Transcript
Speaker: The following podcast was recorded for publication on the 29th of June 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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Speaker: Hello, I'm Piers Bartle in London and a warm welcome to our weekly Macrobrief podcast.
Speaker: Today we're assessing the prospect for the global economy where the headlines have been dominated by high inflation and rising interest rates.
Speaker: We're going to be looking at whether those tightening cycles are nearly complete, the outlook for growth, and some of the upside and downside risks that might lie ahead.
Speaker: And to do that, I'm joined by Janet Henry, Global Chief Economist.
Speaker: Janet, welcome.
Speaker: Thank you, Piers.
Speaker: So Janet, on the face of it, looking at the data since your last Global Economics Quarterly, it will point to a fairly positive environment, activity up and inflation down.
Speaker: Yes, it's been an eventful time for financial markets, particularly interest rate markets, which have repriced significantly in the G10 economies.
Speaker: But yes, on the activity and inflation data, it has broadly at the global level been favourable.
Speaker: The global composite PMI, so the broad measure of activity, has continued to rise.
Speaker: And global inflation, which peaked last September, has gradually fallen.
Speaker: Still too high, but it has fallen.
Speaker: But we know it's never that simple.
Speaker: So what lurks below the surface of that data?
Speaker: No, you're right.
Speaker: There's always lots of moving parts to that overall global picture.
Speaker: So on the inflation side, inflation has peaked and certainly has fallen to a large degree.
Speaker: But for the most part, the fall on inflation has been driven by energy.
Speaker: Base effects have dropped out.
Speaker: You've got to remember it was in February.
Speaker: 2022 that we saw the big impact in energy coming through after Russia's invasion of Ukraine and in some emerging economies in particular, food prices have eased as well.
Speaker: But really, it's on the growth side that we've seen some surprises in the data at the start of the year.
Speaker: Even as recently as March and April, there was a lot of optimism about the China reopening.
Speaker: Clearly, that has stalled to a significant degree, particularly in the property sector.
Speaker: Europe.
Speaker: There was a lot of optimism on Europe as well, particularly on the tailwinds of lower energy prices.
Speaker: But the data that we saw earlier in the year, mainly held back by Germany, are certainly disappointed.
Speaker: It looks like the eurozone did actually have a mild recession around the turn of the year.
Speaker: So how does that work out in terms of your forecasts?
Speaker: Have you updated any of those?
Speaker: Well, in terms of our global GDP forecasts for 2023, it is unchanged.
Speaker: We've got global growth slowing from 3.1% last year to 2.3% this year.
Speaker: And for 2024, we're at 2.2%.
Speaker: So overall, our forecasts at the global level haven't changed.
Speaker: But I mentioned China and I mentioned the euro area.
Speaker: We've lowered those numbers a couple of points, but they have been offset mainly by Latin America.
Speaker: And it's not just Brazil and Mexico, though obviously they are the two big ones.
Speaker: We've seen upward revisions elsewhere in Latin America, even in the likes of Colombia.
Speaker: And the US hasn't disappointed.
Speaker: Once again, we have had a period of ongoing resilience in the US economy as well.
Speaker: So lots of moving parts, even though that global GDP forecast is unchanged.
Speaker: But the big upgrade in EM is really to India.
Speaker: We've revised up growth for this year from 5.1 to 6.1%.
Speaker: Just you mentioned the U.S. and I think that's an interesting hook in terms of a point that you make in your report around the fact that central banks and governments in some areas are working against each other.
Speaker: Can you expand on that?
Speaker: Well, central banks, while they have been relieved to some degree to see inflation gradually move lower, you've seen a lot more on the headline.
Speaker: In the US, headline inflation is now just running at 4%.
Speaker: So clearly heading in the right direction.
Speaker: But the inflationary measure that they focus on more is core PCE, which is still running at 4.7%.
Speaker: So still too high.
Speaker: So obviously they've been tightening policy to slow down demand.
Speaker: And so far you've seen that slowdown in demand coming through most clearly in the interest rate sensitive sectors.
Speaker: But governments and not just the US government, the European governments have been doing likewise, just in some different ways.
Speaker: some of the policies being undertaken by governments are adding to demand.
Speaker: So we've seen tax incentives to encourage investment in manufacturing.
Speaker: We've seen tax incentives.
Speaker: If you buy a car in the US, that's an electric car that's manufactured in North America, you get a tax credit of over $7,000.
Speaker: And in Europe, of course, you've had energy subsidies.
Speaker: So
Speaker: The ECB has actually been more vocal about the fact that the fiscal stance of European governments is not consistent with what they're trying to do on monetary policy in terms of taming inflation.
Speaker: The Fed has perhaps been a bit more diplomatic, but they are not denying that something that's happening on the fiscal side isn't necessarily consistent with slowing demand and returning inflation to target anytime soon.
Speaker: So it kind of feels reading the report, I felt a bit calmer.
Speaker: Are we nearly there?
Speaker: Yes, we are closer to the peak in interest rates and not too many changes to your global GDP forecast.
