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: You're listening to the HSBC Global Research Macro Viewpoint, where we speak to the economists and strategists behind some of our key reports.
Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to a special edition of the podcast.
Speaker: We're going to be taking an in-depth look at the global economy, where soaring inflation, slowing growth, elevated commodity prices, supply chain pressures and volatile financial markets leave central banks with a serious fight on their hands.
Speaker: This podcast was recorded on Thursday, the 23rd of June 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Joining me today are Janet Henry, Global Chief Economist, and Jing Liu, Chief Economist for Greater China.
Speaker: Janet and Jing, welcome to the podcast.
Speaker: Hi, Piers.
Speaker: Thank you.
Speaker: So you've just published the latest edition of the Global Economics Quarterly, and obviously the outlook is very focused on inflation.
Speaker: But should we also be worried about growth?
Speaker: We should be worried about both.
Speaker: But at the moment, the big problem for central banks in particular is that global inflation has been high and rising rapidly.
Speaker: for far too long and the time has come for them to take more aggressive action on policy.
Speaker: So increasingly the financial markets, which obviously have been tumbling, whether it's equities or bonds or indeed crypto recently, are asking the question now how high are interest rates going to have to go in the coming months or indeed possibly even years and how painful is that going to be for the economy
Speaker: I mean, central bank forecasts at the moment are actually pretty benign.
Speaker: Yes, the ECB and the Fed are forecasting some slowdown in growth, but it's not significantly below trend or anything.
Speaker: They don't see a big rise in unemployment, but they have got inflation coming back to target.
Speaker: So they are, I suppose, suggesting that they're going to be able to tame inflation with relatively little impact on growth.
Speaker: But as we've been talking about for the past year or more, there are a lot of disruptions out there regarding supply chains.
Speaker: We are seeing the impact of the Ukraine war feed through in a number of different ways.
Speaker: Yes, we may have seen some commodity prices come off their highs, whether it's energy or metals or even food, some of the wholesale prices.
Speaker: are no longer actually rising, but we're still going to be seeing the pass through into inflation.
Speaker: And of course, we've got still some disruption from China.
Speaker: There are signs of it easing, but that's still going to be feeding through.
Speaker: But we've got Jing on the line, our chief China economist.
Speaker: So I'll defer to her on the China subject.
Speaker: Jing, can you bring us up to date on where we are with any signs that the logistical side or production side is easing in China and what that tells us about the broader growth story in China in the coming year?
Speaker: Thank you, Janet.
Speaker: So for China, actually, we have all seen the Omicron wave this time around has hit wider areas, lasted longer.
Speaker: And in particular, we have seen it basically the flare ups in the relatively more economically developed regions.
Speaker: So as a result, we have seen, you know, production and production
Speaker: services and everything have been hit just like the one we saw in 2020.
Speaker: But this time around, because of the nature of Omicron, a lot of local governments tend to adopt a more preemptive measure when it comes to restrictions.
Speaker: So as a result, we also see
Speaker: the supply chain disruptions, especially in April and in the first half of May.
Speaker: The situation starts to improve going into June, especially because, you know, the cases in Shanghai and also later in Beijing have been much under control.
Speaker: So it appears that the worst has been behind us.
Speaker: But this time around, as I mentioned, because of the supply chain disruption, probably the recovery will take a much slower path than we had previously expected or compared to the 2020 initial break.
Speaker: In that regard, we downgraded our GDP forecast for China for this year from 4.9% previously to 4.1%.
Speaker: This is below the target growth rate of around 5.5%.
Speaker: And the reason is, as I mentioned, we expect a slower recovery and also the hit on the production and consumption
Speaker: and basically all fronts seem to be quite hard.
Speaker: And the labor market is also under lots of pressure.
Speaker: In particular, the unemployment rate seem to stay elevated, especially for the young people as well as for those in big cities.
Speaker: What I wanted to sort of focus on is also in the US.
Speaker: So Janet, when I look at your report, you seem to be taking a more cautious outlook for the US economy than the Federal Reserve, but you're not looking for a recession.
Speaker: Why is that?
Speaker: Well, yes, we do have a more marked slowdown in the US.
Speaker: Certainly our US economist, Ryan Wang, expects growth to slow certainly by early 2023 to around the 1% or below kind of annualized rate.
Speaker: That is a more rapid slowdown than the Fed.
Speaker: certainly is forecasting.
Speaker: It is not a full-blown recession, either in the US or globally.
Speaker: It's not a synchronised cycle, even, that we have globally.
Speaker: But I think probably a better description of our forecast is something of a partial recession.
Speaker: It is going to be somewhat uneven, just as uneven as the upswing that we saw from the middle of 2020 onwards.
Speaker: So the forecast that we have is for an outlook that is similarly divergent,
Speaker: as the downswing comes through.
Speaker: Some parts will be much more resilient than others.
Speaker: Just broadly speaking on the consumer side, already we are seeing signs of housing market weakness in a lot of countries.
Speaker: But when we look at the household sector broadly, we know that there is something of an income inequality story.
Speaker: There's a lot of households with a lot of savings.
