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: Thank you for listening.
Speaker: Hello and welcome to the Macro Viewpoint from HSBC Global Research, our weekly podcast featuring the views of leading HSBC analysts on the outlook for the global economy and markets.
Speaker: I'm Chris Brown-Humes.
Speaker: And I'm Aline Van Dyne.
Speaker: This week, we look at the economic prospects of Asia and Europe.
Speaker: We begin in Asia, where Fred Newman, co-head of Asian Economic Research,
Speaker: explains why the region's recovery is still on target despite a relatively slow vaccine rollout.
Speaker: And then we'll catch up with Simon Wells, Chief European Economist, to hear how the Eurozone is diverging from the US.
Speaker: And with countries scrambling to get hold of COVID-19 treatments, we take stock of vaccine trade patterns with Janela Rajanagam, Trade Economist.
Speaker: This podcast was recorded on Thursday, the 1st of April 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We begin this week in Asia, where our economics team has been looking at whether the region faces a brighter outlook following a lackluster start to the year.
Speaker: Fred Newman is our co-head of Asian Economic Research, and he spoke to Graean Mackay in Hong Kong earlier.
Speaker: Fred Newman, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So the title of your new quarterly is Still on Target.
Speaker: That sounds broadly optimistic.
Speaker: It is in general, yes.
Speaker: So we had a bit of a bumpy start to the year in some Asian economies because of resurgence of the virus in many pockets of the region.
Speaker: But we're still on target in the sense that really growth is improving.
Speaker: Domestic demand is recovering.
Speaker: And gradually we've seen
Speaker: also the rollout of vaccines.
Speaker: And so broadly with our growth forecast, we're still on target for the current year, which actually will, by and large, deliver pretty punchy headline growth rates for much of the region.
Speaker: And is mainland China still the torchbearer for the Asian recovery?
Speaker: Well, mainland China really led the recovery last year.
Speaker: It came out of the major lockdown earlier than other economies.
Speaker: You saw
Speaker: infrastructure investment, property construction really surge ahead.
Speaker: And that helped to put a floor on the growth, not just in mainland China, but really across the region and the world.
Speaker: But if you think about this year, really momentum is cooling a little bit at the margin because the government is kind of tugging the reins on the stimulus and you'll likely see construction cooling.
Speaker: Now, the hope is that actually consumer spending will pick up kind of
Speaker: momentum, but that remains to be seen.
Speaker: So overall, yes, mainland China is delivering strong growth this year, but it's no longer accelerating.
Speaker: And if anything, it might actually cool a little bit at the margin.
Speaker: All right.
Speaker: And which economies then would you say were on a more upwards trajectory?
Speaker: So India probably stands out as one economy where things have really picked up quite a bit in the last two to three months.
Speaker: And that's a bit of a surprise because
Speaker: Of course, India was harder hit in economic terms than most other economies last year.
Speaker: Remember, in the second quarter of 2020, the economy contracted by almost a quarter.
Speaker: But by the end of last year, it had almost erased all the lost ground.
Speaker: And domestic activity is pretty much normalized.
Speaker: Service is still a bit underwater.
Speaker: Manufacturing actually increased.
Speaker: ahead of already pre-pandemic levels.
Speaker: So India is one economy where things are looking up and we're looking for over 11.5% GDP growth for the coming year.
Speaker: Very good.
Speaker: Now, one thing we haven't got onto yet is exports.
Speaker: Tell us a bit more about how they've been going, because I know they're a pretty integral part of this Asian recovery story, aren't they?
Speaker: Yeah, exports have really been roaring in the last two quarters or so.
Speaker: And that's partly because of that insatiable demand across the world
Speaker: during lockdowns for goods, that is work from home, electronics, furniture, kitchen utensils, all stuff that's really made in Asia and that really filled really the containers that were then shipped off from Asia to the rest of the world.
Speaker: And that's led to very punchy headline export growth numbers.
Speaker: Now, when we look ahead, there might actually be a bit of a loss of momentum as the world economy recovers.
Speaker: And that is because
Speaker: We expect that the recovery in the U.S. in particular, but also later on in Europe, will be services led rather than goods demand led.
Speaker: So to that extent, there might be a bit of a payback for Asian exports.
Speaker: Now, that doesn't mean that they will collapse by any measure, but it just means that these very strong growth numbers we'll see will start to slow.
Speaker: Where are things perhaps a little trickier?
Speaker: Well, we have seen the beginning of vaccinations across the region, but there's a long way to go.
