Transcript
Speaker: You're listening to the HSBC Global Research Macro Viewpoint podcast in our weekly chat with our team of economists and strategists from around the world.
Speaker: Hello, everybody, and welcome to the HSBC Global Research Macro Viewpoint podcast.
Speaker: I'm Jack Reed, your host this week, along with Mary Watkins, the editor of the Global Research app.
Speaker: Remember, the disclosures and disclaimers for this podcast, which was recorded today, the 29th of April, must be read on the link attached to your media player.
Speaker: Mary, welcome.
Speaker: Hi, Jack.
Speaker: Mary, this week we'll be talking with Stephen King, Senior Economic Advisor about inflation and whether policymakers are behind the curve in responding to the record price rises we've seen this year.
Speaker: Trade economist Shanela Rajanagam joins us to discuss the impact of the COVID lockdown in Shanghai on global supply chains.
Speaker: And in a moment, we'll hear from our head of FX research, Paul Mackel, about the rapid decline of the Chinese currency in April.
Speaker: What a week for the global research team.
Speaker: Yeah, so just before we get started, Jack, I was looking at the list of the most read HSBC research reports this week and Stephen King's inflation view, the emerging markets FX roadmap from Paul's team and the focus on China's supply chain issues were at the top of the list of the most read reports from global research.
Speaker: Now, Paul Mackel has been tracking the rapid decline of the renminbi in April.
Speaker: Earlier, he told us the challenge for investors over the next month or so will be to find survivors among EM currencies hit by the market dynamics now playing out.
Speaker: very much survival of the fittest for emerging market currencies.
Speaker: There's been a lot of pressures that have been coming through over the last couple of months.
Speaker: But importantly, we can just step back and look at the broader dollar in itself.
Speaker: It has been appreciating pretty quickly lately.
Speaker: What's behind that?
Speaker: Well, our framework has been resting on two key factors for quite some time.
Speaker: First of all is the downward risk or profile for global growth that's been developing.
Speaker: The second thing is well known, we're thinking increasingly about the Fed and what it could be doing next.
Speaker: As I said, that's been driving the dollar stronger for quite a long time.
Speaker: The new information relates to the renminbi.
Speaker: It has weakened pretty quickly lately as there's been more market concerns about China's growth outlook and in turn that's been feeding through with the currency going down.
Speaker: That has a collateral impact for many other currencies, particularly in Asia.
Speaker: And it also amplifies broader dollar strength.
Speaker: So we think that at least over the next month or so, it's about trying to find the survivors when they're trying to navigate all these big uncertainties at the moment.
Speaker: As I said, strong dollar, the Fed, slower global growth, and question marks about the outlook for the renminbi and China.
Speaker: Paul Mackel there, our global head of FX Research.
Speaker: Stephen King is our Senior Economic Advisor here at HSBC and he joins us now.
Speaker: Stephen has just published a report entitled When Inflation Surges, Money Illusion and Central Bank Delusion.
Speaker: Stephen, thank you very much for joining us.
Speaker: Oh, it's an absolute pleasure.
Speaker: So you argue that central bank policymakers are increasingly at risk of falling behind the curve and dealing with the inflation threat.
Speaker: How did they get into this position?
Speaker: Well, I think the honest truth is that they were very happy for a number of months to persuade themselves that the reasons for rising inflation were entirely temporary and nothing to do with monetary policy at all.
Speaker: So if you recall, during the course of 2021, there was lots of talk about semiconductor prices going up and secondhand car prices going up.
Speaker: And there was a sort of general view that these were temporary annoyances rather than anything more than that.
Speaker: What we now know, of course, it's not just semiconductor and secondhand car prices going up.
Speaker: It's a range of prices of both goods and services have been rising pretty rapidly.
Speaker: We also now know that it's not just prices going up, it's wages that are going up.
Speaker: And perhaps most worrying from a central banker perspective is that
Speaker: we're also now seeing perhaps the first signs of inflation expectations begin to nudge higher.
