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 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 Chris Brown-Humes.
Speaker: Hi Piers, with the COVID-19 picture improving across Europe, we get the key takeaways from the latest ECB meeting with Simon Wells, Chief European Economist.
Speaker: Maret Ulgan, Global Head of Emerging Market Research, explains why Europe's recovery, not the US, could be a surprising catalyst for EM assets.
Speaker: And James Pomeroy, Global Economist, looks at what Beijing's shift to a three-child policy could mean for China's population challenges.
Speaker: This podcast was recorded on Thursday the 10th of June 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.com.
Speaker: Here in Europe, the ECB has just held its latest meeting, with the focus this month being the outlook for the bank's emergency bond-buying programme.
Speaker: Let's get the details from Simon Wells, Chief European Economist.
Speaker: So, Simon, there were some expectations going into the ECB meeting that they might start to taper their asset purchases.
Speaker: What did they decide to do?
Speaker: Well, there was some expectation a few weeks ago.
Speaker: This was going to be a key meeting where they revisited the decision made in March to conduct asset purchases at a significantly higher pace.
Speaker: I think perhaps going into the meeting, those expectations had come off a little.
Speaker: And indeed, in the event, the governing council decided to maintain pandemic emergency purchase programme purchases at a significantly higher pace for another quarter.
Speaker: So there was no tapering.
Speaker: And similarly, there was no changes in any other policy instruments or the statement.
Speaker: And Christine Lagarde said at the press conference that what had been required this time was a steady hand on policy.
Speaker: And what were the reasons then you think that they stayed with things as they are?
Speaker: Well, I think, first of all, had they tapered now, there would have been a risk of a further tightening in financial conditions, which is something the ECB has pledged to prevent.
Speaker: It might also have undermined fiscal support, particularly for the most indebted and high deficit countries if the ECB were to scale back borrowing.
Speaker: And of course, the medium term inflation forecast of the ECB is still well below target.
Speaker: So you put all that together.
Speaker: And despite a stronger recovery, it clearly concluded the steady hand was the right approach in June.
Speaker: That's an interesting point about inflation, because as we know, inflation is surging in the US.
Speaker: Why is it so much more subdued in Europe?
Speaker: Well, inflation is rising in Europe, of course, and there are some common factors there.
Speaker: Supply disruption, input costs are rising in Europe very rapidly, as they are in the United States.
Speaker: And similarly, given the improved COVID situation in Europe, demand is starting to pick up as economies unlock.
Speaker: I think the major difference is in the size and nature of fiscal stimulus.
Speaker: The US stimulus has checks going directly to households, which are increasing spending power.
Speaker: By contrast, the eurozone fiscal stimulus is smaller, but more focused on investment and in any case is going to ramp up more next year and have a bigger impact on growth next year than it does this year.
Speaker: We also got some new ECB economic forecast today.
Speaker: Were there any surprises there?
Speaker: There were some pretty big revisions to growth, actually, Chris.
Speaker: 2021, 2022 were both revised up 0.6 percentage points.
Speaker: So we now have 4.6% growth this year and 4.7% next year projected by the ECB.
Speaker: 2023 was unchanged at 2.1%, but this still, of course, implies a faster recovery and importantly, considerably less lost output at the end of the ECB's forecast.
Speaker: And it has changed its balance of risk to be balanced around these higher projections, whereas previously risks had been skewed to the downside.
Speaker: In terms of inflation, as you might have expected, given our previous discussion, near term inflation was was revised up.
Speaker: But perhaps more significantly, the ECB nudged up by point one, its forecast for its measure of core inflation.
Speaker: And that reflects a judgment of less economic slack as a result of this faster growth recovery.
Speaker: So finally, Simon, where does the ECB go from here?
Speaker: Well, Christine Lagarde calls it a steady hand on policy, but I think it's probably the line of least resistance, given the hurdle for policy action in either direction.
Speaker: On the one hand, tighter financial conditions and a still sub-target inflation forecast.
Speaker: might point to more policy easing.
Speaker: But the ECB doesn't want to do this because it would be worried about having to increase its PEP envelope or run into political or legal constraints.
Speaker: And so the hurdle for further easing is pretty high.
Speaker: On the other hand, with the economy recovering more sharply, there's arguably less need for the emergency policy settings.
Speaker: And given some of the constraints and concerns about balance sheet expansion, it's clear that some on the governing council want to do less.
Speaker: But given also the need to offer fiscal support, given that inflation forecast, the hurdle for tapering is clearly quite high as well.
Speaker: So for now, the ECB perhaps does it best when it does nothing at all, but it can't do that forever with the PEP programme scheduled to expire next March.
Speaker: We think it will want to avoid a cliff edge in purchases, not least to offer support for governments fiscally.
Speaker: And we think it will revert to its normal asset purchase program, perhaps a more flexible version and upping the monthly purchase rate, possibly from 20 billion to 40 billion per month.
Speaker: As for the June meeting, though, it was a case of no taper and no tantrums.
Speaker: That's great, Simon.
Speaker: Thank you very much for your time today.
Speaker: Thank you.
Speaker: It's been a challenging start to the year for emerging markets, which have been hampered by continued COVID-19 headwinds.
Speaker: And with EM assets underperforming versus developed markets on a relative basis, where do we go from here?
Speaker: Murad Olgen is our global head of emerging markets research.