Speaker: in part because obviously we have very large populations in some economies, but also because just the procurement of vaccines has been a bit slower than expected.
Speaker: And that raises the risk of temporary resurgence in infection rates.
Speaker: The other one that's often mentioned is this idea of a return of a tapered tantrum.
Speaker: That is a rerun of the 2013 episode where U.S. yields were rising sharply, and that caused all sorts of
Speaker: volatility in financial markets in Asia.
Speaker: We actually think this time around Asia is much more robust.
Speaker: That doesn't really matter all that much.
Speaker: In fact, to date, FX markets have been much more stable than 2013.
Speaker: But certainly a further rise in U.S. interest rates could be a bit of a headwind for Asian growth.
Speaker: All right, Fred.
Speaker: And finally, what does this leave you thinking in terms of the outlook for economic policy across Asia?
Speaker: Well, a monetary policy actually does no reason to expect any tightening anytime soon.
Speaker: The market is obviously thinking that maybe the Fed will have to tighten earlier than expected, perhaps because of a return of inflation in the U.S. But for virtually all of Asia, inflation is not an issue for the time being.
Speaker: And that will mean that virtually all central banks in Asia will not hike interest rates, at least through the end of this year.
Speaker: So that means monetary policy very supportive.
Speaker: And so is fiscal policy actually still supportive by and large.
Speaker: We don't see these big stimulus packages coming out like we did last year.
Speaker: But broadly speaking, fiscal consolidation is very progressing very slowly.
Speaker: And that means the overall fiscal stance is actually still very supportive as well.
Speaker: Fred, great to get your thoughts.
Speaker: Many thanks again.
Speaker: Thank you very much.
Speaker: So Fred was fairly upbeat there on the outlook for Asia.
Speaker: Here in Europe, it's a different story because rising COVID-19 infections are leading to new restrictions and hampering the economic recovery.
Speaker: Our team have just published their latest quarterly outlook.
Speaker: For more, let's speak to Simon Wells, Chief European Economist.
Speaker: So, Simon, you call this report the transatlantic divide.
Speaker: Why have you called it that?
Speaker: Well, because the divide between Europe and the US in particular is widening, and it's widening across several dimensions, across COVID, monetary policy and fiscal policy.
Speaker: And that is, of course, increasing the divergence in economic outlook.
Speaker: So if we look at COVID first, cases are rising sharply again in Europe.
Speaker: This is causing governments to extend and tighten restrictions.
Speaker: And so the consumption recovery we're expecting has been delayed further.
Speaker: Despite resilient investment and a strong tailwind in global trade, this delayed consumption recovery means we keep our GDP.
Speaker: eurozone growth forecast at 3.6% for this year, rising to 4% for next year, which is clearly a much slower pace of growth than we're expecting in the US.
Speaker: Situation in the UK is slightly different.
Speaker: The vaccination programme is proceeding much faster than in the eurozone.
Speaker: And when restrictions are unlocked, there is a clear roadmap to unlocking, we would expect something of a consumer boom.
Speaker: So we've recently revised up our UK growth forecast to 5.8% from 4.7% for this year.
Speaker: And for next year, we've revised up from 5.4% to 6.1%.
Speaker: So the UK economy, perhaps closer to the US, but with the eurozone, there's a clear divide.
Speaker: And one of the divides you highlight is over monetary policy.
Speaker: Why do you think there are such differences there?
Speaker: Well, that's right.
Speaker: Obviously, globally, the reflation trade has been a big theme dominating markets this year.
Speaker: And indeed, in Europe, we would expect inflation to rise above the central bank targets, albeit temporarily in the second half of the year.
Speaker: But longer term, with slack in the labour market, weak underlying inflation is likely to be the ECB's main problem.
Speaker: That, alongside the desire to continue to support fiscal authorities, means we would expect the ECB to announce some more asset purchases later this year to avoid a cliff edge in purchases in March next year when its Pandemic Emergency Purchase Programme, or PEP, is scheduled to end.
Speaker: By contrast, for the Bank of England, the stronger recovery we're expecting in the UK now, alongside the vaccination programme, means that we were previously expecting more QE from the Bank of England in May.
Speaker: We now no longer expect that.
Speaker: So the Bank of England firmly on hold, in our view.
Speaker: The other thing that's been much discussed, of course, is the US fiscal stimulus, the 1.9 trillion programme.
Speaker: What's the situation in the Eurozone?
Speaker: Well, of course, fiscal policy is where the transatlantic divide is most evident.
Speaker: In the UK, we think the discretionary fiscal impulse will be about neutral this year.
