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: Thanks for listening, and now onto today's show.
Speaker: The following podcast was recorded on the 28th of September 2023 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Butler and this is the Macrobrief.
Speaker: On today's program, we're assessing the outlook for the world economy.
Speaker: More than 18 months after it started, it appears that the period of rapid interest rate rises by central banks is finally drawing to a close.
Speaker: So with inflation finally coming down across the globe, how long do rates need to stay high for?
Speaker: And what are the prospects for growth?
Speaker: These are just some of the topics we're talking about with Janet Henry, Global Chief Economist.
Speaker: So Janet, when it comes to this question of peak interest rates, my impression is there's quite a lot of wishful thinking out there.
Speaker: I guess after 18 months of tightening, people want to believe we're at the peak.
Speaker: For central banks, it's more about not letting expectations run away with themselves.
Speaker: So even though emerging central banks have started to cut, where are we in this debate?
Speaker: Yeah, I think that's a fair summary, actually.
Speaker: The fact is central banks just don't know yet.
Speaker: You're right.
Speaker: Some emerging economies have started to cut interest rates, but only a few.
Speaker: Brazil was one of the first to start.
Speaker: In Latin America, they'd had more recent periods of inflation.
Speaker: They were more preemptive.
Speaker: They took real rates to quite high levels.
Speaker: They have started to cut, but there's only one or two others, including Poland, that have cut interest rates.
Speaker: For the advanced economies, we actually are forecasting another rate rise for a few.
Speaker: They include Australia.
Speaker: But for the majors, they basically told us that policy is restrictive and they absolutely stand ready to raise rates further if they need to.
Speaker: but they just don't know yet.
Speaker: So the other key message that we've had is that they are going to be data dependent.
Speaker: They need to be confident that even if it's going to take longer than they want it to, that inflation is over time going to move back down towards target.
Speaker: So they're absolutely giving no hint whatsoever that they are ready to cut anytime soon.
Speaker: It is about managing those expectations.
Speaker: They just are not confident yet, given all the different array of factors facing the global economy.
Speaker: Do you think they've done a better job than historically?
Speaker: Because we have seen in history that the challenge is dealing with the lags between tightening interest rates and the impact on the economy.
Speaker: So far, the impression is that they seem to have managed that reasonably well, or are we still in this period of uncertainty and the data is really going to tell us whether they have been successful?
Speaker: Well, there are many more factors now.
Speaker: And I think this is one of the factors that markets have struggled with.
Speaker: They've always taken the view that actually interest rates rise for a period until something breaks and then you get fairly rapid rate cuts because usually the economy is in a recession.
Speaker: But it has been an extraordinary period over the course of the last few years.
Speaker: And this is never going to be a normal downturn.
Speaker: But in terms of the lags with which monetary policy impacts on the real economy, it varies from country to country.
Speaker: You know, we see it in housing markets globally.
Speaker: Those economies that are more linked into short term interest rates are seeing a big rise in debt service costs.
Speaker: They've seen a much sharper slowdown in consumer spending.
Speaker: You've seen that in Sweden in particular.
Speaker: You've also seen some elements of it in New Zealand.
Speaker: In the eurozone, higher interest rates and slower growth is impacting on certain areas of the corporate sector where you're seeing higher bankruptcies.
Speaker: And in the US, it's partly in certain areas of household delinquencies, not mortgages.
Speaker: A lot of people, the average mortgage rate, I think, in the US in terms of total debt service is still about 3.6.
Speaker: Even if you want to take a new mortgage, it's more like 7.
Speaker: And also what's different this time is the interaction between monetary and fiscal policy.
Speaker: If you think about what happened in the wake of the global financial crisis, governments were tightening fiscal policy after the first year.
Speaker: And so central banks were able to raise rates quickly and to keep them a lot lower.
Speaker: This time around, it's not just the pandemic and the war, but governments have actually been adding to demand at a time when they've been trying to slow it down, including against a ray of supply factors.
Speaker: So as you mentioned, there are many other factors apart from tiny interest rates, which, as we've discussed before, is a blunt instrument.
Speaker: But one factor that's grabbing the headlines at the moment is the oil price, which seems to be heading back up to $100 a barrel.
Speaker: How is that going to affect the outlook?
Speaker: I mean, how have you managed to sort of take that into account, given that often people talk about a rising oil price as having a similar effect to a rate hike?
Speaker: It's certainly unhelpful at the moment for any oil importing country and at a time when inflation is still too high.
Speaker: You know, inflation has fallen.
Speaker: It's no longer in double digits or at nine or ten.
Speaker: In most countries, it's more like half that, although obviously there are some exceptions.
Speaker: So now we have a situation.
Speaker: where oil and energy broadly, which was adding hugely to inflation a year ago, is now actually detracting from inflation.
Speaker: But with the oil at 95 or so, actually, in year on year terms, it is going up.
Speaker: We're still way below where we were at the peak in 2022.
Speaker: But it means that oil will be adding.
Speaker: to inflation again.
Speaker: And the reason why it's particularly troubling now relative to the past is that it happens at a time when central banks have been above their inflation targets for some time.
Speaker: So there has been some impact on elements of inflation expectations.
Speaker: including wage bargaining.
Speaker: Labour markets are tight.
Speaker: People have been asking for higher pay.
Speaker: And we've obviously seen more widespread strikes.
Speaker: So oil and rising energy prices is always a risk about growth.
Speaker: But also at the moment, it's risky because it will keep inflation higher than it would have otherwise been.
Speaker: And the risk is that it therefore becomes more persistent.
Speaker: So, taking all of that into account, I confess when I read your Global Economics Quarterly that I was surprised to see your global growth estimates revised up.
