Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Speaker: Hello and welcome to the Macro Viewpoint.
Speaker: This is our weekly rendezvous with the economists and strategists here at HSBC Global Research for their take on some of the top macroeconomic issues on the global agenda.
Speaker: This week, it's all about growth and inflation.
Speaker: In a moment, we'll be speaking with our global chief economist, Janet Henry, about her team's latest forecasts and a number of risks.
Speaker: We're also chatting with Shanela Rajanayagam.
Speaker: Shanela is our trade economist and she has been looking at supply disruptions and the impact of the so-called just-in-time manufacturing processes.
Speaker: And we'll take a slightly deeper dive into Europe with economist Chris Hare.
Speaker: We'll be asking Chris about the latest developments in the fight against COVID-19 and whether the EU can build back better under its 750 billion euro next generation EU recovery fund and other initiatives.
Speaker: This podcast was recorded for publication on the 24th of June.
Speaker: All our disclosures and disclaimers associated with this edition of the Macro Viewpoint must be viewed on the link attached to the media player.
Speaker: Our economics team, led by Janet Henry, has just published its latest quarterly, and Janet joins us now.
Speaker: So, Janet, the global economy is doing much better than expected a year ago.
Speaker: What are you now forecasting in terms of growth for this year and next?
Speaker: Well, we've actually just revised up our global GDP forecast for 2021, and some of that carries over into 2022, where we've also made a marginal upgrade.
Speaker: But as is often the case, there are a lot of moving parts within that.
Speaker: Broadly speaking, the
Speaker: biggest upgrades have come through in the advanced economies where the vaccination rollouts have been coming through and policy is still very supportive.
Speaker: Our emerging market aggregate is actually broadly unchanged.
Speaker: But a lot of that is just because it's being held back by India in 2021.
Speaker: We've actually made some upward revisions across CMEA and Latin America as part of this forecasting round.
Speaker: Now, just as growth is lurching higher, so too is inflation.
Speaker: How concerned are you about that?
Speaker: Well, inflation has jumped quite significantly.
Speaker: Obviously, what we've seen since the lows of the pandemic last March or April is some really big increases in commodity prices, and that is impacting everywhere.
Speaker: So a lot of countries in the world are now running above central bank objectives or targets.
Speaker: But other countries have also seen some kind of bottleneck effects as they're starting to reopen and demand is resurging much more quickly than the supply side.
Speaker: And now we're starting to see it not just in terms of goods prices, but in areas of service sector demand where that is starting to rotate towards those kind of areas.
Speaker: It should be, I suppose, transitory.
Speaker: We should, over the course of the next year, see inflation come back down.
Speaker: But as with the growth outlook, there are a lot of inflation risks out there as well.
Speaker: So you mentioned central banks there.
Speaker: How do you expect central banks to respond to this?
Speaker: Well, currently, central banks are responding in a number of different ways, which is obviously a step change from what happened at the start of the pandemic when everyone was turning the liquidity taps on.
Speaker: We've already seen the likes of Russia and Brazil raise interest rates quite significantly in the emerging world.
Speaker: And across the advanced economies, some have already started to taper their asset purchases.
Speaker: But we've got a number of important G10 central banks
Speaker: where they are absolutely on the sidelines and still being much more patient about starting to adjust away from this extreme policy and response that they delivered at the start of the pandemic.
Speaker: And do you expect in terms of what happens next, is everyone going to follow the Fed's lead?
Speaker: No, we actually think some central banks will lead the Fed.
Speaker: Obviously, the Fed has got a different policy willing to overshoot 2% inflation moderately for a period.
Speaker: They also want to wait until the economy is back at maximum employment.
Speaker: So, yes, we think the Fed is going to slow its pace of asset purchases starting in December of this year, but we're not looking for rate increases until 2023.
Speaker: But a number of the G10 economies, we think, will be raising interest rates before that.
Speaker: Norges Bank this year, but next year, New Zealand, Canada, and probably most notably the Bank of England, where we're now forecasting 40 basis points of increases in 2022.
Speaker: The Fed chairman himself has said that the sort of no template really is for exiting a pandemic.
Speaker: So there are loads of uncertainties, aren't there?
Speaker: Absolutely.
Speaker: There are still lots of uncertainties, both on the growth and the inflation side.
