, more people using digital payments, that could provide quite a substantial uplift to growth.
Speaker: Now, that can come through a whole number of channels, be it lower transaction costs.
Speaker: It could mean access to other financial products, be it credit, insurance, mortgages, all of these things.
Speaker: And those numbers could be quite stark with some estimates suggesting it could lift GDP by up to about three percentage points in some emerging markets.
Speaker: Henry, there must be big differences in the level of financial inclusion across emerging markets.
Speaker: What are the key drivers of these differences?
Speaker: So in the report, we look at bank account access as being the gateway to financial inclusion.
Speaker: And there's four key drivers for bank account access.
Speaker: The first of which is economic development.
Speaker: So in countries where there's high levels of poverty and lower levels of income, they tend to have less savings.
Speaker: And this is actually the most cited reason from consumers for not having a bank account is that they have insufficient funds to deposit in the first place.
Speaker: The second and third reasons are financial infrastructure and technology.
Speaker: So consumers in EM are often less financially literate.
Speaker: They have less access to mobile phones and the internet.
Speaker: And the digital route is the best way of getting millions of people banked very quickly.
Speaker: And this may prevent consumers in these economies from getting banked.
Speaker: And even if they are able to get banked, they may not know the full benefits of having a bank account due to this lower levels of financial literacy.
Speaker: Finally, you have urbanization.
Speaker: So the most rural economies in the EM are Vietnam, the Philippines and Egypt.
Speaker: And they often, and these three economies have the lowest levels
Speaker: of bank account access that we've had a look at.
Speaker: And this is often because urban consumers tend to be better educated with higher incomes.
Speaker: And actually they're just physically closer to bank branches, which makes it much easier for them to sign up.
Speaker: And so we often see urbanised economies have higher levels of bank account access.
Speaker: James has already talked about the pandemic accelerating things.
Speaker: How do you expect things to change in the coming years?
Speaker: So probably the biggest thing that's happened as a result of the pandemic is the massive actions taken by governments and central banks.
Speaker: So particularly in Latin America, they've moved a lot of their emergency COVID payments online.
Speaker: So you need a digital account to access the payments.
Speaker: And in Brazil, for instance, this has meant that 73% of those who are unbanked before the pandemic are now banked.
Speaker: And across Latin America as a whole, that's 40 million people now with access to an online account.
Speaker: In the central banking space, you've seen central banks like Malaysia, they've announced that they want to issue five banking licenses this year, following similar announcements out of Singapore and Hong Kong and Korea.
Speaker: And if these follow trends that we've seen in the rest of the world, these are likely to be digital banks that allow you to sign up through online channels.
Speaker: which could really help spur bank account access and financial inclusion.
Speaker: You mentioned two there, but which other economies do you expect to be big beneficiaries of this shift towards financial inclusion?
Speaker: So that's kind of split into two parts.
Speaker: So the first question is who's most likely to catch up to developed markets and get to kind of 90% plus of their population with access to a bank account.
Speaker: And this is likely to be those who have already made quite big strides.
Speaker: So mainland China, Chile, India, Malaysia and Thailand.
Speaker: are all kind of nearly there and we expect them to kind of get over the line first.
Speaker: In terms of those economies that are most likely to make the biggest jumps and currently have very low levels of bank account access, this is Egypt, the Philippines, Vietnam,
Speaker: Indonesia and Mexico would expect to see quite large increases in the coming years.
Speaker: Finally, James, back to you.
Speaker: You've written a lot about central bank digital currencies.
Speaker: Do you expect them to play a role here?
Speaker: I think so.
Speaker: Central bank digital currencies are a really interesting topic.
Speaker: And what we're seeing across the world right now is all different central banks looking at this from a load of different reasons.
Speaker: And one of the main drivers in the emerging world is financial inclusion.
Speaker: A lot of central banks are saying that actually if we can cut transaction costs, if we can make digital payments much more accessible to people, this really could help accelerate financial inclusion.
Speaker: And that's a key part of why we've seen the biggest moves in many emerging markets.
Speaker: There's some smaller emerging markets, central banks, and
Speaker: Ukraine, Cambodia, Bahamas, far more advanced in this journey than the likes of the Fed, the ECB or the Bank of England.
Speaker: And I think it's a story that's going to keep growing.
Speaker: And if we see more and more emerging markets, central banks issue their own central bank digital currencies, that could act as a really, really good catalyst to accelerate financial inclusion across the world.
Speaker: James and Henry, thanks very much.
Speaker: Thank you.
Speaker: Thank you.
Speaker: That brings us to the end of another edition of the Macro Viewpoint.
Speaker: Thank you to our guests, Liz Martins, Shanela Rajenagam, James Pomeroy, and Henry Ward.
Speaker: From Pearson Mead, thanks very much for listening.
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.
