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: Hello and welcome to the latest edition of the Macro Viewpoint podcast.
Speaker: I'm Chris Brown-Hulmes, Managing Editor here at HSBC Global Research.
Speaker: And in this edition, I'm joined by economist Liz Martins to guide you through some of the key macro research our team has been producing this week.
Speaker: Liz?
Speaker: Thank you, Chris.
Speaker: Coming up, we'll be looking at the economic impact of COVID-19 in both Europe and Asia with economists Chris Hare and Joseph in Calcaterra.
Speaker: Joseph has just downgraded his forecast in a number of Southeast Asian economies, including Vietnam, where virus cases have been surging.
Speaker: Liz, you're going to be first in line because we want to discuss today's meeting of the Bank of England and those expectations that inflation here in the UK will hit a higher than expected peak of around 4%.
Speaker: This podcast was recorded for publication on the 5th of August 2021.
Speaker: All of our disclosures and disclaimers must be viewed on the link attached to the media player.
Speaker: Liz, let's start with the Bank of England.
Speaker: Policymakers have just concluded their monthly meeting.
Speaker: What were the headlines from that and were there any surprises?
Speaker: Well, one thing that was a surprise to no one was that bank rate was kept on hold at 0.1%.
Speaker: Slightly more surprising, perhaps only one member of the committee voted for an early end to the QE programme.
Speaker: That was Michael Saunders.
Speaker: We had speculated that perhaps his colleague Dave Ramsden would join him.
Speaker: He didn't.
Speaker: in the end.
Speaker: And the other headlines were, of course, the Bank of England's new forecast for growth, unemployment, inflation, and they laid out some guidance on how monetary policy would be tightened in terms of the sequencing between rate rises and balance sheet reduction.
Speaker: So quite a lot to process today.
Speaker: So let's take those in order then.
Speaker: What were the bank's new forecasts for growth and inflation?
Speaker: Well, the growth forecasts were actually quite bullish.
Speaker: So the Bank of England has kept its forecast for 2021 GDP growth at seven and a quarter percent.
Speaker: We'd expected some of that to be revised down given the Delta wave, the so-called ping-demic that's keeping people away from work.
Speaker: and a kind of apparent loss of momentum into the summer.
Speaker: The Bank of England obviously doesn't subscribe to that because they left their 2021 forecast unchanged and revised up their growth forecast for 2022 and 2023.
Speaker: Now, in terms of inflation, you mentioned at the beginning, they now see the peak of near-term inflation rising to 4%, so double the bank's 2% target.
Speaker: But once again, they still say,
Speaker: This is a transitory phenomenon.
Speaker: It'll come back to target so that actually three years out, it's standing at 1.9% year on year.
Speaker: So it's essentially saying that the amount of tightening that's in the market curve at the moment, which is two rate rises, will be enough.
Speaker: A modest amount of tightening, they called it, will be enough to bring inflation back below target.
Speaker: And on the sequencing of tightening, what did the bank have to say about that?
Speaker: So first of all, the bank has confirmed that the primary policy tool is bank rate.
Speaker: So rate rises would come before balance sheet reduction, not the other way around, as some had speculated.
Speaker: But the bank does want to reduce the balance sheet at some point.
Speaker: And it told us how it might want to do this.
Speaker: So first of all, it said when bank rate gets to 0.5%, at that point, in theory, all being well with market conditions,
Speaker: it would cease reinvesting the proceeds of maturing bonds in its QE portfolio.
Speaker: But actually went further than that.
Speaker: And it said, actually, when Bankrate gets to 1%, it would actively or consider actively selling bonds into the market.
Speaker: However, we should put that into context.
Speaker: The market profile it was working with doesn't see Bankrate getting to 1% at any point in the forecast period.
Speaker: We're not forecasting it ourselves.
Speaker: So that latter step does seem some way away.
Speaker: And how does that compare with what our own forecasts are for tightening?
Speaker: So our own forecasts are slightly more hawkish than those of the market.
Speaker: We have the first 15 basis point rise in bank rate in May of 2022, and then another 25 basis point rate rise in November.
Speaker: So that would get us to 0.5% by the end of 2022, opening the door in theory for the bank to cease reinvestment of the QE programme.
Speaker: Thanks, Liz.
Speaker: Let's turn to Europe now and pandemic-related developments there.
Speaker: Economist Chris Hare joins us to talk about the latest COVID-19 tracker.
Speaker: Chris, welcome to the podcast.
Speaker: You say there are reasons for cautious optimism around developments on the COVID front in Europe.
Speaker: Why is that?
Speaker: Yes, well, with regard to cases across the continent, I think there is certain scope for optimism.
Speaker: So if we look at some of those countries that have been most affected by the Delta variant of COVID-19, I'm thinking in particular about the UK, Spain and the Netherlands.
Speaker: Well, over the last week or two, case numbers in those countries have fallen pretty sharply, sharply, more sharply than many had expected.
