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The Macro Viewpoint - China’s reopening, Eurozone wage risks, and a global data check
42 Plays2 years ago
Jing Liu discusses our revised GDP forecasts in light of China’s property and COVID-19 policy changes, Fabio Balboni looks at how labour market developments could affect inflation and James Pomeroy assesses a divide in the latest economic data.
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Transcript
Introduction to HSBC Global Viewpoint Podcast
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
Key Views from HSBC Global Research
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You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
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This podcast was recorded on Thursday, the 8th of December, 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
China's Policy Changes and Economic Impact
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Coming up this week, property and COVID-19 policies have undergone pivotal changes in China lately.
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We consider what they mean for growth.
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We look at how labour market developments in Europe could affect inflation and ECB policy.
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And are there any signs that the global economic outlook is improving?
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We take a look at the latest data.
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Hello, I'm Piers Butler.
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And I'm Aline Van Dyne.
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We begin this week in China, where two big themes are dominating the agenda.
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First, we saw a rollout of measures aimed at stabilizing the property sector.
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And this week, there was a further relaxation of COVID-19 restrictions.
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Jing Liu, chief economist for Greater China, has been looking at what these developments mean for the growth outlook.
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She spoke to Graham Mackay earlier.
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Jing, welcome to the podcast.
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Thank you for having me again.
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So since we've last spoke, property and COVID restrictions have eased even further in China.
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You're now saying that things are going to get better in the long run, but it's going to be a bumpy economic picture in the near term.
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Just sort of talk us through that near term and longer term view.
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Yes, so we have seen actually with the 20 calibrated measures and recently the 10 new measures, China has accelerated the reopening process.
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And as you can imagine, and also other countries' experience suggests, we probably will see China grapple with the rising cases and potentially some disruption to the economic activity.
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So in that, we actually see
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for this quarter and Q1 next year, probably the economy will grow slower than we previously anticipated.
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However, basically after China normalizes from the pandemic, probably in the next one to two quarters, we will see actually the consumer confidence to bounce back, business confidence as well, which can help with consumption recovery
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as well as housing market, further stabilization, those can all push for a strong, significant rebound of China's economy in 2023 and also into 2024.
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Okay, and how does that translate into your new forecast that you've just published?
China's Economic Outlook for 2024
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Right, so basically we revised down 2022's forecast from 3.5% to 3.0%, and next year revised down slightly from 5.2% to 5.0%.
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However, given the strong momentum into 2024, we now revise up our 2024 forecast from 4.8% to 5.8%.
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Okay, so ultimately a positive picture for the economic trend in China, but as you say it is going to likely be quite rocky in the interim.
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What sort of policy support do you see on the horizon to try and make that transition as smooth as possible?
China's Policy Measures for Growth
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Yes, I think, you know, if we look at the health-related policies, China is starting a vaccination campaign.
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And then they set the target by the end of next January.
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They want to see elderly above 60-year-old would have the booster coverage as high as 90%.
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And they also will make it easy for people to purchase a fever medicine and also to recover at home.
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And from the economic policy perspective, we have seen actually continuous rollout of different housing market support.
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That is part of the measures trying to stabilize the housing market and beyond the economic growth.
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And of course, we will continue to see very conducive monetary and fiscal policies, including more liquidity injection into the market,
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as well as potentially, you know, the targeted support on certain consumption goods and targeted support for SME and beyond.
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Okay, and Jing, before we end, I want to go back to something that you touched on in your first answer, and that was how ultimately it's going to be a consumption, a domestic consumption story that is going to drive this recovery in 2023 and 2024.
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Can you just give us a bit more detail on that?
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Sure, so if we look at the consumer confidence, actually we see a significant deep back in April.
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And till now we haven't seen our material recovery yet.
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But as the economy is reopening,
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and we will see basically more certainty down the road, a brighter economic outlook that can boost the consumer confidence.
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And on top of that, the stabilizing housing market will also help lift consumption due to the wealth effect.
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Basically, when you feel richer, you probably would tend to consume more.
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And of course, don't forget, over the past three years, Chinese households actually managed to save a lot more than before.
