Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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 Piers Butler and I'm joined by our senior UK economist, Liz Martins.
Speaker: Hi Piers.
Speaker: Coming up this week with global manufacturing booming and supply bottleneck building,
Speaker: We look at the prospects for the industrial cycle with Janet Henry, our chief global economist.
Speaker: Silver prices have been volatile so far this year.
Speaker: We assess the outlook for the metal with Jim Steele, chief precious metals analyst.
Speaker: And governments in Europe are facing difficult decisions as we approach this summer.
Speaker: I'll talk through the latest COVID-19 picture.
Speaker: This podcast was recorded on Thursday, the 3rd of June, 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We start with a look at the world economy, where this week Janet Henry, Global Chief Economist, has put out a major report assessing the outlook for the industrial cycle.
Speaker: Janet joins us now.
Speaker: Janet, welcome to the podcast.
Speaker: Hello, Piers.
Speaker: So, Janet, the Global Purchasing Managers Index has recorded a decade high in May.
Speaker: Commodity prices are soaring.
Speaker: And goods export volumes are rising sharply.
Speaker: We're seeing bottlenecks all over the place.
Speaker: So it really does look like a booming environment.
Speaker: Your point in the report that you just published is that we should really be looking a little bit more behind the headlines.
Speaker: Yes, when you look at the global aggregates, it all looks very good.
Speaker: It does look like a manufacturing boom.
Speaker: In fact, global industrial production is not just above pre-pandemic levels.
Speaker: It's actually back already on its pre-pandemic trajectory.
Speaker: So what I'm highlighting in the report is just that, one, there is a lot of country variations within that.
Speaker: Most of the, well, I suppose the most impressive aggregates
Speaker: reacceleration that's come through has been in China and elsewhere in Asia.
Speaker: We've also seen some pretty strong bounce back in some other emerging economies over the last year, and for instance, Poland and Turkey.
Speaker: But actually, what we sometimes forget is that some of the advanced economies, in particular Japan and Europe,
Speaker: entered the pandemic when they were already in industrial recession.
Speaker: So yes, while they are pretty much back at pre-pandemic levels, they're certainly not back at the peak of say early 2019.
Speaker: And in the coming year, as Europe reopens, we may actually see parts of Asia starting to slow down in terms of production from this very strong momentum.
Speaker: And for at least the next few months, based on that really strong survey evidence that you pointed to,
Speaker: we should actually see a bit more momentum being maintained in Europe.
Speaker: So can we drill down on this whole area of supply bottlenecks and how they're likely to ease?
Speaker: Again, in your report, you talk about the different pace of easing of bottlenecks and what impact that's likely to have.
Speaker: Yes, we've seen over the last year, a very strong revival in consumer spending globally, particularly in the advanced economies where incomes were supported.
Speaker: And it's been a very goods intensive one.
Speaker: And then we go back to the start of the pandemic, our production in a lot of sectors just shut down and orders were cancelled.
Speaker: And so it's perhaps unsurprising given that massive rebound in demand for goods,
Speaker: that supply has been unable to keep pace.
Speaker: And in the piece, we look at a number of different sectors, but in particular what's happened to semiconductors and to timber.
Speaker: So consumer electronics and cars being the other big sector that obviously uses a lot of semiconductors.
Speaker: Timber has been a function of the revival in demand for housing markets.
Speaker: new house building and of course furniture that tends to go with that.
Speaker: But these are going to be easing at different paces.
Speaker: Already the indication is that a lot more investments going into the likes of semiconductors.
Speaker: That will take a while to come on stream, but the suggestion is we should see some easing for the auto sector chips in the third quarter, even if some shortages brought more broadly in semiconductors
Speaker: lasts until early 2022.
Speaker: And this will all impact on industrial production.
Speaker: We think we've seen the best of the global industrial upswing, but we're not looking for a rapid synchronized downswing.
Speaker: In fact, some of these sectors like cars where production's fallen over the course of the last few months in a lot of the major producers, we should see at least a mild reacceleration and perhaps in some other sectors as well, because we need to remember inventories in many sectors are at rock bottom levels.
Speaker: So even if underlying demand is slowing, a lot of retailers and manufacturers will want to get back to a more normal level of inventories coming through.
