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: The following podcast was recorded for publication on the 4th of April 2024 by HSBC Global Research.
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Speaker: Just search for The Macro Brief.
Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm your host, Piers Butler.
Speaker: Coming up today, we are assessing the prospects for the European economy.
Speaker: Many of the region's economies have suffered from high inflation and sluggish growth since the pandemic.
Speaker: But with headline inflation now approaching target and policy rate cuts apparently imminent, has Europe turned a corner?
Speaker: To discuss this, I'm joined by Chris Hare, senior European economist.
Speaker: Chris, welcome.
Speaker: Thank you.
Speaker: So all the headlines tend to be about the resilience of the US economy and kind of leaves Europe in the shadows with much greater fears of recessions and sort of sluggish growth.
Speaker: But you write that survey data
Speaker: may indicate that this pessimism is a bit overstated?
Speaker: Yes, I think so.
Speaker: In Europe, we don't expect a US-style rate of expansion anytime soon.
Speaker: But you're right, some of the survey indicators at the start of this year are looking a little bit better.
Speaker: And with falling inflation, real household incomes are starting to pick up.
Speaker: So after a very stagnant year last year, we see some modest pace of economic growth in the European economy as a whole.
Speaker: And at the same time, some of the developments in terms of inflation, or should I say disinflation, are looking somewhat better.
Speaker: So we've got this gradual move back towards, we think, inflation targets that should not only help household income growth and real spending in the economy, but it should also help move the debate on from the part of central bankers potentially towards the idea of rate cuts.
Speaker: So where does that leave central bankers and interest rate policy?
Speaker: After all, we have seen the Swiss central bank cut rates.
Speaker: Does that signal the end of the rate height cycle?
Speaker: I think we're getting close in terms of our forecasts for the ECB, for example.
Speaker: We think that the first interest rate cut will happen in June, so not too long till then.
Speaker: And that's really a function of the fact that headline inflation is falling and wage growth does seem to be moderating.
Speaker: However,
Speaker: Over the medium term, we only think the pace of rate cuts is going to be pretty gradual, only 25 basis points of cuts per quarter from the part of the European Central Bank.
Speaker: And underpinning that view is the fact that although wage growth is moderating, it's only moderating slowly.
Speaker: And at the same time, productivity is soft.
Speaker: So unit labour cost inflation is still there.
Speaker: It's still somewhat sticky.
Speaker: So we do see rate cuts ahead, but some mitigating factors which will mean that this rate cutting cycle we think will be pretty gradual.
Speaker: And what about in the UK?
Speaker: In the UK, it's actually not too different a story.
Speaker: For quite some time, actually, UK inflation and wage growth and underlying cost pressures have seen higher than they have been in the eurozone.
Speaker: But over the last few months, the tide does seem to be turning somewhat in the UK too.
Speaker: At the same time, communications from the Bank of England are getting more dovish.
Speaker: So, in terms of our forecast, we actually also see the first Bank of England base rate cuts in June.
Speaker: But again, it's a similar sort of story to the Eurozone.
Speaker: Because of a gradual pace of disinflation in our forecast, we only see a gradual pace of rate cuts.
Speaker: So like in the Eurozone, we only see 25 basis points per quarter of bank rate cuts between June and the end of 2025.
Speaker: So let's go back to household income.
Speaker: Clearly, one of the keys to economic recovery is household spending.
Speaker: And that in turn is partially driven by a lower savings rate, which in Europe remains elevated.
Speaker: What's going to shift that?
Speaker: Yes, again, this is another big part of that transatlantic divergent, whereas in the US, saving rates came down very sharply through the pandemic and following the COVID-19.
Speaker: But in Europe, that hasn't happened.
Speaker: Potentially a few reasons for that, one of which is the legacy of the shocks not only relating to COVID, but also the cost of living crisis driven by COVID.
Speaker: mainly by higher energy prices in the war in Ukraine.
Speaker: We think that legacy is still going to be there such that we're actually not too confident that saving ratios are going to fall very sharply from here.
Speaker: So where we see an improvement in household spending, it's mainly due to the fact that inflation is falling, labor markets are holding up pretty well, such that household incomes in real terms, we see
Speaker: growing modestly over the next couple of years.
Speaker: And that's really the fuel behind our view that household spending will grow modestly over the next couple of years.
Speaker: What would it take for the savings rate to really shift?
Speaker: I think potentially...
Speaker: Sharp declines in interest rates could potentially incentivise less savings and bring about more household spending.
Speaker: Although, as I mentioned earlier, we only see those rate cuts being pretty gradual.