Speaker: Murat, welcome to the podcast.
Speaker: Thank you very much.
Speaker: So Murat, you've just published your latest update on global emerging markets.
Speaker: And clearly, investors have been very focused on very strong recovery in the US and some of the inflation expectations.
Speaker: What's the impact on emerging markets from this?
Speaker: That's very true.
Speaker: I mean, there's a lot of focus on the US economy and its inflation dynamics.
Speaker: And also the global reflation narrative since the beginning of the year has moved very swiftly towards emphasizing inflation rather than growth.
Speaker: And we sort of spent most of the first quarter to price in the data volatility for the rest of the year.
Speaker: And in the meantime, global upturn seems more sequenced than synchronized.
Speaker: So this backdrop generates some mixed blessings for emerging markets.
Speaker: given that EM, excluding Asia, is an underperformer in recovery.
Speaker: There are various reasons for that, like COVID-19 headwind still there in certain parts, disappointing vaccination performance and lack of expansionary policy space.
Speaker: So a relatively mixed outlook, but still the growth-sensitive assets have done relatively well so far this year.
Speaker: But overall, EM actually has underperformed EM.
Speaker: Now, you say that your models are telling you to maybe take the focus away from the US and look elsewhere.
Speaker: Where would that be?
Speaker: Correct.
Speaker: So we asked ourselves the question, what's next for EM?
Speaker: And to find out, we actually updated our models from last year that looked at drivers of EM returns.
Speaker: But this time we split the global factors into two regions, the US and the Eurozone.
Speaker: And as opposed to the US, Eurozone's stronger economic activity is actually having pretty positive impact on emerging markets and also loose financial conditions in Eurozone is also positive for emerging markets.
Speaker: That probably reflects Eurozone's role as the largest trading partner and capital provider for emerging markets.
Speaker: And also Europe domiciled funds are pretty big investors in EM as well.
Speaker: Overall, any changes to your outlook for emerging markets?
Speaker: Not really.
Speaker: We've been recommending growth-sensitive stories since the beginning of the year.
Speaker: And in the second quarter, we moved our focus more to commodity narrative, commodity stories.
Speaker: We still stick to our guns and we still believe there are opportunities in more growth-sensitive assets and commodity-linked stories in particular.
Speaker: All right.
Speaker: Thank you very much.
Speaker: Thanks for having me.
Speaker: Now, we finish up this week in China, where President Xi Jinping has just approved a policy to allow couples to have up to three children instead of two.
Speaker: So what impact will this relaxation have on China's demographics?
Speaker: Let's hear from economist James Pomeroy, who's one of our global coordinators of demographics research.
Speaker: James, it wasn't that long ago that China only had a one-child policy.
Speaker: So why are we seeing this new change?
Speaker: So a couple of things have happened in China.
Speaker: Firstly, you've had the latest census showed a big drop in the birth rate over the course of the last decade.
Speaker: But also over the course of the past year, things may have got even worse given the pandemic and the drop in births.
Speaker: in China.
Speaker: So clearly, Beijing is a little bit concerned about some of the demographic projections for China, both in terms of total population and in working age population in the coming years.
Speaker: So what impact is this likely to have on the country's demographics?
Speaker: So there's two
Speaker: to that question, Chris.
Speaker: Firstly, we have to think about is this likely to mean we get an upturn in the fertility rate?
Speaker: Now, we don't think that is necessarily likely, partly because of looking at other parts of Asia.
Speaker: You can see in many places you have much lower fertility rates, so that suggests that things could drop even further.
Speaker: But equally in China itself, the fertility rate has been running well below two, even when couples can have two children.
Speaker: So it seems unlikely that this is the policy that's been holding that back.
Speaker: It's much more likely there are economic concerns, particularly for a younger generation and social change in terms of the number of children that couples are choosing to have.
Speaker: And those trends are unlikely to be changed by this policy move.
Speaker: But also it's important to remember that a lot of the demographic projections are using what's almost already happened in terms of birth rates.
Speaker: So if you think about the working age population in China, that's not going to be affected until maybe 20, 30 years down the line based on any policy change.
Speaker: And if you look at what's already in those projections, it's quite likely that the working age population in China drops by about 100 million people by the time we get to 2040.
Speaker: And if the fertility rate stays low, which we think it will, that could mean a further 100 million fewer workers in China by the time you get to 2050.
Speaker: So it seems unlikely these fertility rates do rise.
Speaker: But even if they do, you wouldn't really notice the impact for another 20 years or so.
Speaker: So what's that going to mean for Chinese growth?
Speaker: Well, you look at this and you think that's bad news because clearly you've got a shrinking working age population.
Speaker: That's likely to mean a drag to potential growth.
Speaker: But it is important to stress there are a lot of offsetting factors, particularly in terms of the productivity of that workforce.
Speaker: and which can continue to be improved, notably through continued urbanization.
Speaker: There's still a lot of that to run in China.
Speaker: But most importantly, in terms of the skills of the labor market, a lot better education rates, more people going to university, improvements in technology, all of those things should help to improve labor productivity.
Speaker: And this is why we still think that China's potential growth rate can stay above six and a half percent.
Speaker: James, that's a great summary.
Speaker: Thank you very much for your time today.
Speaker: Thank you.
Speaker: That's it for this week.
Speaker: Thank you to our guests, Simon Wells, Meret Olgan, and James Pomeroy.
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.