Speaker: So in terms of pricing and inflation, what's the outlook there?
Speaker: And what about central bank policy, which has been very accommodative?
Speaker: Well, on the pricing side, we've already seen a sharp acceleration in consumer goods prices over the course of the last year.
Speaker: And in particular, that was the main reason why
Speaker: for the sharp spike in US inflation that we saw coming through in April.
Speaker: But of course, what we're also starting to see is the beginning of a rotation of spending towards greater services.
Speaker: So these bottlenecks do mean that inflation, even on goods, is likely to remain quite sticky in late 2021 and even into 2022.
Speaker: But as the supply bottlenecks ease and the spending shifts towards service sector spending,
Speaker: we would expect inflation to be moving back down during the course of 2022.
Speaker: And for central banks, I think their message has been quite clear.
Speaker: That's basically in their forecasts.
Speaker: They know that inflation was seeing a spike in inflation currently.
Speaker: But as they've been keen to point out, what happens during reopening when you get this resurgence in demand doesn't tell you very much about the medium term outlook for inflation.
Speaker: And we've written a lot about this as well.
Speaker: Ultimately, what happens to inflation will depend on what happens in labour markets.
Speaker: And of course, what happens to inflation expectations, which while they're off their lows, their lows were too lows.
Speaker: We've got to remember that the Fed in particular has been trying to shock inflation expectations at least a little bit higher.
Speaker: And currently, they're not really much above where they were, for instance, back in 2013, 2014.
Speaker: So for central banks, it's still transitory, at least for now.
Speaker: Janet, thank you very much.
Speaker: Thank you, Piers.
Speaker: Let's turn to the precious metals market now and the prospects for silver.
Speaker: And that industrial production boom that Janet talked about has important implications for the price outlook.
Speaker: James Steele is our Chief Precious Metals Analyst.
Speaker: He spoke to Aline Van Dyne in New York earlier.
Speaker: Jim, you have a positive outlook for silver, highlighting that it's both an industrial and a precious metal, and that it's benefiting from good demand on both fronts.
Speaker: Let's start with the industrial side.
Speaker: What is the picture there?
Speaker: Well, after a rather disappointing last year due to COVID-related shutdowns and reduction in industrial production globally,
Speaker: Silver demand is very robust now.
Speaker: A little more than half of all of silver offtake is generally absorbed by industry and manufacturing.
Speaker: And of that 50%, fully two-thirds of that is electronic and electrical, which means that silver is reliant on chips, production, semiconductors, as well as autos, where you have an increasing amount of electronics going into autos and all sorts of consumer products.
Speaker: items, all of which are increasing quite rapidly right now.
Speaker: But silver also has traditional components to it, such as soldering, heavy industry, as well as chemicals and refining.
Speaker: So really, it very much reflects this broad-based industrial demand globally.
Speaker: And I mean, more than 100 million ounces alone goes into the photovoltaic sector, which is solar power.
Speaker: And silver really does very closely track swings in industrial
Speaker: production globally, both in emerging markets and the OECD.
Speaker: And we can look for good demand based on that in the near to medium term.
Speaker: And Jim, what about investor demand more focused on the precious metal side of the equation?
Speaker: Well, to that degree, silver will often parry or eight gold to some degree.
Speaker: And silver has benefited from investment demand on a wide range of fronts, particularly the growth in exchange traded fund demand was quite notable last year.
Speaker: Gathering into this year, there's been a sharp recovery in coin and bar demand as well.
Speaker: Now, after such spectacular year of investment demand in 2020, particularly in the ETFs, we are looking for some moderation
Speaker: and exchange traded fund demand.
Speaker: But nonetheless, we're looking for it to be positive and above historical averages.
Speaker: Coins and bars, small bars especially, which hit the retail market, are also strong.
Speaker: Although India, which is often the first or second largest importer of silver, is lagging a bit in this aspect compared to China.
Speaker: And Jim, on the supply side, what has been the impact of the mine lockdowns we've seen in the last year?
Speaker: Well, we saw a significant reduction in mine production last year due to the lockdowns.
Speaker: It was centered mostly in Latin America, which is coincidentally where the majority of silver is being produced now.
