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.
Speaker: And I'm Chris Brown-Hulmes.
Speaker: Coming up on this week's podcast, India's COVID-19 situation is raging out of control, with new cases skyrocketing over recent weeks.
Speaker: We get the latest and what it means for the economic recovery from Pranjal Bhandari, Chief India Economist.
Speaker: COVID-19 cases also remain elevated across much of Europe.
Speaker: Simon Wells, Chief European Economist, brings us up to date on that and the key takeaways from the latest ECB meeting.
Speaker: And with a strong headline GDP growth, is China's economy in danger of overheating?
Speaker: We get the thoughts of Xu Hongbin, Chief China Economist.
Speaker: This podcast was recorded on Thursday, the 22nd of April 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We start this week in India, where the COVID-19 picture has deteriorated rapidly.
Speaker: New cases have picked up dramatically during April, with the country hitting a global daily record of 315,000 new cases today.
Speaker: For more on this and the implications on the economy, let's speak to Pranjal Bhandari, Chief India Economist.
Speaker: Pranjal, welcome to the podcast.
Speaker: Great to be here, Piers.
Speaker: So every day we're getting new headlines in the press about the worsening situation for COVID-19 infections in India.
Speaker: At the start of the year, India seemed to be in great shape.
Speaker: So what happened and what's the latest data?
Speaker: Yes, yes, Piers.
Speaker: You know, this is a very infectious second wave that has sprung out of nowhere.
Speaker: It's a new strain that is spreading like wildfire across the country.
Speaker: Just to give you some numbers, you know, India is seeing about 300,000 new cases per day.
Speaker: And last year in the first wave, at peak, it was about 97,000 new cases.
Speaker: The mortality rate remains low.
Speaker: But just the sheer number of fatalities that we're seeing per day has risen sharply.
Speaker: And the health infrastructure is quite overwhelmed.
Speaker: There are shortages of beds, medicines and oxygen.
Speaker: Could an acceleration in the vaccine program that's underway make a difference?
Speaker: Yes, I think so.
Speaker: I think vaccines are probably the best stimulus that can be given to the economy right now.
Speaker: But the vaccination rate currently is about 3 million jabs a day.
Speaker: And only those who are over the age of 45 years are eligible.
Speaker: But this criteria is being widened.
Speaker: Starting from 1st May, all people over the age of 18 years will be able to get a vaccine.
Speaker: We're also expecting that there will be an increase in the supply of vaccines around the middle of the year.
Speaker: So if we bring all of this together and if the vaccination rate rises from 3 million doses per day now to about 5 million doses by August, it could cover about 50 percent of the population by the end of the calendar year.
Speaker: So all of this is likely to have an economic impact.
Speaker: How has it affected your outlook for the economy?
Speaker: Yes, for sure.
Speaker: You know, many local lockdowns are back in play.
Speaker: Maharashtra announced a 15-day complete lockdown.
Speaker: Delhi followed up by announcing a six-day full lockdown.
Speaker: The growth cost of just these two could be 1% of the country's GDP in the June quarter and could actually rise further.
Speaker: if other states also replicate these lockdowns.
Speaker: We also have a recovery tracker, which has already fallen 10 percentage points from the February highs.
Speaker: Unemployment rates have begun to rise, particularly in urban India.
Speaker: High touch services have been impacted.
Speaker: Electricity consumption, which is generally the more resilient part of the economy, has also begun to fall.
Speaker: In fact, we think this is going to impact GDP numbers.
Speaker: We're expecting a negative year-on-year GDP growth print in March and a negative quarter-on-quarter print in the quarter ending June.
Speaker: I also think this will have implications for monetary policy and fiscal policy.
Speaker: It is likely to delay the exit of the central bank from very loose monetary policy.
Speaker: We now expect that the central bank will start on its gradual exit
Speaker: Only in the fourth quarter of the year, when vaccination reaches critical mass, you know, earlier we were expecting that the exit would begin in the middle of 2021.
Speaker: In terms of fiscal finances, I think there are going to be some new challenges that come up.
Speaker: For instance, demand for more social welfare schemes, weaker tax revenues, and uncertainties around asset seals.
Speaker: So I think all parts of the economy are going to get impacted.
Speaker: Pranjal, thank you very much for joining us.
Speaker: Great to be here.
Speaker: So let's get the latest now on the COVID situation here in Europe, where cases remain elevated.
Speaker: And we'll get an update on the outcome of the latest ECB meeting.
Speaker: Simon Wells, Chief European Economist, joins us to discuss both these topics.
Speaker: So Simon, we've just been hearing there about the alarming COVID situation in India.
Speaker: What is the latest in Europe?
Speaker: Well, in Europe, Chris, the news is slightly better in that case numbers are now largely stable.
Speaker: There are still some rising hospital admissions in Germany and they're creeping up in France.
Speaker: But generally, I think we're seeing now a stabilisation in case numbers as a result of the lockdowns.
Speaker: And we're also seeing in the EU a big step up in the pace of vaccination.
Speaker: The EU wants to vaccinate 70% of the population by the end of the summer.
Speaker: And a few months ago, that was looking very challenging indeed.
Speaker: There's still work to be done in terms of increasing the pace further, but it doesn't look quite as unrealistic as it once did.
Speaker: And in that sense, that is also good news.
Speaker: Meanwhile, this continues to cost governments quite a lot of money and it's pushing up budget deficits.
Speaker: That's right.
Speaker: I mean, we've also seen, I guess, some favourable news on the fiscal side, too.