Speaker: And on growth, yes, COVID itself is still the biggest downside risk.
Speaker: The biggest upside risk is still this huge stock of savings that's been accumulated by households over the last year.
Speaker: If that's drawn down more quickly, we could see a bigger consumer rebound and more upper pressure on inflation.
Speaker: But there are also other uncertainties.
Speaker: The huge scale of fiscal stimulus is already starting to expire in a number of emerging economies.
Speaker: It's going to wane in the US and to a lesser extent in Europe later this year and going into 2022.
Speaker: So that could certainly lead to a slowdown in activity in a number of places.
Speaker: And there's still a lot of uncertainties related to the rotation from goods to services and what happens regarding investment spending and capital goods demand and what that means for trade and for commodity prices.
Speaker: and a big uncertainty related to labour markets.
Speaker: We keep hearing about the labour shortages that are in place in a number of sectors and a number of countries, how much that is just linked to these job support schemes might workers' return, or indeed might we just see a bigger increase in wage growth and, again, get back to growing concerns about inflation.
Speaker: A lot of uncertainty.
Speaker: Janet, that's a great summary.
Speaker: Thank you very much for your time today.
Speaker: Thank you, Chris.
Speaker: Janet Henry, our global chief economist.
Speaker: Supply chain disruptions are the subject for our next guest.
Speaker: Trade economist, Shanela Rajanagam, this week published a report looking at the extent of the disruptions and the long running strategy of just in time supply chain management for many of the world's manufacturers.
Speaker: So Shanela, can you give us an idea of some of these trade disruptions that are occurring at the moment?
Speaker: Sure, Piers.
Speaker: So over the past year, there has been a lot of trade disruption due to ongoing shipping disruption, but also really strong demand for certain products like electronics, autos, and even construction materials.
Speaker: And as a result of this, the lead times for certain components and final goods have lengthened, plus input prices continue to surge.
Speaker: So for instance, in the US, there's evidence that this disruption is lingering.
Speaker: For example, electrical components have remained in short supply for eight consecutive months.
Speaker: Also, there have been shortages of semiconductors and steel for around six consecutive months, as well as shortages of foreign products.
Speaker: So in your report, you talk about just-in-time manufacturing.
Speaker: So firstly, remind us what that is and why it is such a significant factor in these disruptions.
Speaker: Sure.
Speaker: So just-in-time manufacturing was pioneered by Toyota over 60 years ago, and it essentially aims to cut down on excess inventory.
Speaker: So under this process, producers will only order and hold the amount of passing components they actually need.
Speaker: However, that of course relies on the seamless movement of these components between buyers and sellers around the world.
Speaker: And COVID-19, due to those disruptions that I mentioned earlier, has significantly affected just-in-time and lean manufacturing processes.
Speaker: So are we going to actually change from just-in-time to just-in-case?
Speaker: Well, that is the question.
Speaker: And certainly the effectiveness of just-in-time manufacturing has been questioned during COVID.
Speaker: And it has prompted some companies to look to hold higher stocks of components going forward.
Speaker: So for instance, there's evidence to suggest that HP companies
Speaker: is stockpiling critical computer parts, a Taiwan semiconductor manufacturing company.
Speaker: They expect their customers to gradually prepare higher levels of inventory going forward.
Speaker: And even Toyota, the pioneer of just-in-time manufacturing, they have been stockpiling critical components, which has essentially enabled it to better mitigate the chip shortage compared to some of its competitors.
Speaker: However, overall, I don't think this is the end of just-in-time manufacturing.
Speaker: Holding excess stocks can be quite costly for businesses.
Speaker: And of course, there's a risk that they could be left with excess supply once demand eventually normalizes as lockdown restrictions lift.
Speaker: So are there any implications to your trade forecast from this short-term stockpiling?
Speaker: Well, building up these safety stocks or holding excess inventories could help to support trade flows going forward.
Speaker: The risk, of course, is that it can exacerbate existing shortages of critical components.
Speaker: Now, we might expect businesses to build up stocks of goods, particularly where production tends to be concentrated in a small number of economies.
Speaker: or for products that are in high demand.
Speaker: So with ongoing shipping disruptions that last at least until the end of this year, we could see some build up in stocks of electronics and autos components, but also that trade could remain disrupted for some time to come.