Speaker: So for all these reasons, I think this idea that inflation was transitory, to use the sort of terrifying word people were using last year, that I think was an error.
Speaker: And in hindsight, I think that what perhaps central bankers didn't recognize was that the extraordinary loosening of monetary conditions in 2020 and 21 during the pandemic
Speaker: simply gave rise to a huge amount of, if you like, stored up liquidity during lockdown, which is now being unleashed at a time when the global supply chains are not working as well as they once were.
Speaker: So you have this combination of very loose monetary conditions alongside constrained supply.
Speaker: And that, frankly, is not great from the point of view of price stability.
Speaker: You also focus in the report on the importance of factoring both nominal rates and real rates into this equation.
Speaker: What is it that central bankers are in danger of not recognizing here?
Speaker: Well, if you look at the typical central bank argument at the moment for why inflation will come back,
Speaker: to heal effectively.
Speaker: One aspect of the argument is believe us, we're central banks, we're credible, therefore we'll definitely hit the right inflation target in a year or two years time, which is sort of an act of faith more than anything else.
Speaker: But the other argument they're using is that because prices are rising faster than wages, then real wages will decline.
Speaker: And as real wages decline, demand will weaken.
Speaker: And as demand weakens, inflation will come back down again.
Speaker: So it's a kind of strange argument that says that high inflation today will cause low inflation tomorrow.
Speaker: The problem with this is that interest rates do have to adjust to changing inflation realities.
Speaker: And if they don't, you're going to end up with the wrong kind of monetary policy.
Speaker: So to give a very simple example,
Speaker: Let's imagine in the first case that you have inflation at 2% and wage growth at zero, then you've got a real wage cut of 2%.
Speaker: Imagine the second case where you've got inflation at 10% and nominal wage growth at 8%, you've still got the same real wage cut of 2%.
Speaker: But if interest rates are still at 1%, then actually it is incredibly cheap for someone getting a nominal wage increase of 8%.
Speaker: to borrow heavily because if interest rates are only one, your wages are rising at eight, then effectively your real interest rate you're being faced with is incredibly negative.
Speaker: So you may find that people's real wages are being squeezed, but at the same time, they're still able to leverage themselves up to buy houses, to push house prices higher.
Speaker: to borrow more to spend and to add to inflationary pressures.
Speaker: So this sort of failure to understand the distinction or to recognize the distinction between real and nominal variables is a really important part of what I think is going wrong at the moment.
Speaker: It paints a picture of inflation continuing to defy gravity and leading to an unanchoring of those inflation expectations you touched on.
Speaker: The biggest long-term risk is absolutely that inflationary expectations could destabilise.
Speaker: Now, of course, central banks find themselves now in a very awkward position because we know that simultaneously we've got higher inflation and weaker growth.
Speaker: And in those circumstances, it's sometimes difficult to get policy right.
Speaker: But we do know, I think, something from the 1970s, which is that
Speaker: If you worry too much about growth, don't think enough about inflation, you're likely to find that inflation just accelerates or at least remains higher than people expect.
Speaker: And once it's out there, it becomes socially very, very divisive.
Speaker: So under those circumstances, life just becomes a lot more complicated for central banks and policymakers more generally.
Speaker: So this brings us to your conclusion.
Speaker: Central bankers need to do a rethink on policy.
Speaker: But what do they really need to do now that they aren't doing?
Speaker: Well, I think at the moment there's a lot of talk about peak rates or terminal rates and where rates will eventually end up.
Speaker: But most of the peak and terminal rate forecasts that I've seen would suggest that monetary policy would still not be particularly bracing.
Speaker: And it still would suggest that central banks are absolutely dependent on the idea that inflation sort of self corrects over the next year or two.
Speaker: And that leaves me with the thought that there are three risks out there relative to the consensus.
Speaker: The first risk is that short rates will have to rise a lot further than anyone's currently forecasting if inflation is going to come back to heel.
Speaker: The second risk is that if rates don't rise fast enough, that inflation will indeed be de-anchored to a certain degree and it'll be more difficult to get it back down later on in time.
