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: This is the Macrobrief from HSBC Global Investment Research, where we look at the issues driving financial markets. I'm Piers Butler, and here in the UK, after weeks of rain, the weather is finally starting to brighten up.
Speaker: And the same looks to be true for the latest data across Europe. So as we head into spring, have we reached a turning point for Europe's economies? And are there better days ahead?
Speaker: To find out, I'm joined in the studio by our senior UK economist, Liz Martins. Liz, great to have you back on the Macrobrief. Thanks very much, Piers. So yeah, I can certainly vouch for the fact that the temperatures are getting warmer and the days are getting longer, which does lift the mood. And are you saying that some of the recent economic data is also improving? Where have you seen this?
Speaker: Yeah, so at the moment it's mainly in the surveys, although i have to say we also pick up on it as a mood from our clients as well. So when we talk to investors, there seems to be rising optimism about Europe as a region and growth story. And the surveys are starting to reflect that. So the PMI, the Main Business Activity Survey, that one was pretty strong and in February for the Eurozone, particularly seeing the manufacturing sector returning to growth territory for the first time since last August. So just let me interrupt. Yeah. PMI.
Speaker: Purchasing managers index. Purchasing managers index. Yes. A survey of companies. But they actually talk to people, don't they? And they get a response from them or they get to survey people and see what their sentiment is. Yeah, exactly. And it's one that economists really like to watch. comes out every month. They do it for a wide range of countries around the world. And it's it's an economist's favorite.
Speaker: Right. And what what other surveys have you looked at? um Well, the other one that shows some signs of life really is the German IFO, which is a similar but a German domestic survey of business activity. um And that one's picking up as well, both the current activity, ah but also um future expectations. And then not a survey, but also a good news story ah in the most recent data was UK retail sales.
Speaker: And they saw a bit of a A good growth number for January as well. So some some better numbers. Definitely. Can I just check on surveys in particular? Because you and your team have made this point that response rates for surveys have been declining. Is that something that undermines the message that's coming through from this data? Yeah.
Speaker: Yeah, it can be. So I think response rates are important. The other thing is that with the PMIs, it is a survey of breadth rather than depth. So if you ask you know a number of companies, did your output go up or down, and everybody's output went up very, very fractionally, that's going to come out as a really strong reading. It's telling you about the breadth, but it's not necessarily telling you how much things got better. So let's say things were really bad and then they get slightly better. It might come out looking maybe stronger than it is. And generally speaking, the link between PMIs and eventual GDP growth numbers is not brilliant.
Speaker: Right. And there was a lot of skepticism when you talk about the German data about the fact that all these intentions about increasing defense and infrastructure spending would take a long time to materialize. But are we saying that we're starting to see of some of the impacts of that? I think we are. Yeah, I think we've seen um certainly yeah a focus from a policymaking level on both this defence push and, you know, the the response to what is seen as a whole new world order that feels like it's become more urgent. And Europe is responding, one, with this German spending push on defence and infrastructure, which does seem to be bearing some fruit. We are seeing German manufacturing orders pick up, and it's not in the traditional areas of strength like cars and chemicals. It's in these defence-related sectors. So it does feel like it's starting to happen. And the other area where policymakers are looking to focus is on competitiveness and reform as well. So both of these things are contributing to this better mood around the region.
Speaker: But we shouldn't get carried away. Like we shouldn't get carried away about the ah the improved weather conditions in the UK because the winter can often come back and and bite us when we least expect it. But why the caution?
Speaker: Yeah, well look, I mean, I think in particular for the UK, we are used to false storms, both with the weather and the economy. And, you know, actually 2024 and 2025 also started with what we kept on calling perky data, the perky PMIs and a better move mood all round. And sadly, in both of those two years, it didn't um it didn't last, it ended up fizzling out by the summer. So there's the worry that, you know, the UK just cheers up. I don't know why, because the weather's terrible, but we just cheer up in the new year for some reason, we we get some optimism, which ah which which fizzles out through the year. um So that's one thing. And then of course, you know, we still have all the issues that the UK we know about, the political risk, the fiscal risk, the lingering inflation, and the rising unemployment, you know, those make for a challenging backdrop.
