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: Hello, I'm P.S.
Speaker: Butler and welcome to The Macrobrief.
Speaker: The threat of tariffs continues to loom over Europe, with President Trump saying he will absolutely impose specific measures.
Speaker: So on this week's podcast, we're looking at what any tariff action could mean for the region's growth, inflation and monetary policy outlook.
Speaker: Plus, ahead of this week's crucial election in Germany, we assess the economic challenges that the incoming government will face.
Speaker: Joining me here in the studio is European economist Chris Hare.
Speaker: Chris, welcome back to the Macrobrief.
Speaker: Thanks for having me.
Speaker: So hard as it is to make forecasts in the current environment, in you and your colleagues' recent report, US tariffs in Europe, you have attempted to do so.
Speaker: And if I'm right, your underlying assumption is of a blanket 10% tariff.
Speaker: So what is the impact likely to be?
Speaker: And in fact, you've identified several channels.
Speaker: Let's talk about the direct ones firstly.
Speaker: Yes, well, we've gone to try to estimate a 10% blanket US tariff on the EU.
Speaker: Who knows what specific tariffs would be applied, but it's a decent kind of baseline to start from.
Speaker: In terms of the potential direct effects of that, well, you've got a headwind to European export demand because European exports will become costlier for the US.
Speaker: And a second direct effect, which might even be kicking in now, is a degree of economic uncertainty.
Speaker: What do you mean?
Speaker: by uncertainty I was reading the report I thought well what does that mean really in practical terms?
Speaker: If businesses are uncertain particularly export oriented business are uncertain they might hold back on investment and that flows through into a weak growth in the economy as a whole and also particularly with the geopolitical situation in the world so febrile at the moment
Speaker: Maybe this is feeding through to consumers too.
Speaker: And we know that saving rates in Europe are high and maybe there's some of that uncertainty effect that could continue to feed into that.
Speaker: Again, that could be a headwind to Europe's growth outlook.
Speaker: And in your report, you break down the different sectors and how they're affected.
Speaker: Some sectors are much more affected than others.
Speaker: Well, that's right.
Speaker: The auto sector, for example, could be particularly badly affected.
Speaker: We know that German car manufacturers have had a tough time of it in the first place.
Speaker: And a ramp up in U.S. import tariffs, I think, could make those headwinds even larger.
Speaker: So, yes, those bits of the economy with exposures to the U.S., particularly those that are faring a little bit worse at the moment, you know, could face the bigger headwinds, we think.
Speaker: And what about the indirect impacts?
Speaker: So these are really hard to estimate if estimating the effect of economic uncertainty isn't hard enough in the first place.
Speaker: But a US imposition of tariffs would probably lead to effects through financial markets, particularly effects, potentially downside for the euro, for example.
Speaker: And we may also see some hard to predict diversion of supply chains or in demand patterns, which could also have a broader economic impact.
Speaker: And you say in the report that Europe could retaliate.
Speaker: What form would that take and what will be the impact?
Speaker: The impact of retaliation is really important.
Speaker: Without EU retaliation, we're probably looking at unequivocally weaker growth for Europe, but because of that weaker growth, lower inflation too.
Speaker: If the EU retaliates, for example, by lifting its own tariffs vis-a-vis the US, again, you've got weaker growth in Europe, but also potentially those tariffs create some cost pressures.
Speaker: So at least in the near term, you might have some higher inflation.
Speaker: So weaker growth, higher inflation, not an easy time to be on the governing council of the ECB.
Speaker: Yes, so bad luck for you guys.
Speaker: It's even harder to predict what the ECB is likely to do.
Speaker: It is for the most part.
Speaker: In both of those scenarios, our thinking bias is in a somewhat dovish direction.
Speaker: So, for example, we think the ECB will cut rates a little further with the deposit rate ending up at two and a quarter percent.
Speaker: But in the event of tariffs being implemented, potentially those risks would be somewhat to the downside, two percent, maybe even one and three quarters of percent.
Speaker: Now, this weekend Germany will go to the polls and although we will know the results on Sunday, is it fair to say that it will take some time before new government is in place?
