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.
Speaker: And now onto today's show.
Speaker: You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
Speaker: This podcast was recorded on Thursday to 5th of January, 2023.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, Happy New Year and welcome to our first program of 2023.
Speaker: We start with one of the biggest economic drivers for the year, China's reopening.
Speaker: We discuss the latest as borders reopen and assess the key issues that will shape its economy in the year of the rabbit.
Speaker: Also, inflation in Europe may be near its peak, but can policymakers bring it down as quickly as they hope?
Speaker: And we bring you a quick roundup of our views on the global economic outlook for 2023.
Speaker: Hello, I'm Aline Van Dyne.
Speaker: And I'm Piers Butler.
Speaker: Investor attention is firmly on the impact of the reopening of China's borders on January 8th, which have been closed for more than a thousand days due to COVID restrictions.
Speaker: The relaxation of the controls comes just two weeks before the start of the Chinese Lunar New Year festivities, and Chinese tourists are gearing up for international travel again.
Speaker: Jing Liu, our chief economist for Greater China, says the reopening will be the dominant macro issue facing China in the new year.
Speaker: She spoke to our producer in Hong Kong, Gray Makai, about her new report called The Great Reopening.
Speaker: Jing, welcome to the podcast and a very happy 2023 to you.
Speaker: Happy New Year.
Speaker: So, I think it's fair to say we're expecting a pretty significant year for China in 2023.
Speaker: You've just put out your five key macro themes for China for the year, and we're going to go through those one by one, and I guess it makes sense to begin with the issue that really is front and centre, and that is, of course, the theme of the grand reopening.
Speaker: Yes, China reopening actually will be the dominant theme throughout 2023 and even into 2024, in our opinion.
Speaker: For now, probably we're still focusing on the challenging time China is going through as the virus is reaping throughout the regions in China.
Speaker: But the reopening, fair to say, is already taking place.
Speaker: For example,
Speaker: We're going to see the busiest lunar new year travel season over the past three years starting very soon.
Speaker: And probably you will see Chinese visitors across the world starting from 8th of January too.
Speaker: And I guess hand in hand with all of this comes a return of consumption.
Speaker: Yes, exactly.
Speaker: We will see basically the different business sectors booming and consumption will actually be the first to highlight in a sense that consumption has been very sluggish ever since the pandemic.
Speaker: But this year with economic recovery, with a better outlook, with economic
Speaker: improved sentiment, we actually expect consumers willing to spend more in the sense it's nowhere different from the revenge spending we observe in other economies.
Speaker: And they can also draw on the excess savings accrued over the past three years, about 6.6 trillion RMB according to our estimate.
Speaker: And will that take us back to pre-pandemic levels of consumption?
Speaker: We think in terms of the growth rate, probably it will be around 8%, roughly on par with the pre-pandemic levels.
Speaker: Very good.
Speaker: Now, one thing that we talked about a lot towards the tail end of last year was, of course, the housing market.
Speaker: A lot of government stimulus in November and throughout the rest of 2022.
Speaker: Something we're going to see continuing into 2023?
Speaker: Yes, as we have already observed the policy pivot since November last year, we expect the mild rebound to come for the housing sector this year.
Speaker: And that will not only basically
Speaker: stabilize the housing market, but also help to push for the recovery in China.
Speaker: After all, the housing sector together with the up and downstream sectors constitute about 25% of China's GDP.
Speaker: Now, obviously, an economic recovery is going to bring to some extent price pressures along with it.
Speaker: What are the implications therefore for CPI, PPI, and how manageable will any of those price pressures be?
Speaker: Yes, we do expect a reflation on both CPI and PPI inflation this year.
Speaker: However, we think China will be very different from other economies.
Speaker: In particular, we think the inflationary pressure will be quite manageable.
Speaker: And what has made China different in our view?
Speaker: First of all, China is pretty much the last large economy to reopen.
Speaker: So it will not confront with the supply
Speaker: disruptions as other economies faced during the reopening.
Speaker: And also the negative output gap, the labor market slack
Speaker: will take time to absorb.
Speaker: That means the wage inflation will be pretty much contained.
Speaker: And on top of that, we also didn't see the households receive large amount of handouts from the government.
Speaker: To some extent, it will limit the extent of pent up demand too.
Speaker: And in terms of policy, where do we see the real focus in 2023?
Speaker: What have government officials been suggesting?
Speaker: growth, growth, growth.
Speaker: Basically, the two important meetings in December send a strong signal the government will focus on the growth.
Speaker: The expansionary fiscal policy will take the lead, complemented by a very accommodative monetary policy.
Speaker: And also in terms of regulation, we expect more transparency and
Speaker: collaboration across different agencies.
Speaker: So taken together, we think the policy support together with a reopening will basically let China grow at 5% this year.
Speaker: Jing, great to get your insight.
Speaker: Thank you very much, as always.
Speaker: Thank you.
Speaker: Wish everybody a great year ahead.
Speaker: Jing Liu speaking to Gray and Makai on five macro themes for China in the Year of the Rabbit.
Speaker: And to hear more about China and the rest of Asia, we'd like to invite you to HSBC's Asia Outlook Conference, which kicks off in Hong Kong on Tuesday, January the 10th, before heading to Singapore on January the 12th.
Speaker: The event is titled Inflation, Recession and Beyond, and features presentations from global researchers, leading economists and strategists.
Speaker: If you can't make it to the in-person events, you can join an online session a week later.
Speaker: If you're a Global Research client, you can register online at research.hsbc.com or reach out to your HSBC representative for more details.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Neumann.
Speaker: And you can find us under the banyan tree.
Speaker: 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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Speaker: Enjoy the rest of your podcast and we'll see you under the banyan tree.