Speaker: They can draw those down to smooth their spending in the face of what is a very severe cost of living squeeze.
Speaker: But some households, particularly if they're not necessarily benefiting from subsidies or from booster household incomes, which a lot of consumers in the US are not, even if some in Europe are, they are going to suffer more for them, it will feel more like a recession.
Speaker: And we also have a divergence within the corporate sector.
Speaker: Large firms, generally speaking, have healthier margins.
Speaker: They have higher profit margins.
Speaker: They start from better cash reserves.
Speaker: They've undertaken a lot of refinancing.
Speaker: They're not going to be as affected by the rise in interest rates that's coming through.
Speaker: But some of the smaller companies, they barely recovered from the pandemic.
Speaker: So divergences within households and unevenness, same for companies and same for countries.
Speaker: And everybody's been hopeful of seeing a sort of reopening in China and some recovery certainly had a positive effect on market sentiment.
Speaker: But how robust is that likely to be, Jane?
Speaker: Well, I think this basically depends on how the COVID situation evolves over time and whether there's any change or deviation from the dynamic zero.
Speaker: Our base case remains that most likely China will stick to the dynamic zero COVID policy for this year.
Speaker: And on top of that, I think it's important to note that there have been quite some policy stimulus
Speaker: announced in the first half of the year.
Speaker: But going forward, we actually expect the policy implementation to be more rigorous.
Speaker: A reason for that is basically at local level, in particular for 31 provincial level administrations, they are going to finish the party official turnover by the end of this month.
Speaker: And historical evidence seems to suggest basically the newly appointed local officials would be more driven to grow the economy.
Speaker: And the reason is obvious.
Speaker: For a long time, the relative economic performance has been a big factor impacting officials' future career paths.
Speaker: So in that regard, we expect the fiscal policy to do heavy lifting, so things like infrastructure investment and support for SMEs for the manufacturing, etc.
Speaker: And also on top of that, the direct support to help stabilize the labor market will take more shape in the later part of this year.
Speaker: I guess one of the overall messages, Janet, from your global economics quarterly is this sort of encapsulated in the in the sentence of peaking is not enough, that this is actually going to take time for the central banks to get the situation of inflation under control.
Speaker: And therefore, there's a lot of risks associated with growth.
Speaker: Can you just expand on that a little bit?
Speaker: Yes, it is going to take some time.
Speaker: The global inflation picture is very, very complex and it's coming from a very, very high level.
Speaker: In a lot of the major economies, it really is getting close to 10 percent.
Speaker: So coming from such a high level, we should see inflation rates start to peak at some point relatively soon.
Speaker: But the key risk for central banks is that there is still a risk of a wage price spiral.
Speaker: Even if inflation goes from nine to seven, that's not going to stop workers in a tight labor market seeking higher pay gains.
Speaker: So the fact is the central banks are not going to be able to loosen their grip anytime soon.
Speaker: They are going to have to continue to tighten policy in the coming months until they are confident that inflation is not only heading lower, but is going to continue to head lower.
Speaker: and back towards their 2% inflation targets, at least over the course of the next couple of years.
Speaker: So they'll be looking not just at what's influenced by base effects, you know, the fact is the year on year changes should improve.
Speaker: But at the moment, some monthly rate of inflations are still rising at kind of point six each month, they need to start rising by less than point two each month.
Speaker: And central banks are increasingly acknowledging that to stop the risk of a wage price spiral and to lower wage growth, that is going to mean that we're probably going to see some higher unemployment rates coming through.
Speaker: That will be feeding through into the lower growth outlook.
Speaker: And over time, lower growth should mean at least the demand side of inflation.
Speaker: should start to ease.
Speaker: And of course, central banks will be hoping that the supply side, these supply constraints will be easing as well.
Speaker: But of course, China's starting from a very different backdrop.
Speaker: You know, I'm talking a lot about central banks, which are going to be still tightening policy.
Speaker: And that is pretty much a global story, apart from the Bank of Japan and in China.
Speaker: Everywhere else, it's still tightening.
Speaker: Latin America, even, we keep revising up our interest rate targets, although we do look for some easing in 2023.
Speaker: But China is still the one that is going to be easing policy, both on the monetary and on the fiscal side through this year.
Speaker: A difficult outlook.
Speaker: Just to wrap it up, just remind us what your latest changes to our forecasts are.
Speaker: Yes, of course, Piers.
Speaker: We have lowered our global growth forecasts from 3.5% to 3% for 2022, the biggest downward revisions being to the US and to China, with a lot of the China slowdown having already occurred in the second quarter of this year.
Speaker: For 2023, we've lowered our global growth estimate from 2.9% to 2.6%.
Speaker: which is quite weak by global standards, but more if that slowdown comes through in the advanced economies.
Speaker: Parts of Asia we still see being resilient, particularly if this China stimulus can help to feed through.
Speaker: And of course, at this stage, we are still revising up our global inflation forecasts, both for this year and for next.
Speaker: Janet and Jing, thank you very much for joining us.
Speaker: Thank you, Piers.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: We hope you've enjoyed the discussion.
Speaker: From all of us on the team, thanks very much for listening.
Speaker: We'll be back again 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.