Speaker: And the third risk, frankly, is that if monetary policy does have to be tightened quite a lot further than people are currently anticipating and there are growth consequences coming from it,
Speaker: It may mean that riskier assets like equities themselves are more vulnerable than they have been in quite some time.
Speaker: Bear in mind that equities made huge gains partly because monetary conditions were incredibly loose and there was no hint whatsoever of monetary policy being tightened.
Speaker: I'm afraid to say the game has now changed.
Speaker: Stephen, thank you very much for that perspective.
Speaker: It's a pleasure.
Speaker: Stephen touched on the continuing problems with global supply chains, and that includes those tied to China.
Speaker: The lockdown of China's largest city, to blunt an outbreak of COVID-19, is now in its fourth week, and our trade economist, Shanela Rajanayagam, has been looking at the impact this is having.
Speaker: Shanela joins us now.
Speaker: Welcome.
Speaker: Thank you.
Speaker: So Shanela, the lockdowns in Shanghai have added to supply chain disruptions.
Speaker: Can you tell us what's going on at the moment?
Speaker: Well that's right, the lockdowns have added to another wave of supply chain disruptions just when supply chains were already extremely stretched and these lockdowns in particular have impacted businesses in nearly every sector.
Speaker: However, production is slowly starting to resume in Shanghai.
Speaker: So for example, earlier this month, over 600 companies were permitted to actually restart operations by operating under what we call a closed loop system.
Speaker: So that means that workers essentially live on site at the factories to contain the spread of the virus.
Speaker: Now, most of these companies that were eligible to restart are mainly in the autos and the tech sectors.
Speaker: However, as at the end of last week, just 70% of eligible companies had actually restarted operations.
Speaker: So most of these companies still face a lot of component and labour shortages and a lot of the disruptions actually to do with land side logistics.
Speaker: So especially the operations at ports and the testing requirements of truckers.
Speaker: To give you just one stat about the sense of the impact, it is now estimated to take over 12 days for imported containers into Shanghai to be picked up and delivered to the destination.
Speaker: And that's up from around 4.6 days in March.
Speaker: And how is the lockdown impacting operations elsewhere?
Speaker: So as with all the disruptions that we've seen through the pandemic, these will certainly ripple through the supply chains and impact other markets.
Speaker: For example, already the delays at Shanghai port have added to the congestion and has led some freight to actually be diverted to other ports in China, such as Ningbo and Zhushan, which is now grappling with its own port congestion.
Speaker: And then elsewhere, parts shortages due to these lockdowns have also impacted auto's production in Japan.
Speaker: Honda recently said that it will have to idle some of its production in May because of these shortages.
Speaker: And of course, the risk in coming weeks is that
Speaker: There will be some pent up shipments from China as Shanghai slowly restarts production.
Speaker: But this could exacerbate the congestion at US West Coast ports.
Speaker: So the ports of LA and Long Beach, they did have a little bit of reprieve from the congestion, but they may face added disruption in May, particularly as the labor union contract negotiations are also due to begin.
Speaker: And that could certainly lead to some operational disruption.
Speaker: And could these restrictions impact business operations in China longer term?
Speaker: So given the breadth of these restrictions and that nearly all businesses have been impacted in some way or form, ongoing restrictions could certainly hurt businesses operating in mainland China.
Speaker: We did take a look at some of the business survey data
Speaker: And according to US businesses operating in the economy, they have said that persistent restrictions could reduce their profitability or their revenue.
Speaker: It could lead to a reduction in investment, and it may also result in a loss of expat staff.
Speaker: And of course, all this just adds to the discussions companies will be having at the moment around building resilience into their supply chains, perhaps through nearshoring or reshoring or even diverting production to other locations.
Speaker: Shanela, thank you.
Speaker: Thank you.
Speaker: So that's our podcast for this week from Mary Watkins and me.
Speaker: Thanks for listening.
Speaker: And special thanks to Paul Mackle, Stephen King and Shanela Rajanayagam.
Speaker: We'll be back next week.