Speaker: And if we look longer term, what sort of alternative measures could businesses take to guard against future trade shocks?
Speaker: Sure, so there are various other measures businesses could take aside from building up stocks.
Speaker: They could look to diversify markets and trade deals are a good way of doing this.
Speaker: They could also look to bring sourcing closer to home, so either nearshoring or reshoring.
Speaker: They could also look to bring some production in-house, so the likes of vertical integration.
Speaker: And they may also use digital technologies to better monitor their supply chains and to better manage inventories.
Speaker: Janela, thank you very much.
Speaker: Thanks, Piers.
Speaker: Here in Europe, economist Chris Hare has just published our team's weekly COVID-19 tracker.
Speaker: Chris joins us now to talk about the latest situation.
Speaker: So, Chris, to what extent are things improving on the pandemic front?
Speaker: Well, at first blush, things on the European continent do seem to be getting better.
Speaker: We're seeing falls in case numbers.
Speaker: We're seeing a vaccine rollout that is progressing pretty quickly and governments are able to continue loosening some restriction measures.
Speaker: There is a bit of a concern though and that's the rising risk of the more transmissible delta variant of the disease which has certainly taken a hold in the UK where cases are rising, it's also taken a hold in Portugal and the European Centre for Disease Control now predicts that the delta variant could take up around 90% of cases across Europe as a whole by the end of August.
Speaker: Now, that could be a concern to the extent to which it could lift cases.
Speaker: And I think there are questions still about whether that will start causing risks around further reopening over the coming months.
Speaker: Where we do take heart is from the fact that in the UK, where we are seeing rising case numbers, we're not seeing an increase in hospitalisations and we're not seeing a very high likelihood of a reversal of the easing in measures that we've seen so far.
Speaker: But certainly this Delta variant, I think, is something to watch very closely.
Speaker: Now, you've also been looking at some of the longer term prospects for economic recovery and how policymakers are aiming to build back better.
Speaker: What have you found?
Speaker: Yes, we look at various sorts of policy options for European policymakers to try to lift rates of long run growth and also to try to facilitate the green and digital transitions.
Speaker: And within that, we look at four different policy areas.
Speaker: First, we look at the kind of measures that have been put in place to try to prevent supply side scarring from COVID-19.
Speaker: The news here so far has been pretty good given job support schemes.
Speaker: Long term unemployment doesn't look like it's set to rise in the way that we have feared before the pandemic.
Speaker: Second policy areas on investment, and this perhaps is the most important.
Speaker: We're set to see some pretty hefty increases in public investment and incentives to try to boost private investment, all part of the 750 billion euro
Speaker: Next Generation EU Fund and that could in principle lift investment rates to not only above pre-COVID levels but above pre-2008 levels.
Speaker: Third we look at industrial strategy where a lot of measures here are geared towards small and medium businesses particularly with regards to try to facilitate that transition towards a greener more digital economy.
Speaker: And fourth, we look at structural reforms, which is sort of a mixed bag in terms of the outlook in our view.
Speaker: Nothing major on the labour market, but bits and pieces that could be fairly important when countries are looking at trying to improve public administration and their legal systems, for example.
Speaker: There is quite a lot on the supply side policy agenda.
Speaker: And will the combined effect of all this be to lift growth, do you think?
Speaker: Well, yes, taking all that together, as I said, it's a bit of a mixed bag, I think, with the supply side policy outlook.
Speaker: But taking things into context, by our estimates, we think that long run growth in the eurozone probably trended at around 1% per year in the decade leading up to COVID-19.
Speaker: But you take all these policies together and in particular the prospect of significantly higher levels of investment, we actually think long-run growth trends can lift a little bit over the coming decade, perhaps up to around one and a quarter percent per year.
Speaker: So it's a little bit of an improvement.
Speaker: So you could conclude that Europe may have a chance of building back a little bit better after the pandemic.
Speaker: Chris, thanks very much for taking us through all that.
Speaker: Thank you.
Speaker: So that's the end of the Macro Viewpoint podcast for this week.
Speaker: Special thanks again to Janet Henry, Shanela Rajanayagam and Chris Hare.
Speaker: Thanks for listening.
Speaker: We'll be back 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.