Speaker: And this had a detrimental effect on supply, which helped buoy price last year.
Speaker: But this year and towards the end of last year,
Speaker: we saw a very significant recovery in production, as well as ramp-ups and expansions in other projects.
Speaker: So we're looking for a significant rise in output this year.
Speaker: Also, something that is often not realized is that over 70% of silver is produced as a byproduct of base metals and gold, and forecasts implying increased rises in gold and base metals production will also boost silver output.
Speaker: But we're also seeing increases from standalone silver mines.
Speaker: But on the supply front, it's good to point out also that we have a significant amount of above ground stocks all over the world for silver, which can be mobilized to meet significant rallies.
Speaker: Recycling is also going to be higher, we think, as silver is encouraged onto the market to be recycled by higher prices.
Speaker: Jim, thank you so much.
Speaker: A pleasure, and thank you to everyone.
Speaker: Let's finish this week with the latest on the COVID-19 situation in Europe.
Speaker: Liz, you've been looking through the latest data, and it's fair to say there's some good news in Europe on the COVID-19 front.
Speaker: There really is, Piers.
Speaker: I mean, if you look at just the big four, France, Germany, Spain and Italy, the case numbers were down 17% compared to the previous week's COVID-19 tracker, and they're now down 75% compared to the peak in January 2021.
Speaker: of this year.
Speaker: So the numbers have come right down, so have hospitalisations, intensive care admissions, deaths and of course the vaccination rate is picking up as well.
Speaker: So at first, you know, the UK was running ahead on the vaccination programme, but we're starting to see European countries catch up, certainly on the daily rate of vaccination and increasingly on the percentage of the population
Speaker: So there is plenty of good news out there.
Speaker: Unfortunately, this sunny outlook is clouded by data out of the UK.
Speaker: Yeah, so the UK is struggling with the spread of what is now being called the Delta variant, used to be called the India variant.
Speaker: And that means that actually UK case numbers are picking up quite sharply, up 67% since the 5th of May.
Speaker: Now, in absolute terms, those numbers are still low.
Speaker: We're talking around three, four thousand a day.
Speaker: You know, hospital admissions still low.
Speaker: And on June the 1st, the UK celebrated its first day since the start of the pandemic with zero deaths from COVID.
Speaker: So that's all very good news.
Speaker: And the other good news, of course, is that the UK has now delivered at least a first dose of the vaccine to 75% of the adult population.
Speaker: And if the vaccine does its job, then despite the rising case numbers, you should see far fewer hospitalizations and deaths.
Speaker: But it's a bit too early to say for sure that that is the case.
Speaker: And some scientists are starting to worry
Speaker: about a possible third wave.
Speaker: So that really presents a set of difficult decisions for the summer ahead.
Speaker: It does indeed.
Speaker: So first of all, there's a difficult decision for the UK government because they have penciled in their final stage of lifting all the restrictions on the 21st of June.
Speaker: So no more social distancing, no more masks, mass gatherings allowed, all of that stuff.
Speaker: And some scientists are saying, look, it would be nice to do that, but maybe we should just wait a little longer, given that the numbers are picking back up again.
Speaker: So that's the difficult decision for Boris Johnson.
Speaker: But I think there's some difficult decisions elsewhere in Europe as well, because, you know, there's a lot of countries which are hoping to be put on the UK's green list of tourist destinations.
Speaker: Spain, for example, tourism revenues are a tiny fraction of what they were pre-pandemic, and they are desperate to get people
Speaker: back in and enjoying themselves on holiday.
Speaker: But at the same time, opening back up to the UK could risk opening up to this Delta variant and another wave of COVID infections.
Speaker: So the French have already made their decision.
Speaker: They've imposed some quite hard restrictions on entries from the UK.
Speaker: And the big question is whether other tourist destinations, so Spain, Italy, Greece, decide to do the same.
Speaker: Liz, thank you very much.
Speaker: Thank you.
Speaker: So that's it for another week.
Speaker: Thank you to our guests, Janet Henry and Jim Steele.
Speaker: And Liz, thank you very much for stepping in to co-host.
Speaker: From Piers and me, thanks very much for listening.
Speaker: We'll be back again 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.