Speaker: Yes, exactly.
Speaker: German coalition talks can take sometimes a number of months to nail down.
Speaker: What we know from the opinion polls is that the centre-right, CDU, CSU party grouping is well ahead in the polls and has consolidated a lead of around 30%.
Speaker: 30% of public support.
Speaker: It looks through the composition of the polls that they may be able to enter a grand coalition arrangement with the centre-left SPD.
Speaker: But it's a question as to whether they'll get enough seats in the first place.
Speaker: And even if they do, a lot of policy wrangling and it may be a loveless marriage.
Speaker: So quite a few steps, I think, between now and actually forming a government.
Speaker: Nevertheless, your colleagues Anna Hyman and Stefan Schilber wrote that the different parties' manifestos have tended to ignore the fiscal element in the room.
Speaker: What do they mean by that?
Speaker: Yes, so there's a lot of discussions in Germany about the debt break, for example, whereby the structural budget deficit in Germany cannot exceed 0.35% of GDP.
Speaker: Now, that's a pretty low number, which means that German public spending on investment, for example, or potentially on defence,
Speaker: according to a lot of people, should potentially be higher in order to lift economic growth.
Speaker: So there's going to be a lot of discussions potentially about any loosening on that front.
Speaker: But I think there are other elephants in the room even beyond fiscal policy.
Speaker: If we think about weakness in German industry, for example,
Speaker: energy intensive industries, weakness in the export sector, in the auto industry, for example.
Speaker: There are so many policy headaches, I would argue, not only of fiscal policy, but in terms of, you know, what is the business model for Germany?
Speaker: So it's going to be, I think, an interesting set of policy discussions ahead there.
Speaker: And a need for deregulation?
Speaker: Yes, potentially.
Speaker: And, you know, our feeling is that a centre-right-led CDU, CSU government could lean in that sort of direction towards deregulation.
Speaker: But there are big questions about what kind of deregulation and what's the kind of deregulation that can really spur on significant economic growth.
Speaker: On that front, we're still pretty cautious.
Speaker: And Chris, let's finish closer to home with UK inflation, where the latest data wasn't that great.
Speaker: No, the January numbers for UK inflation didn't make for very pretty reading.
Speaker: The headline CPI rate went up from 2.5 to 3%.
Speaker: That was 0.2 above consensus expectations.
Speaker: Now, admittedly, the core underlying bits of inflation were fairly well behaved, but the upside news was in food prices.
Speaker: That may not be a persistent phenomenon, but it's not exactly great for household perceptions of the cost of living squeeze.
Speaker: But over and above that, there are other price pressures coming through in the pipeline.
Speaker: For example, energy bills are set to go up again in April.
Speaker: A whole load of indexed prices like water bills are also set to go up.
Speaker: So we may see inflation in the UK well above 3% for a good few months before we think then it will start normalising.
Speaker: So it's going to be a tricky few months, I think, when we're looking at UK cost and price pressures.
Speaker: Well, lots to keep you busy in the coming weeks, but for now, thank you for joining us today.
Speaker: Thank you.
Speaker: Elsewhere in global research, we published a handbook ahead of the HSBC Minat Future Forum, which takes place in Dubai at the end of the month.
Speaker: The team say that the region comprising of the Middle East, North Africa and Turkey has a growth state of mind, but the prospects of different economies vary widely.
Speaker: From reform stories and industry diversification to geopolitics and oil price uncertainties, the report explores the opportunities ahead.
Speaker: Shanela Rajanagam, our trade economist, has just released her latest monthly outlook.
Speaker: And if you'd like to know more about the impact of tariffs or about trade and supply chains more generally, then please join us on our next live insight discussion on LinkedIn.
Speaker: It's taking place on the 25th of February, and I'll be putting your questions to Shanela.
Speaker: The event is open to everyone.
Speaker: You don't need to be an HSBC client.
Speaker: So please look us up.
Speaker: It's hashtag HSBC research on LinkedIn for details on how to sign up.
Speaker: So that's all from us this week.
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Speaker: Until next week, thanks for listening.
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