Speaker: A very sharp improvement in economic confidence could also help.
Speaker: But again, given the legacy of shocks we've seen in the economy, it's hard to be too optimistic on that front.
Speaker: So as a central case, we're pretty cautious about household dis-saving.
Speaker: It's all about household incomes.
Speaker: Now, this year we're going to see both European and UK parliamentary elections.
Speaker: Is that likely to have an impact in terms of fiscal policy?
Speaker: Yes, to a degree.
Speaker: At least for now, we think that any prospect of fiscal tightening is not in the long grass, but something that's likely to be deferred, at least for now.
Speaker: So in the UK, for example, the government has recently announced tax cuts.
Speaker: And in the eurozone, we're not seeing the fiscal tightening, which we think we will ultimately see more like next year.
Speaker: So it's really a story of pain delayed.
Speaker: I think it's a case where governments, when it comes to the European elections or upcoming UK elections, don't necessarily want to announce tax rises or big spending cuts in the run up to those elections.
Speaker: Perhaps that's unsurprising.
Speaker: What about productivity?
Speaker: As you say in your report, both monetary and fiscal policymakers often bank on that as a potential savior, but is that too optimistic again?
Speaker: Yes, well, if you take the experience really over the last 15 years, productivity growth in Europe has been very soft.
Speaker: If anything, those trends have worsened over the last year or so, particularly in comparison with the US, where productivity has been going great guns.
Speaker: In the report, we talk about various candidate explanations for this.
Speaker: Low investment rates, for example, fragmented capital markets.
Speaker: And from our perspective, given that this productivity weakness seems so entrenched, at least in terms of our normal forecast horizon, the next year or two, we don't necessarily see a tremendous pickup from here.
Speaker: What about AI?
Speaker: I mean, you've written about this previously.
Speaker: It's early days.
Speaker: But does that have the potential to be a game changer?
Speaker: I mean, we are seeing a lot of...
Speaker: being written.
Speaker: Even our colleague Mark McDonald did an experiment with one of his analysts in using ChatGPT to carry out tasks and it does seem like it could be a productivity boost.
Speaker: Potentially and indeed some of the anecdote when we speak to our corporate clients sounds really positive about some of the investments that are being made in AI.
Speaker: But often what we see on a macro level
Speaker: is that when new technologies come along, yes, they can boost the productivity potential of economies, but that can take some time to feed through.
Speaker: I'm certainly hopeful that it will, and that productivity trends, which is so important for prosperity and for policymakers, will improve in Europe, partly as a result of AI, but it might take some time to come through.
Speaker: Let's finish with a recap of your forecasts.
Speaker: Yes, in terms of our forecasts, it's a slow and steady pace of economic growth.
Speaker: So for this year in the Eurozone, we see GDP growth of half a percent, pretty close to that in the UK, but a gradual acceleration.
Speaker: So when it comes to next year, we see GDP growth of just above 1%.
Speaker: Then at the same time, we think that that last little bit of inflation will take a little bit of time to squeeze out of the system.
Speaker: But nevertheless, we see two percent inflation over the medium term in the eurozone and the UK.
Speaker: And that's the basis behind our view of rate cuts starting this June.
Speaker: Chris, thank you very much for joining us today.
Speaker: It's a pleasure.
Speaker: That was Chris Hare on the prospects for Europe.
Speaker: We've also published our quarterly outlooks for the other regions.
Speaker: In Asia, Fred Newman says that the macro picture is rosier than it first appears.
Speaker: Exports are starting to tick up, consumption is proving quite resilient, and easing price pressures are set to lend support, opening the door for rate cuts.
Speaker: And our economists see reasons to be hopeful in Central and Eastern Europe, the Middle East and Africa.
Speaker: Simon Williams says painful economic adjustment measures are gaining traction, strengthening our conviction that this could be the transition year for many of the region's troubled economies.
Speaker: And finally, we're just days away from the first HSBC Global Investment Summit.
Speaker: More than 3,000 delegates will gather for the three-day event in Hong Kong under the theme of New Networks Connecting the Global Economy.
Speaker: And we're running a special Live Insights on Friday, the 12th of April, where I'll be joined by Murat Olgun, Global Head of Emerging Markets Research, to discuss the key takeaways from the conference.
Speaker: For more details on that and to register, please email osresearch at hsbc.com.
Speaker: So that wraps up another edition of the Macro Brief.
Speaker: Thanks very much for listening.
Speaker: We'll be back again next week.
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Speaker: We hope you enjoyed the discussion.
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