Speaker: And even in those other countries which are still seeing rises in COVID cases,
Speaker: the pace of those increase starts is starting perhaps to be slowing down.
Speaker: And Italy and France are examples of that.
Speaker: So when we're looking at cases, perhaps some of the numbers looking a little bit better.
Speaker: Hospitalisations still remain very low relative to previous waves of Covid.
Speaker: That's given vaccine rollouts.
Speaker: So overall, I think slightly better news over the last week or two.
Speaker: And turning to the economic impact, there are signs, aren't there, that growth's actually peaking in Europe now?
Speaker: Yes, well, following the sort of reopening upswing, it's possible that we're seeing a peaking in growth on the continent.
Speaker: The good news here is that in the second quarter of this year, GDP growth came in at 2%, and that was about half a percentage point stronger.
Speaker: than markets expected, it does seem like we've seen a pretty decent reopening bounce.
Speaker: But if you drill down less into the quarterly data, but more into the monthly or even the higher frequency weekly or daily data, it looks like some of those indicators are starting to level off.
Speaker: Now, a couple of things might be going on here.
Speaker: First, it's perfectly natural to think that after that reopening bounce,
Speaker: activity should start settling down.
Speaker: Or second, perhaps more concerningly, we might be seeing some of the more disruptive effects from the Delta variant of COVID-19.
Speaker: And that's one of the reasons why some of the slightly better news that we're having with regards to the COVID backdrop might bode better with regards to the near term growth outlook.
Speaker: Now, your biggest concern really at the moment is inflation.
Speaker: Why is that?
Speaker: Yes, well, inflation is now rising in Europe.
Speaker: This has certainly been the case in the US and in the UK where we've seen some significant upside surprises in inflation rates.
Speaker: And of course, as Liz mentioned, the Bank of England is now forecasting 4% at UK inflation in the near term.
Speaker: Now, in general, this isn't the kind of story that's been shared in the Eurozone.
Speaker: If you look at Eurozone core inflation,
Speaker: Well, it was down at 0.7% year on year in July.
Speaker: But Germany is quite interesting because in Germany, the harmonized inflation rate climbed up to 3.1% in July.
Speaker: Now, some of that's relating to base effects on energy prices and VAT changes.
Speaker: But also a lot of companies around Europe and in Germany in particular are really concerned about major supply shortages in terms of manufacturing inputs, higher shipping costs, possible reopening effects and broader supply demand imbalances in those service sectors that have recently reopened.
Speaker: And those sorts of things are generating some inflationary pressure.
Speaker: Now, this is particularly the case in Germany.
Speaker: We think broadly speaking, this is a near term phenomenon, but perhaps it poses some of those broader questions about upside inflation risk, which might linger on over the coming months.
Speaker: And in particular, it's certainly a concern to businesses who are suffering from these higher costs.
Speaker: And what does this mean for monetary policy?
Speaker: So higher inflation will be of concern to central bankers across Europe.
Speaker: And indeed, this is a global phenomenon.
Speaker: But
Speaker: Our central view is that this strength in inflation that we are indeed seeing in Germany to an extent is mostly likely to prove temporary.
Speaker: These are reopening effects related to COVID-19.
Speaker: These are temporary shipping costs that are very elevated at the moment.
Speaker: But over the medium term, you know, we think those cost pressures are likely to fall away.
Speaker: And in a slight contrast to what we're seeing in the UK, you know, we think that in the eurozone, inflation pressures in an underlying sense are still very soft.
Speaker: such that a medium term inflation forecasts are materially below the 2% mark.
Speaker: And as a result of that, we think monetary policy is going to stay very dovish.
Speaker: So with regards to the European Central Bank, now the deposit rate is down at minus half percent.
Speaker: We see that remaining the case for the foreseeable future.
Speaker: And we see an ongoing set of net asset purchases under quantitative easing.
Speaker: So there's a contrast here with underlying inflationary fundamentals, we think set to remain softer in the Eurozone than elsewhere.
Speaker: that's going to keep central bankers more dovish.
Speaker: Chris, thanks very much for your time today.
Speaker: Thank you.
Speaker: We turn to the other side of the world now, to Southeast Asia.
Speaker: The ASEAN region has grappled with some of Asia's most debilitating COVID-19 outbreaks.
Speaker: I spoke with our chief ASEAN economist, Josephine Calcutta, earlier, and I started by asking him why the situation this year has become so challenging.
Speaker: You know, really the main issue was that most countries struggled to start their large scale vaccination programs earlier this year.
Speaker: And as a result, the recovery prospects for Southeast Asia are really lagging behind the Western economies or other economies that were able to secure vaccines.
Speaker: Now, in many cases, you know, there was limited supply of vaccines earlier in the year.
Speaker: There were also some delays of production for key vaccines.
Speaker: So it's really not policymakers fault.
Speaker: But ultimately, the fact that most of the region has very low levels of vaccination right now is really leaving the populations highly sensitive to the Delta mutation, which is spreading like wildfire across Southeast Asia.