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So they have the dry power to support the consumption recovery.
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All right.
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So in a nutshell, a potentially quite sort of choppy next couple of quarters, but a gradually positive trend for China's economy into 2023 and 2024.
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Yes, we will see a strong recovery upcoming.
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Jing, thank you very much.
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Thank you.
European Wage Inflation and Economic Implications
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With inflation at double digits in Europe, you might expect workers to be asking for higher wages to compensate.
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But what's actually happening on the ground?
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Fabio Balboni, senior European economist, is here to explain.
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So Fabio, how has this high inflation affected the outlook for wages?
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Well, indeed, wages are picking up.
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They are picking up.
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We've got very high, all-time high inflation in the Eurozone, some important wage negotiation taking place across Europe and particularly in Germany.
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The electronic and metallic sector just struck a deal for pay rises in 2023 and 2024, and the trajectory is definitely upwards.
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It depends what type of indicators we are looking.
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In this note, we look at several indicators, particularly one produced by the Central Bank of Ireland recently.
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It looks at job growth in new job openings and is tracking at around 5% for the Eurozone, over 7% for Germany.
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But there is also another indicator, so-called the forward-looking wage indicator by the ECB that looks at the pay deals agreed across the Eurozone and tries to infer the trajectory of pay growth for the upcoming years.
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And here the attendance is a little bit more muted.
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So we're seeing pay rises in the region of three and a half percent this year, declining slightly to three percent next year.
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And really the bulk of the pay rises this year take the form of bonuses rather than one off pay rises.
Impact of Wage Increases on European Inflation
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So there's a bit of a difference between workers staying in a job and those taking new ones.
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So overall, the tendency seems to be that if you're changing job, you're getting a big, big rise.
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Of course, the labor market is very tight.
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But if you keep the same job, then probably you're starting to trade off slightly lower pay rises for more security, job security against the risk of recession and of course, possibly losing your job.
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Is there a risk that if workers are given higher wages, that could push inflation up even higher?
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so-called wage inflation spiral?
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Well, absolutely.
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The longer inflation stays higher, the bigger the risk is that we will see bigger pay rises in the future.
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This is what economists call the real wage resistance.
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So, so far, wages have increased, but not as much as inflation.
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That means the real wages are falling.
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And indeed, we estimate they've gone back to the level of
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They were 10 years ago almost in the eurozone.
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So clearly there is that risk.
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As I said, the fact that so far the pay rises take the form more of one-off payments rather than increases in base pays reduces that risk of the margin, but it doesn't eliminate it.
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And we do see a risk that more real wage resistance could emerge in the future if inflation stays higher.
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We have an ECB meeting coming up next week.
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How will policymakers be looking at this?
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Well, wages will be in focus at the ECB meeting.
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Of course, headline inflation was a little bit down in November, but core inflation remains at a whole time high print at 5%.
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So that means inflation is...
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broadening and workers will be increasing their pay demands in the future.
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So the ECB will be looking for signs of second round on wages.
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Hawks and doves might be looking at these from a slightly different perspective.
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But what is clear is that with inflation still very high,
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the ECB has to keep increasing rates.
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And we think they will increase rate by 50 basis points in December.
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So a little bit slower than they did in September, because also some of the energy price pressures are faded a little bit.
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And as I said, so far, at least there aren't signs of second round effects
ECB's Focus on Wages and Interest Rates
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on wages.
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But certainly the risk is that the ECB might have to remain aggressive in terms of rate rises for longer than we currently expect if we were to see more signs of second round effects emerging.
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Fabio, thank you very much.
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Thank you.
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I'm Harold van der Linde.
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And I'm Fred Newman.
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And you can find us under the banyan tree.
00:10:42
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Join us weekly on our new podcast where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
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Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
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Enjoy the rest of your podcast and we'll see you under the banyan tree.
Global Economic Activity and Inflation Trends
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So let's wrap things up for this week with a look at what the latest activity data are telling us about the state of the global economy.
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We're joined by James Pomeroy, global economist.