Speaker: But in the Eurozone, it's still supportive.
Speaker: We calculate in this report about one and a half percent of GDP for this year.
Speaker: So fiscal policy is helping the recovery, but clearly much, much smaller in terms of stimulus than is being felt in the United States.
Speaker: So why doesn't the Eurozone go big as they have done in the US?
Speaker: Well, that's a great question and one that we are asked quite a lot and we address in detail in this report.
Speaker: And the answer is that there's a lot of uncertainty in terms of how much spare capacity there is in the eurozone economy at the moment.
Speaker: There's also a huge pile of savings accumulated last year waiting to be spent and a lot of fiscal measures that were introduced last year that are still waiting to have an effect on the economy.
Speaker: So a big stimulus now might risk overcooking things slightly.
Speaker: Now, does this matter?
Speaker: Well, from an ECB point of view, it might, because if it starts forecasting above target inflation, it might have to try and counteract this fiscal stimulus.
Speaker: Unlike in the US, of course, where the Fed has adopted average inflation targeting.
Speaker: But perhaps more importantly, is the accumulated debt.
Speaker: In the eurozone, countries know that sooner or later they will be facing fiscal rules.
Speaker: So if they embark on a huge stimulus now, it may simply result in required austerity further down the line.
Speaker: So the eurozone can afford to be more cautious, wait to see what happens in the US before it dives in to breach that transatlantic divide.
Speaker: Simon, thanks very much indeed for that summary.
Speaker: Thank you.
Speaker: So we heard from both Fred and Simon there about COVID-19 vaccines and how crucial they are to the recovery.
Speaker: And in a new report this week, Shanela Rajanayagam, trade economist, has been looking at global vaccine trade patterns.
Speaker: She joins us now.
Speaker: Hi, Shanela.
Speaker: Your report shows that the trade in vaccines is fairly imbalanced.
Speaker: Why is that?
Speaker: That's right, Chris.
Speaker: So the report that we did, it took a look at trade in vaccines.
Speaker: They're certainly a hot topic at the moment, but they only comprise around 0.2% of global goods trade.
Speaker: But the pace of vaccine rollouts has been quite uneven to date.
Speaker: And one of the reasons is this imbalance that you mentioned in terms of trade.
Speaker: because even though all economies want vaccines, only a small number of markets actually produce them.
Speaker: So for the COVID-19 vaccines, for example, the US, India, mainland China and Europe are expected to be large producers of these vaccines, which means that other markets around the world will rely on exports from these economies.
Speaker: But another factor contributing to the imbalance is the fact that some countries have ordered more vaccines than their populations need.
Speaker: That's right.
Speaker: So high income economies have really snapped up vaccine supplies.
Speaker: at the expense of developing markets.
Speaker: So Canada, for example, it has purchased enough vaccines to vaccinate its population around four times over.
Speaker: Similarly, the UK and the EU have purchased enough jabs to vaccinate double their populations.
Speaker: Now this compares to the likes of the African Union, which has purchased enough vaccines to vaccinate just about 30% of its population.
Speaker: Yeah, not surprisingly then, we're seeing some tensions, aren't we?
Speaker: And indeed some sort of vaccine nationalism.
Speaker: That's right.
Speaker: So the shortages in vaccines, which one analytics company, Airfinity, puts that at around 2 billion doses this year, there's a risk that this could lead to trade protectionism because some economies may impose new export controls in order to secure enough vaccines for their domestic market before exporting these.
Speaker: And we've certainly seen this happen in the EU where they've tightened export authorizations for vaccines and also the likes of India, which has imposed a de facto ban on its vaccine exports, which could delay some of these supplies to other markets.
Speaker: And also, given the imbalance in vaccine trade, we've seen some markets like India, mainland China, Russia, step up their supplies to emerging markets.
Speaker: India is even sending some free of charge.
Speaker: So how do you see the situation evolving?
Speaker: Well, looking ahead, there's a lot of uncertainty around the rollouts or the pace of rollouts for vaccines across the world.
Speaker: But in terms of trade, these rollouts should provide support to air cargo volumes.
Speaker: And of course, vaccine demand and trade flows will also be impacted by the potential emergence of new COVID variants, which could lead to the ongoing need for vaccines, as well as by the uptake of vaccines across markets.
Speaker: Shanella, thanks very much indeed for that roundup.
Speaker: Thanks, Chris.
Speaker: So that's all from us today.
Speaker: Thanks to Fred Newman, Simon Wells, and Shanella Rajanayagam.
Speaker: We hope you found today's podcast useful.
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.