Speaker: And that's ultimately what's led to the latest lockdowns and restrictions, which have derailed economic recovery.
Speaker: And how severe have the lockdown restrictions been in response to the more recent wave of infections?
Speaker: Yeah, so every single country in Southeast Asia has imposed some form of restriction or lockdown.
Speaker: In most cases, it's been the most severe form of restriction that policymakers have in the toolbox.
Speaker: Now, I think the impact has probably been the largest in Malaysia and Vietnam.
Speaker: Most Malaysians have seen over two months of MCO lockdown movement control order.
Speaker: And ultimately, not only has that dented consumption in retail industries,
Speaker: but it's also impacted the manufacturing sector, which wasn't always the case in previous waves.
Speaker: For example, in Selangor State, for two weeks in July, we saw a virtual halt to all manufacturing, including electronics and biomedical.
Speaker: In Vietnam, a similar situation.
Speaker: In addition to very severe lockdowns on mobility for residents, there's also been a significant interruption to manufacturing activities.
Speaker: For example, in the South, many textile firms have stopped operations,
Speaker: And in the North, key electronics producers, such as Samsung, for example, have in many cases have their capacity to kind of deal with the restrictions that are in place.
Speaker: So ultimately, this not only impacts, of course, growth in Southeast Asia, but it will have to some degree an implication for supply chains.
Speaker: And even consumers in the West may see delays and interruptions in terms of the goods that are available, given the important role that in particular Vietnam plays
Speaker: in consumer electronics and apparel.
Speaker: Now these disruptions have had a material impact on your growth forecast.
Speaker: What adjustments have you made?
Speaker: We've made adjustments across the board to our GDP forecast.
Speaker: In Indonesia, we downgraded our 2021 outlook from 4% to 3.5%.
Speaker: In Malaysia, from 4.1% to 3.6%.
Speaker: But note that in Malaysia, we had already downgraded that forecast in June when these lockdown measures were first imposed.
Speaker: So
Speaker: Probably Malaysia is where we've seen the largest deterioration in growth prospects over the last two months.
Speaker: Now, in this report, we also made significant downgrades in Thailand and Vietnam.
Speaker: In Thailand, from 2.1 to 1.3.
Speaker: In Vietnam, from 6.1 to 5.1.
Speaker: And again, that's quite large given the prospects that we saw earlier.
Speaker: And what policy tools do ASEAN nations have at their disposal at the moment?
Speaker: And how do the sorts of inflation concerns that we have here in Europe play into your thinking?
Speaker: So we do not think that there's any risk to inflation in Southeast Asia.
Speaker: In fact, if anything, there's going to be risks of more monetary policy easing.
Speaker: It's not our base case forecast, but in Thailand, for example, if these current restrictions were delayed or extended until the fourth quarter,
Speaker: you may see the BOT entertain the possibility of a rate cut in the end of September.
Speaker: In Indonesia's case, we think that the central bank will increase its bond purchases slightly in the coming months, given subdued foreign inflows.
Speaker: And in other countries, in just about every country, we've also seen fiscal policy become a bit more assertive.
Speaker: So deficits have actually creeped higher across the region, even though there's increasingly signs of credit rating concerns.
Speaker: But by and large, we think that fiscal policy still remains the best way to react to lockdowns.
Speaker: And actually, we expect imminent fiscal packages in both Thailand and Malaysia.
Speaker: So putting all this together, what is your view on recovery prospects for the region?
Speaker: Well, it really depends on vaccines.
Speaker: So I mentioned earlier that the vaccine prospects don't look great in the short term.
Speaker: But the good news is that both Singapore and Malaysia will most likely get to a 70% vaccination coverage level this year.
Speaker: And that means that these economies can actually reopen more sustainably.
Speaker: So we have better visibility that policymakers can actually avoid lockdowns in the future, even with new mutations, given that there will be such a large level of vaccine protections.
Speaker: But unfortunately, we can't say the same for economies like the Philippines, Thailand, Vietnam, Indonesia, where it's not going to be until 2022 until we see that level of likely vaccination coverage.
Speaker: Now, ultimately, what matters is that when economies do reopen, that there still is fiscal policy room to spur the recovery.
Speaker: And ultimately, we think the most important consideration is still investment policies and infrastructure.
Speaker: We know that both in the Philippines and Thailand, that's probably the best way for governments to restart those economies.
Speaker: So the key is to preserve some fiscal space to ensure that there is that ability to jumpstart the economy when we do see the virus risks start to subside next year, hopefully.
Speaker: Josephine Calcaterra, our chief ASEAN economist, talking about his latest report, ASEAN Perspectives, Assessing the Damage.
Speaker: And Liz, that brings us to the end of the Macro Viewpoint podcast for this week.
Speaker: Special thanks to economist Chris Hare and Josephine Calcaterra for joining us.
Speaker: From Liz and me, thanks very much for listening.
Speaker: We'll be back soon.
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.