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So overall, James, it looks like the activity data are weakening.
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Is that a fair assessment?
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I think it is.
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If you look at the broad range of data that we're trying to keep on top of every single month, there is a clearly growing downbeat sentiment across most of that data.
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And if you look at the PMIs, for example, the global composite PMI fell by another point in November, and that's now pointing to
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Not necessarily a deep contraction, but at least a notable one.
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And the spread is really happening now.
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We're seeing this come through the manufacturing data and the services data.
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This is feeding through very clearly into business optimism, into employment intentions.
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And some of the hard data looks like it's softening a little bit too, particularly around the housing market.
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So more and more data in the last couple of months starting to suggest that a global downturn is either happening or is imminent.
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And turning to inflation, is there any good news there?
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Well, that's the sort of the positive, if you want to take it at the moment, is that there's some growing good news on the inflation front, particularly in terms of the supply side.
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So continuing to see in this survey data, more and more businesses saying they're not having as much trouble getting stock.
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They're starting to see supply chain challenges largely dissipate.
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We're seeing the cost of shipping.
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continue to fall and that's likely to come back to pre-pandemic levels, possibly by the end of this year for many parts of the world.
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We are starting to see more of this drop in commodity prices, starting to feed through into some of the inflation data too.
00:12:51
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So there is some better news on inflation and this clearly happened over the last couple of months, but there is still a bit of a challenge out there from the service sector, from this energy story that's still lifting inflation in parts of Europe in particular.
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So there's some much better news that we've seen in the last couple of months.
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We're certainly not out of the woods in terms of inflation yet.
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And James, in your report, you discuss regional divides.
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What are you seeing?
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So it's quite clear that the weakness at the moment is heavily concentrated in Europe and in some of the Chinese data as well.
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But there is some bright spots out there, which are particularly in ASEAN, where we've seen a really good set of data in the Q3 GDP prints, parts of the world that are still benefiting from the reopening story.
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Exports have been relatively decent.
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There are some signs of those maybe
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dipping away in the higher frequency data.
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And the other bright spot is in Latin America, where all of the data continue to point to continued growth.
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It's not necessarily a boom, but these economies are still doing relatively well.
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In other parts of the world, such as the US, the data are sort of OK, but there's a divergence between sectors.
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So consumer spending is holding up.
00:14:00
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The labour market looks like it's still doing reasonably OK.
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But the housing market looks particularly weak and with transactions data falling away.
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So there's a very diversified story, both across sectors and across economies at the moment.
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So, yes, the global economy as a whole looks like it's weakening, but some bright spots are still out there.
Central Banks and Economic Data on Tightening
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We've got a busy week coming up with key central bank meetings, including the Fed, the ECB, the Bank of England.
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How will they be viewing this data?
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So I guess they're looking at this in some ways as being good news.
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We are expecting these central banks to continue tightening, but at a slower pace than previously.
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So we're seeing a little bit of a slowdown in the pace of tightening from these central banks, largely because of some of these inflationary pressures that look like they are dropping away.
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particularly in some of the underlying inflation data.
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So things like shipping costs, commodity prices looking much, much better.
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That gives central banks a little bit of hope, but also the softness in the housing market.
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We're seeing an area of the economy that is very, very
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vulnerable to higher interest rates, really starting to show the impact of the tightening we've seen.
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So this is suggesting at least to some of these central banks that the slowdown in economic activity, some of the drop in inflation is quite good news, but they were not yet at a situation where these central banks can say we've beaten inflation or we need to stop tightening.
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It's just a slower pace of tightening from here.
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And we think once we get into the first quarter of next year, most global central banks will have stopped tightening.
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but we're still a fair way from cuts in most of the world, just simply because inflation is still too high.
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And whilst economic growth is slowing down, it's not yet the position that may make central banks thinking about cuts.
00:15:39
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James, thanks so much for summarising that.
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Thanks very much.
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So that's all from us this week.
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Thanks to our guests Jing Liu, Fabio Balboni and James Pomeroy.
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From all of us here, thanks for listening.
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We'll be back again next week for our final show of 2022.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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