Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Under the Banyan Tree – Fred's economics outlook for 2026
0 Plays1 second ago
Herald turns interviewer this week and Fred's in the spotlight, as our co-hosts discuss trade, consumption, central bank action and more across Asia in 2026.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/vH9rXCW
Stay connected and access free to view reports and videos from HSBC Global Investment Research, just search for #HSBCResearch on LinkedIn or click here: https://www.gbm.hsbc.com/insights/global-research.
Recommended
Transcript
Introduction to HSBC Global Viewpoint Podcast
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Meet the Hosts: Fred Newman and Harold van der Linde
00:00:33
Speaker
Hello from Hong Kong and welcome to Under the Banyantree. I'm Fred Newman, Chief Asia Economist. And I'm Harold van der Linde, Head of Asian Equity Strategy, coming to you from HSBC Global Investment Research.
00:00:44
Speaker
We are weekly co-hosts here on the podcast, but every once in a while it takes on the more interviewer-interviewee kind of vibe. And that's the case on the show today. That's indeed the case, Fred. You interviewed me for the equities outlook a couple of weeks ago, and now it's my turn to ask the questions to you about the macro outlook for a year.
Impact of Trade and Tariffs in 2025
00:01:03
Speaker
I want to talk about trade, tariffs in 2026, consumption, central banks. And I also want to know what a K-shaped recovery is because I've been hearing you talking about that. Well, bring it on, Harold. From HFPC Global Investment Research, this is Under the Banyan Tree, where we put Asian markets and economics in context.
00:01:24
Speaker
So Fred, um I'm gonna ask you a bunch of questions this time around, and I wanna start off actually with trade, because that was the big topic of 2025. And I remember that you said on this podcast a couple of weeks ago that actually trade has been pretty strong this year because a lot of that was kind of brought forward. People wanted to get their stuff in before the tariffs were imposed and the prices would go up. So that means that trade must be really kind of collapsing at the moment. Is that the case?
Global Trade Trends: Record Volumes Despite Tariffs
00:01:51
Speaker
Not really, Harold. And this is perhaps one of the big surprises in 2025 because you have all these headlines about tariffs in the U.S., of course, up, down, lot of uncertainty. um But if you look at actual trade volumes, we're running at record global trade volumes this year. and particularly out of Asia. So Asian exporters on the whole have actually done quite well. Now why is that? the u s Is that to the US? Yeah. Yes, it's partly to the US, but it's also to other parts of the world. Now part of this is of course because of the fear of terrorists. Maybe some importers into the US have front loaded their purchases. yeah
00:02:29
Speaker
But actually, the evidence for that is not very strong. It's probably played a role, but it's not that strong. ok And so there are other factors driving this. um One must be the extraordinary AI hardware boom that we're seeing.
00:02:45
Speaker
And you know if we think about in the US, the estimates are around $450 billion dollars in data centers investments this year alone. course. And where do they get the chips?
00:02:57
Speaker
And all of that comes from Asia. Now, the chips are the obvious one, right? And you talk about Korea and Taiwan being very much exposed to that part. But it goes beyond that. um If you think about the cabling that goes into these data centers, if you think about the ventilators for cooling, that comes out of Asia. If you think about the fact that they need to bring in electricity-generating machinery that comes out of
The Role of High-Value Chips in Asian Exports
00:03:23
Speaker
Japan. Components and all these things. And even hard disk drives out of Thailand. So it's it's really the broader Asian ecosystem that really got buoyed by by this. ai But I suspect that the the Korean and the Taiwanese export numbers, they must have been good because that's really the chips and that's the expensive stuff, right? And has that been the case? That's that's been the case. um But interestingly, it's very narrow categories, right? So you know An economy like Korea exports thousands of different goods from big shipping vessels to tiny microchips and plastics and chemicals and petrochemicals and then you know all the cars. But it's really the export performance was largely carried by just these tiny… tiny, tiny chips who are soaring in volume but even more so in value. So that balsa sort of the reported exports that these countries report. And I also remember we spoke with Aris who looks at Asian economics and he was talking about that the Asian economies were actually exporting more to the US s now than China. as as a group, right? So there's also some supply chains that are being moved around and they benefit from some slightly better terrorist structure. So it's not just these countries, but I guess it's ah phenomenon across the whole region that traders remain strong. That's right. There's ah some evidence that ASEAN economies have gained a bit of market share in the U.S. at the expense of China, probably. But that doesn't mean that China's exports themselves were doing badly because China has increases exports to the rest of the world. So China's exports are running at record levels. ASEAN's exports are running at record levels. So everybody has had a very good year and that hints at something else. And that is so not just the tariffs, it's not just the AI hardware boom, but also the world is demanding more goods nowadays.