Speaker: How did that come about?
Speaker: Yes, I think a lot of people might be surprised by that.
Speaker: But it is quite interesting in terms of the geographical split because the upward revisions that we've made to our forecasts are a lot of it driven by the Americas, but also Japan.
Speaker: and even small upward revisions to the likes of India and Indonesia.
Speaker: So the US, it has been persistent upside surprises for a lot of this year, and a lot of it has been driven by consumer spending.
Speaker: But we've seen, obviously, some growth disappointment.
Speaker: notably in China, which is still grappling with the challenges in the property sector.
Speaker: But there are at least some signs of stabilisation, but we have had to lower our numbers.
Speaker: And Europe is being weighed down by the weakness in the world trade cycle, which is also, to some extent, weighing down on the ASEAN countries.
Speaker: Actually, there's still growth outperformers relative to the rest of the world, but relative to expectations at the start of the year, that trade side has really dragged them lower.
Speaker: So we talked a little bit about inflation in your answer to the oil price.
Speaker: But again, I was surprised to see how elevated inflation is remaining in your 2024 forecast.
Speaker: I mean, is inflation becoming embedded in the system?
Speaker: Well, inflation, actually, we did revise up, but it was all driven by the emerging economies.
Speaker: And within that, a couple of the really high inflation economies, which obviously include Argentina.
Speaker: But the broad point is a fair one, even in especially in 2024 and even beyond.
Speaker: Inflation is still above central bank targets.
Speaker: But we also need to be mindful,
Speaker: Even the Federal Reserve does not expect inflation to get back to target until 2026.
Speaker: So despite all of these uncertainties, you've actually attempted to introduce a 2025 forecast, which reading it seems a little bit more positive.
Speaker: It is.
Speaker: Our global growth forecast for this year is 2.5, for 2024 is 2.3, and then we do have a small uptick to 2.5 again.
Speaker: That's still globally a forecast that's below pre-pandemic trend levels of growth, although clearly there will be some outperformers which we look at in the report.
Speaker: But there are a number of factors that could possibly even drive upside surprises.
Speaker: But ongoing challenges, obviously, a lot of them still relate to inflation and how central banks respond to that elevated inflation.
Speaker: But also in some countries, we've got really tight labour markets.
Speaker: Often when you've had a recession, you get a nice strong rebound because unemployment's risen a lot.
Speaker: You've had massive rate cuts.
Speaker: We're forecasting only very modest easing.
Speaker: of interest rates, particularly they only come very late in 2024, although they do gradually continue in 2025.
Speaker: But we're certainly not talking about a world where we go back to zero interest rates.
Speaker: You know, we're only talking about a percent or so in terms of the interest rate reductions.
Speaker: So with not much slack in the labour market and with only limited reductions in interest rates, because we do think we're in this world of a deteriorating growth inflation interest rate tradeoff, the extent of the revival that we see in 2025, we still think will be relatively modest, albeit, as I said, with some relative outperformers.
Speaker: to coming back to 2024 it's going to be an election year in many countries notably the us how did you deal with that in your forecasts or to put it another way should we take your 2024 forecast as a central scenario but with a wider range of possible outcomes than normal
Speaker: Yes, it's our central scenario, but we do explicitly say in the report that obviously two years out, there is a higher degree of uncertainty for forecasts over the course of the next quarter or so.
Speaker: And even those could clearly bring some surprises.
Speaker: Already there's a lot of focus on the possibility of a government shutdown.
Speaker: And we've talked about the impact of higher oil prices and what could possibly happen there.
Speaker: But in terms of how we incorporate it into our forecasts,
Speaker: I think when we think about elections and there are, you know, there's more than a dozen next year.
Speaker: Don't forget we've got one in the UK as well.
Speaker: We have to take a view on fiscal policy in particular.
Speaker: And as I mentioned, fiscal policy is generally being quite supportive at the moment.
Speaker: In the US, they've been pushing for a greater industrial policy under either a Democratic led administration or a Republican administration in the US in 2025.
Speaker: It's highly unlikely that we get any significant tightening of fiscal policy.
Speaker: We'll probably get none at all.
Speaker: It's just that it could make a difference as to whether you get tax cuts or spending increases.
Speaker: And you could have different sector impacts and company impacts.
Speaker: But we've just taken a view that fiscal will not be something that's slowing down growth, nor will it be something that's going to drive inflation lower.
Speaker: So that's part of the way in which we incorporate it.
Speaker: Janet, thank you so much for joining us.
Speaker: Pleasure to be here, Piers.
Speaker: Thank you.
Speaker: Janet Henry there on the outlook for the global economy.
Speaker: If you're an HSBC client, you can catch Janet at our Global Investment Seminar, taking place at our London headquarters on the 9th of October.
Speaker: The event features presentations from our economists and strategists from across the asset classes.
Speaker: Contact your HSBC representative to register your attendance.
Speaker: A couple of other highlights from global research now.
Speaker: It's not often that bonds get compared to potatoes.
Speaker: But that's what Steve Major, global head of fixed income research, has done in his latest report.
Speaker: Steve uses the analogy of a market stall to explain why an increase in the supply of bonds does not necessarily mean higher yields.
Speaker: And did you know that Southeast Asia is set to become the fourth largest economy in the world by 2030?
Speaker: Our team in Asia has just published a primer on the Association of Southeast Asian Nations, otherwise known as ASEAN, comparing the diverse economies, banking systems, and stock markets in its sixth biggest countries.
Speaker: For more details on these reports, please email askresearch at hsbc.com.
Speaker: So that's all from us today.
Speaker: Don't forget you can follow the podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Speaker: Thank you very much for listening and we'll be back next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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