Speaker: We turn to Europe now, where 2022 was a fairly grim economic year as growth slowed under the pressures of the war in Ukraine and high energy prices.
Speaker: The key challenge has been inflation, which hit double digits and 40-year highs, forcing central banks to raise interest rates markedly.
Speaker: Over the coming years, policymakers expect inflation to fall from around 10% to that target of 2%.
Speaker: But is this a realistic expectation?
Speaker: Let's turn to Simon Wells, Chief European Economist.
Speaker: Simon, welcome.
Speaker: Thank you.
Speaker: So, Simon, we heard from your colleague Jing Liu earlier in the podcast about her expectations of a recovery in China.
Speaker: Is that going to be a positive in your outlook for Europe for 2023?
Speaker: Well, when it comes through, it should be.
Speaker: But Europe's experience suggests China's recovery could be quite bumpy.
Speaker: We've also got the risk, of course, of a harsher slowdown in the United States.
Speaker: So globally in the near term, the backdrop isn't going to be great.
Speaker: That means Europe's growth is going to have to be powered domestically.
Speaker: And in some sense, there are good signs.
Speaker: The energy crisis and energy storage levels through the winter are looking fairly promising so far.
Speaker: So the risk of outright rationing is down.
Speaker: And household spending, despite high inflation, was actually pretty robust in the second half of last year.
Speaker: And that came even without running down some of the accumulated savings from the pandemic.
Speaker: So in that sense, there's been a bit of resilience.
Speaker: There may well have been a turning point in some of the European leading indicators.
Speaker: But ultimately, this inflation and this squeeze on real incomes probably will catch up with consumers.
Speaker: And therefore, our central case for Europe in 2023 is a mild recession, fortunately backstopped by what is still a fairly resilient labour market.
Speaker: And Simon, the challenge of inflation, policymakers expect inflation in the eurozone to fall from around 10% to their target of 2%.
Speaker: Is this realistic?
Speaker: Well, European inflation has been very volatile over recent months.
Speaker: And a lot of that reflects measurement and government support schemes on energy and, of course, the volatility in wholesale energy prices as well.
Speaker: But you're right, I think what we need to look at is the core underlying inflation picture and how that's going to evolve.
Speaker: And the title of our European Economics Quarterly is 10 to 2.
Speaker: And as you say, getting from 10% inflation to 2% inflation in under three years, historically, at least across a very wide range of economies, would be extremely unusual.
Speaker: That's not to say that it can't happen.
Speaker: But particularly when we consider the real terms income hit that consumers will have felt, they are likely to use the fact that the labour markets are still relatively tight to push for higher wage growth both this year and next.
Speaker: And that might keep core inflation pressures up.
Speaker: So in our view, at least, inflation in an underlying sense will not fall back to central banks targets as quickly as they are expecting.
Speaker: So, Simon, let's focus on the UK now.
Speaker: They had a tougher time relative to continental Europe in 2022.
Speaker: Does that mean that they might come out of the downturn sooner?
Speaker: Unfortunately, it probably doesn't.
Speaker: Many of the factors influencing the European economy are, of course, similar in the UK.
Speaker: There's a big income squeeze as a result of high inflation, even if wage growth in the UK is a little bit stronger.
Speaker: But I still think we have a bit more energy pass through to come through and hit consumers.
Speaker: That's going to restrain their spending power in the UK.
Speaker: And of course, the Bank of England started to raise rates earlier, a lot earlier than the ECB did.
Speaker: And so we've got more monetary tightening coming through for the UK.
Speaker: That is starting to be felt in the housing market, where house prices have started to fall really quite sharply.
Speaker: I think the UK is likely to suffer a more prolonged recession than the eurozone, although by historical standards, still not a deep one.
Speaker: Again, thanks in part to what is still a pretty tight labour market.
Speaker: So Simon, to finish, what are your policy rate forecasts?
Speaker: Well, partly reflecting that backdrop for the UK and the fact that the Bank of England sees inflation dropping well below target over its forecast horizon, we think the Bank of England is nearly done.
Speaker: So we have just 25 basis points of further rate hikes taking the policy rate to 3.75, quite a bit less than the market's pricing in.
Speaker: For the ECB, well, it's been fairly clear that it thinks the mild recession might not be enough downward pressure on inflation to be sure of it coming back to target.
Speaker: It sounded pretty hawkish in December.
Speaker: So we've brought forward our expectations for ECB rate rises.
Speaker: We now see 50 basis point rate rises in February and March, which would take the key deposit rate to 3%.
Speaker: And then a long pause.
Speaker: But of course, as always, there's a lot of uncertainty and fiscal policy will also be pretty interesting this year.
Speaker: If we start to see consumers really feel the pinch, fiscal authorities loosening policy further, that could counteract some of the effects from the central banks and put them in opposition with each other.
Speaker: Certainly, the central banks are quite concerned that fiscal policy could end up acting against them.
Speaker: It will be a fascinating year for policy.
Speaker: Simon, thank you very much for joining us.
Speaker: Thank you.
Speaker: So we've heard about drivers in China and Europe.
Speaker: In terms of the world's outlook, Janet Henry, our global chief economist, sees overall growth stalling early in the new year under the weight of higher central bank rates, persistent inflation and volatile housing markets.
Speaker: The economic team's global growth forecast has been revised lower to 1.8% in 2023.
Speaker: But the timing and magnitude of a global economic downturn and any subsequent stabilization may well hinge on what happens in China.
Speaker: In the US, all eyes are, of course, on the Federal Reserve, which we think will raise its policy rate by final 50 basis points in February, taking the target range to 4.75 to 5%.
Speaker: But we do not see rate putts until 2024.
Speaker: So that's all from us for this week.
Speaker: Thanks to our guests, Jing Liu and Simon Wells.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