Shift from Software to Goods: Boosting Asian Trade
00:05:15
Speaker
um So consumption patterns are shifted towards consumption compared to say 10 years ago. We buy more stuff. At the moment, the type of investment that's undertaken in the world right now has moved from sort of software and research investment really more towards stuff. yeah And so that benefits trade per se. And and so that's why actually we had a pretty good year here in Asia when it comes to trade. That's interesting because there's a debate in equities and I want to move on to consumer in a second here, but there's a debate in equities that should we be pricing companies that were software companies, very asset light, don't need a lot of debt too, that now become data centers that are very investment heavy, therefore need a lot of debt and debt is a risk.
00:06:00
Speaker
Should we be pricing these companies now differently as well? So that's a sort of a kind of, you could say, an equity reflection of what you just mentioned. So exports have remained really strong across the region for all the reasons you you mentioned.
00:06:12
Speaker
Consumption, is that something? Because that was the talk at the beginning of the year. If the export would slow, and that's not the case, maybe governments need to do more to to boost domestic consumption. What's happened on that point? Well, here's bit of the puzzle for 2025, and that is, Traditionally, when exports are doing well, domestic demand in Asia does well as well because you know these economies are highly export-oriented. As exporters do better, they hire more people, they pay out more bonuses and wages, that drives consumption, they invest more, that needs more workers. And so we see domestic demand picking up as well.
00:06:48
Speaker
The trouble this year is we don't really see that in the data. Consumer spending generally across Asia has actually been quite sluggish despite the good performance in exports.
Understanding the K-Shaped Recovery
00:07:01
Speaker
And so here you see a divergence in economic performance. And what you could argue, this is a sort of K-shaped recovery. And this is a term we… I wanted to get into, what is that, a K-shaped recovery? Yeah, K-shaped recovery. So the term originated really from this idea that within consumption, there is higher-end consumers that have more income, actually can spend a lot. because maybe they own a lot of equities and equities are doing better. But that lower end consumers are struggling. And so the broader consumption is lagging behind. So you have this divergence within consumption. The rich are doing better and the poor are doing not good. Interesting, because a couple of weeks ago we spoke with Erwin Rambo, the luxury specialist we had. He was in Asia here. And that's exactly what he saw in the luxury markets. The high end really doing well. Low end luxury. We're talking about luxury. That's in general already high end, of course. But he said low-end luxury is really struggling. There's a lot of things going on. So sort of case-shaped recovery there as well. So you see that in general consumption patterns in Asia. And it has partly to do with the fact that the AI hardware boom, for example, is driving exports in a very narrow set of companies. Mm-hmm. And they are doing phenomenally well. But it doesn't mean that the economy is hiring more workers because these are, say, chip companies that are firing up. They're churning out more chips and making lot of money. But that doesn't mean that they're hiring tens of thousands of workers. And again, you see that being reflected in equity markets. You see some stocks and markets have done really well and other ones have really struggled this year. So that K-shaped recovery is something that I can use in my equity universe as well. Yeah, that's another great example of how equity strategies copy really the intellectual work of economists. Normally, we don't really want to listen to you guys because we look ahead and you guys look backwards. But in this case, maybe there's an exception here. Yeah, and so there's other elements as well to the K-shaped recovery.
Growth vs. Inflation: Policy Implications
00:09:00
Speaker
And particularly in poor economies, they're still scarring from COVID-19. So we all like to think the pandemic is behind us. But socially, we're able that. Particularly in poor economies, the average household has really suffered quite a bit because they didn't get the fiscal transfers that maybe American households got from the government or European households in the they are in a more difficult situation. So the average Indonesian, the average Indian, the average Filipino, they all – struggled much more. They to dip into their savings. And now coming out of the pandemic, they need to rebuild their savings. They need to rebuild the nest egg. And takes a couple of years. Takes some time. And so that contributes to the K-shaped recovery as well. And what does that mean for investments then? Because you have one part of the economy doing really well. Other parts of the economy still struggling. So I guess you have a bit of K-shaped recovery in the investment cycles as well.
00:10:00
Speaker
um Yeah. Well, in investment cycle, I suppose you do to some extent, although that's probably more question for you and how within equity markets there some companies that do better and others maybe not. um But I think the big the big question mark now is for policymakers. How do they respond? Because you have, on the one hand, you have very strong growth. I mean, we had just had news out that the Taiwanese economy is expanding over 8% every year in the third quarter. I mean, these are yeah rock solid numbers. I mean, i can't dream I used to live in Taiwan 20, 25 years ago now, but I can't remember seeing any so ah number like that coming out of Taiwan. In decades decades. Maybe around COVID when there was collapse and and base effects. But But this is this is roaring growth. But um this is driven by a few companies. And so that doesn't mean then that the economy is generating inflation because there's no broad-based growth. And so if I'm a central banker, I'm saying, oh, yeah, I got strong growth. but
00:10:59
Speaker
The inflation picture actually is very benign. If anything, inflation is going down. So there might be an argument to cut interest rates because really the aim of central bankers is to lift everybody up, not to bend at a few economies. So that's one aspect. But there's also implications for fiscal policy.