Speaker: We'll come back to you, Kay, in a minute, but also I guess we should be careful about some of the survey data. As you point out, in France, the survey data has been improving, but nevertheless, the absolute reading isn't that great.
Speaker: Yeah, exactly. The PMI has improved, but they stayed below the 50 watermark. So they continue to indicate net contraction um in activity, which is which is not great. And actually, then the the French domestic survey, the INSEE, that one actually fell back a little bit in terms of business confidence. So, yeah, France feels like a bit of an exception um at the moment. And again, there may be some um fiscal and domestic politics kind of aspects to that.
Speaker: So coming back to the UK, there is one economic date in the calendar which is coming up fast, and that's the UK's spring statement. What is the significance of the spring statement, remind us, and why do you think that this time it could be a non-event?
Speaker: and So the UK has two fiscal events every year. We have the autumn budget and a spring update. Rachel Reeves said when she came in, she wanted the spring update to be a non-event. wanted She wanted it to be quiet so we have minimum policy instability. Now, last year, that didn't happen because we had a lot of global economic turbulence, which wiped out the very small amount of headroom she had left for herself. And the market essentially put pressure on her to take action, which she ended up doing. Now, this year, circumstances are much more conducive to a a quiet one. And actually, the format will change a little bit as well. So she's calling it the spring forecast. It's not even a statement. There shouldn't be any policy announcements. The UK won't be assessed against its fiscal rules. Now, it will be easy enough to see what the headroom is, because the headroom is simply the size of the current budget surplus in the target year. So we'll be able to tell whether that headroom has been eroded or grown or whatever. um And base case for us and I think other um observers is that it should be very little change. So we really need some stability in the yeah UK. We've had three very eventful news driven fiscal updates. They've been difficult. They've been challenging for the economy. And a really nice quiet one would be, I think, more than welcome in this environment where actually we are starting to see some slightly better signs.
Speaker: And the signals from the all-important gilts market is also reassuring from that perspective? Yeah, that's right. I think the gilt market has responded well to a few things. um One is the fact that Bank of England has been a little bit more dovish, so the BOE signaled more rates cuts to come. in February, in their February meeting. um The second is that actually year to date, borrowing numbers have come in below what the OBR was expecting. So it looks like, um you know, some of the things that Rachel Reeves has done, like put taxes up, are succeeding in reducing ah the the deficit. So that's good. um And then i think the third thing is that people are anticipating
Speaker: a quiet spring statement and and and and lower gilt issuance for next year. And all of those things um are positive. um So, yeah, slightly more favorable market conditions compared to some of the the turbulence we've seen. Any other risks we should be aware of? When's the next Bank of England meeting?
Speaker: Next Bank of England meeting is 19th of March. The market is 75% priced for a cut at that meeting. So, I mean, you know, not not not nailed on by any means. And our own forecast is that they wait for April. Always hard to tell with the BOE, to be honest, whether they're going this one or Or the one after that, exactly. So not sure on that one, but we continue to think there'll be three more cuts by the end of the year. um And the risks remaining, I think I listed them off earlier. It's the political risk, it's the fiscal risk, so the risk that the budget is not a non-event, um which is which would not be so good. um Unemployment, which is sadly still rising, and inflation, which is coming down rapidly, but some people think there's a lot of lingering pressure still in the system. Well, let's hold on to some of those positive thoughts for now. And I'm sure we'll have you back after the Bank of England to see whether your interest rate forecast was on the money or not. But thank you for joining us today.
Speaker: Thank you.
Speaker: Liz Martin's there on the latest European economic data. Our colleagues in Asia are back from the Lunar New Year break. And on this week's edition of our sister podcast, Under the Banyan Tree, the team delve into the holiday spending trends in China.
Speaker: You can find the podcast along with our latest reports and videos on the Global Investment Research mobile app. It's available on Apple's App Store or Google Play. And if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com.
Speaker: So that brings us to the end of this week's episode, hosted by me, Piers Butler, and produced by Tom Barton. Don't forget to like and subscribe to the podcast, and please share with friends and colleagues.
Speaker: From all of us here, thanks for listening, and we'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.