Speaker: So a new 40 billion euro stimulus package has been announced in Italy, for example.
Speaker: That means its deficit target for this year has been raised from 7% of GDP per
Speaker: to 11.8% of GDP.
Speaker: That means it will have one of the highest deficits in the eurozone this year.
Speaker: But it does mean that governments are ramping up the response.
Speaker: And importantly, we've had a ruling from the German Constitutional Court, which has ruled that the German government can sign up to the EU's 750 billion euro recovery fund,
Speaker: which is good news.
Speaker: It removes one risk of delay.
Speaker: But the court also reminded us that to be legal, any recovery fund has to be limited in scope and limited in time.
Speaker: And it did leave the door open to overturning this ruling once it's had time.
Speaker: time to take a more considered judgment.
Speaker: But in terms of removing risks of further delays, that was also a positive step on the fiscal front.
Speaker: So you mentioned the fiscal issues there.
Speaker: Turning to the monetary side, we've just had an ECB meeting today.
Speaker: Have we learned anything new?
Speaker: Well, not much, to be honest.
Speaker: It wasn't a particularly exciting meeting.
Speaker: There were no changes in policy, no changes in the statement, with the ECB simply reiterating from the last meeting that it intends to significantly increase the purchase pace of bonds under its pandemic emergency purchase programme.
Speaker: So in that sense, it was just reiterating the previous meeting
Speaker: However, further ahead, it is going still to face some challenges.
Speaker: It was questioned a lot at the press conference on its communications.
Speaker: We think that to avoid a cliff edge in central bank bond buying when that pandemic emergency purchase programme is scheduled to end next March,
Speaker: It will probably need to do some more loosening and we think it will revert back to its normal programme of bond buying, the so-called asset purchase programme.
Speaker: And so it might soften the impact of the end of PEP with an announcement at some point this year.
Speaker: But the April meeting itself was no great shakes.
Speaker: Simon, thanks very much for your comments today.
Speaker: Thank you.
Speaker: One economy that is firing on all cylinders is China.
Speaker: Growth recovered to pre-pandemic levels at the end of 2020, leading some commentators to ask whether the economy runs the risk of overheating.
Speaker: Let's hear from Chu Hongbin, chief China economist.
Speaker: So Hongbin, could China's economy overheat in the coming years?
Speaker: As we all know, the Chinese economy has been rebounded very, very strongly, particularly in the first quarter of this year.
Speaker: partly because the low base effect, we have something like above 18% year on year GDP growth rate.
Speaker: But I have to say that a significant part of that is coming from the low base effect.
Speaker: If you strip off the low base effect, the underlying growth rate is probably something around five to 6%, which is still below the pre-pandemic level and also below the potential growth rate.
Speaker: the risk for economy to overheat, in our view, will be limited.
Speaker: So what is China's potential growth rate, do you think?
Speaker: The consensus view seems to suggest that China's potential growth rate has been slowing quite fast in recent years and is heading towards around 5% in the coming years, mainly due to the shrinking labour force and the rising debt burden.
Speaker: And we disagree.
Speaker: we believe that the potential growth rate for China is still going to remain above 6.5% in the coming years.
Speaker: This is mainly due to the
Speaker: The fact that the improvement in human capital is likely to offset the negative impact of the shrinking labor forces.
Speaker: And how did you arrive at that 6.5% potential growth figure?
Speaker: There are three key components, labor and capital and the total factor productivity.
Speaker: On the labor front, China's working age populations already passed its peak and is likely to slow in the coming years.
Speaker: But however, the human capital is going to improve significantly.
Speaker: So that will more than offset the negative impact from the shrinking workforce in the coming years.
Speaker: On the capital front,
Speaker: China's capital stock per worker is still significantly below the level of the developed world, which means plenty room for China to do catch up in terms of the capital deepening.
Speaker: And the latest five-year plan has already introduced a set of policies to encourage the private companies to boost their investment, particularly in the high-tech sector.
Speaker: which we believe will continue to increase the capital stock per worker in the coming years.
Speaker: Lastly, but not least, the total factor productivity, which is mainly driven by the innovation technology progress
Speaker: China has already made impressive progress in terms of building the innovation capacity.
Speaker: And again, the new five-year plan has doubled down the efforts and the investment in R&D and also the tax incentives for the private sector to boost the R&D spending.
Speaker: All this means that we like to see acceleration in terms of the piece of the innovation and technology progress that's going to continue to support the total factor productivity in the coming years.
Speaker: What about the debt level of the state-owned enterprises?
Speaker: Is that a risk to China's capital investment capability?
Speaker: Yeah, I'm sort of right.
Speaker: A very high debt level is going to constrain the SOEs
Speaker: investment in the future.
Speaker: For some SOEs, it's not about the investment.
Speaker: It's all about, maybe it's about the investment and in order to really consolidate the balance sheet.
Speaker: But the private sector and the private firms in China don't have the, you know, over-leverage issues.
Speaker: If anything, they're still under-leverage because the state banks has been reluctant to lend to them.
Speaker: So going forward,
Speaker: The further progress in financial reform, we believe is likely to increase the credit access to the private sector.
Speaker: That's likely to encourage the private companies to make the investment.
Speaker: That, in our view, is going to help to support the growth.
Speaker: Hongbin, thanks very much.
Speaker: My pleasure.
Speaker: So that's all from us today.
Speaker: Thanks to Prential Bhandari, Simon Wells, and Chu Hongbin for talking to us.
Speaker: From peers 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.