00:11:16
Speaker
And that is that because the average person is not benefiting from this strong growth, there's more pressure on fiscal policy to help the average consumer. And this is something new we haven't seen in Asia, whereby fiscal policy is geared more towards spending vouchers are being handed out. Maybe there's discussion on expanding Social Security. So this is more social type of spending.
00:11:44
Speaker
Whereas in the past, Asia was very good at infrastructure, the hard stuff. But now you see these governments responding a bit more towards the need of the average person. And that also changes the discourse among policymakers. Well, I'm learning a lot here, Fred. I want to take a quick break here and then maybe zoom in on two or three economies in Asia just to go a little bit deeper on this. That sounds like a plan.
00:12:15
Speaker
So, Fred, just to for me to get it clear, so basically the economies in Asia have shaped up differently than we would have expected at the very beginning of the year. You would have thought with all the tariffs, maybe the trade would eventually slow. Hasn't really happened. That's because of the AI boom. And we've seen a big divergence, what you call a K-shaped recovery in in consumption and maybe investment across the region, right? Now, I'd like to dig a little bit deeper and go into a couple of countries. What's going on in particular, China, for example, that's a dominant place. What do we see exactly these trends unfolding in China? And what are they doing to deal with this?
00:12:49
Speaker
Yeah, so China fits this pattern very, very well that we described because exports running at record levels. fact, in many measures, China even outperformed the rest of Asia, which it itself has done quite well. So that part is doing well. But on the domestic side, the consumer spending is lagging behind. And that partly, of course, is a result of the real estate market, which is deflating and still actually over the course of this year has taken another leg. It seems like it went up and then it struggled and then it went up a bit again and now it's coming down again. It's really up and down, and down. Yeah, the latest numbers are bit discouraging.
00:13:24
Speaker
But it's not just that. It's also the weak labor market. It's you know income growth slowing. We have slight tick up in the unemployment rate. So all of that is holding back consumer spending. And therefore, you see the government starting to talk more about But allocating more money towards consumption, helping households. We had, for example, this year, free child care being announced. There's a lot of talk about pension reform. Pension reforms. But all these sort of – as you mentioned, these sort of social policies instead of the sort of hard infrastructure building bridges and roads that they used to do, say, a decade ago, yeah right? Yeah. Now, some people argue the shift hasn't been fast enough, um but we are seeing clearly the direction changing, even if the speed might not be quite there, what many people hope for. yeah um But there is a greater emphasis on that to address that K-shaped recovery, if you will.
00:14:22
Speaker
And you could argue it will be difficult for them to cut. interest rates that much more because it's already quite low in in in China. They're already quite low and so they kind of exhausted a little bit their monetary policy channel as we call it. and a look at So the emphasis is more on fiscal policy. and And that's generally true in economies that already have low interest rates. You you know, cutting interest rates doesn't give you as much bang for the buck. You need to move to fiscal policy. And that's clearly what we see in china happening in China. Then India. India had some phenomenal growth coming out in the last week or so. So what what is going on there? Are they also benefiting from this AI K-shaped recovery or is there different story there?
00:14:59
Speaker
um It's been a bit of a K-shaped recovery as well. um You had very, very strong growth, 8.2% headline GDP growth third quarter, phenomenal. Now, if you dig a little bit through the numbers, it turns out there's some statistical quirks. So maybe the run rate is closer to 7%, which is still very good. yeah um ah There, part of the growth has really come from the government cutting taxes and offering more support to consumer spending. And that's given the economy a bit of a jolt in the third quarter. yeah But it is a K-shaped recovery in the sense that over last few years, um again, it's been certain sectors that have done well, not the broader economy.
00:15:43
Speaker
rural consumption has lagged behind in recent years coming out of the pandemic in part because of the severe impact of the pandemic on household finances in rural areas. But then you also had environmental issues. Last year, there was a heat wave, right? And if you think about half the population is in rural areas and you have severe drought and yeah you know older issues water issues, that immediately impacts consumer spending. So um But on the other hand, IT services are doing well, right? So it's it's ah it's a bit of a mixed picture.
00:16:14
Speaker
um But generally, India has also weathered some of the external challenges quite well this year. They have very high tariffs right now. They're facing in the U.S. 50 percent more than any other country. Asian economy. And despite that, they still managed to drive up growth. These growth numbers are very good. So India is slightly different story. Now, we've spoken about Taiwan and, tu so next time I guess, North Asia already. So what about ASEAN? And the biggest economy there is Indonesia. What's moving on there? Because that's been a sort of a confusing story as well this year. It's a confusing story. Now, overall, ASEAN is really mosaic of different types of economies, as you well know, Harold, and different economies have different growth drivers.
ASEAN Economies: Diverse Growth Drivers
00:16:56
Speaker
Indonesia really is a generally more domestically focused economy because it is such a large population, close to 300 million people.
00:17:05
Speaker
um And it's been traditionally much more exposed to a commodity cycle. um But if we look at the performance this year, headline numbers, yeah, they're okay, around 5%, although they never really much move. But we know that consumer spending is very sluggish. We know that in the manufacturing sector there were job losses this year. And we see that also reflected in very low inflation numbers because inflation is so low, partly because people aren't spending.
00:17:32
Speaker
And this then has led essentially to a fiscal policy response, what we just discussed, which is kind of a trend we see across Asia, whereby the government is now emphasizing more spending that helps households directly. One is the famous... The the school lunches. School lunches, for example. simple yeah um and And that's that's meant to help the average person really save money, make money of food available for their kids, and when they're school, address nutrition deficiency, et cetera. So there's a subtle shift here. It's not clear in whether this is enough to drive long-term growth because you spend on very worthwhile causes, of course, school, nutrition.
00:18:19
Speaker
But the risk is that you then maybe scale back the infrastructure investment, which is driving the future growth. it's a fine balance situation. They'll need to strike. And I think going to next year, that will one of the key questions, how Indonesia balances those two things. Interesting. Maybe the last country I quickly want to go to is Japan. We spoke about North Asia, but Japan seems to be in a slightly different sort of cycle, right?
Japan's Economic Cycle: Inflation and Labor Market
00:18:45
Speaker
Slightly different because it's one of the few central banks that will likely hike interest rates next year with everybody else's Probably only one i know of that is doing that. Yeah, there's a little bit New Zealand, Australia where you know things are shifting a bit towards tightening. But in emerging Asia really it's it's probably more towards cuts than hikes. But Japan is firmly in the in a tightening cycle and that's because – um unlike in the rest of the region, the labor markets are very tight. And they're tight for demographic reasons. they They're running out of workers. yeah and And so that drives up wages, drives up inflation. And here we are after 30 years of no inflation Japan. We suddenly have some of the highest inflation rates in Asia or in Japan. Who would have known? um But that that means there's a slightly different cycle there. And there's other stuff that's that's happening in Japan that's kind of
00:19:31
Speaker
suggests there's a reinvigoration of the economy. They're doing quite well in some of the AI hardware stuff and semiconductors, for example. and The tourism sector, obviously, doing still quite well.
00:19:41
Speaker
and and And consumer spending is also coming back, particularly among young people. Young people are spending again. Japan is not the older people, but you know the fewer younger people they have, they are spending and because they often have jobs that are higher-paying jobs. And so, yes, there's a more dynamism now in Japan that we've we've seen, say, 10 or 20 years ago.
00:20:01
Speaker
So we've covered a lot of ground here, Fred. So can we tie this all together? What does this mean for growth in 2026?
00:20:10
Speaker
Look, the headline numbers this year are strong, but there is a certain degree of fragility to growth, right? The K-shaped recovery, for example. And that means that as we look into next year, we're not necessarily looking at dramatically accelerating growth because we have to be mindful of the drags that still increasing. in these economies. And also there is a vulnerability that because everything is so dependent on export growth, if there's a pullback, then that could immediately impact how these economies perform. Now, that doesn't mean we're looking at recessions in Asia. It's just we have to be mindful of the fact that Despite these very stellar headline numbers, there are these underlying fragilities, and I think that will cap growth to some extent. I mean, Asia will continue deliver some of the highest growth rates in the world, very impressive, but we're not necessarily looking at a breakout that sees suddenly this reinvigoration. I think for that we may need to wait until 27, 28. And particularly we need to wait for the Chinese economy to turn that last corner, turn over that last leaf of its challenges. And that that fiscal spending as you mentioned.
00:21:20
Speaker
Yes. Well, Fred, I'm going to compliment you here. You've been an excellent interviewee. Thank you for letting me ask the questions today under the banyan tree. And we'll be back to our regular co-hosting shift next week.
00:21:33
Speaker
Well, indeed. And thank you, Harold. Pleasure as always. And thank you, dear listeners, for joining us today under the Banyan Trees available wherever you get your podcasts, including YouTube. And while you are there, do also tune into The Macro Brief, our other weekly podcast from HSBC Global Investment Research. Have a great rest of the week and we'll talk to you again very soon.
00:22:29
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.