Speaker: So in a way, you sort of looked at that and said, well, perhaps we should focus on some upside and downside risks if we're thinking about the future.
Speaker: So maybe let's talk about the upside risks.
Speaker: Yes, we can.
Speaker: Clearly, there are some downside risks of those relating to leverage in particular.
Speaker: But on the upside, yes, we are seeing some continued good news in terms of input costs.
Speaker: We've obviously seen energy prices return to much lower levels and a whole array of other inputs for product markets, but for goods in particular.
Speaker: We have seen goods price deflation, particularly in the US, and gradually that's coming through a bit more quickly.
Speaker: In Europe, there's lots of discussion about profits, but if we see a quicker pass through of these lower input costs, then we may see lower goods price inflation come through more significantly.
Speaker: And there's even some on the labour market side.
Speaker: The US still has some way to go, but wage growth...
Speaker: has unusually slowed markedly from nearly 6% to below 4.5%, again, still too high, but somewhat remarkable that we've seen that with no big jump in unemployment, which is normally the case.
Speaker: Powell himself has talked about that being highly unusual this time.
Speaker: But the other ones include upside to risks to demand elsewhere in the world, other parts of emerging world, possibly China, possibly India.
Speaker: We've already had some upgrades or other parts of the emerging world.
Speaker: And let's not forget Japan.
Speaker: When we're thinking about financial markets, any sustained inflation and policy normalisation in Japan.
Speaker: would actually have some global implications as well.
Speaker: So there are some upside risks, which could be quite helpful from a supply side and an inflation perspective, as well as growth.
Speaker: There are other upside risks to growth that may actually add to inflationary pressures elsewhere as well.
Speaker: Now, we can't finish without talking about the downside risks.
Speaker: And obviously, one of the ones which struck me was the fact that we might be close to peak interest rates, but there are lag effects associated with tightening monetary conditions.
Speaker: So have we seen the worst of it or is that still to come?
Speaker: Well, we obviously in the US had a degree of turmoil in March with the regional banking crisis, and that situation has stabilised.
Speaker: But we know that anyone dependent on leverage, whether it's a company or a sector or households or indeed of its countries, some countries are heavily dependent on funding to some degree.
Speaker: The higher that interest rates go, or even if they don't continue to rise further, the longer they stay high for, then the more the strains are that feed through to those areas.
Speaker: And we are seeing some signs of delinquencies, not so much on the household side, particularly not in those countries like the US or, for instance, France and Germany.
Speaker: where mortgage markets are much tied into 20, 30 year mortgages, where we're seeing more pain on the household side is in some of those other G10 economies in particular that are more tied into variable rates like New Zealand, like Sweden, like Australia and in countries over time where refixes fall due like the UK, we'll see the speed.
Speaker: It is hard to gauge, given that we have an array of two-year, three-year and five-year fixes that will gradually be falling due over the course of the next few years.
Speaker: And also talking about other downside risks, the inflation genie, is it really back in the bottle or could it sort of spring some more surprises?
Speaker: Inflation is out of the bottle to some degree.
Speaker: And the challenge that central banks face from here clearly is not just having stopped it rising because they have.
Speaker: Inflation did peak in many places around that 10 percent or more level.
Speaker: in a number of countries, it's heading in the right direction.
Speaker: But in most countries, it's still around double, if not more, of their inflation targets.
Speaker: And while we have seen some good news on product markets, on goods prices in particular, they know that the risk of inflation persistence stems from labour markets.
Speaker: So that's why there's still this big focus on what's happening to the unemployment data and the wage settlement data, average earnings data, because once that inflationary side becomes entrenched, the risk is that central banks don't actually manage to get back to their inflation targets.
Speaker: And then the other risk related to that is the one that we focused on a lot more in our quarterly three months ago, the risk of financial stability dominance.
Speaker: that if these continued high interest rates add to financial stability risks, and there is a risk of more financial sector turmoil, that central banks may risk stopping tightening policy or reversing course more quickly than their inflation priorities might require them to do.
Speaker: Now, just to finish on, you make, looking at it slightly more medium term, this point about fiscal consolidation, this whole idea that governments actually, the level of their debt is significantly higher, the quantum of debt that they're having to service is higher, and therefore, really over the medium term, they have to start thinking about some serious fiscal reforms.
Speaker: I think that's an important point.
Speaker: Obviously, emerging market investors are used to this.
Speaker: They know that they have to focus clearly on what's happening in monetary policy, but also they focus a lot on fiscal debt, public sector debt, sustainability.
Speaker: For the advanced economies, this is a relatively new focus.
Speaker: And we had a touch of it, obviously, with the Eurozone crisis in the wake of the global financial crisis.
Speaker: But over the last few years, most Western governments have been quite supportive on the fiscal side in Europe and in the US now with tax incentives in particular being the new support for fiscal policy.
Speaker: But for governments, it is going to get harder.
Speaker: There's an array of new spending demands, whether it's for defence spending or economic resilience, and as well as energy transition in particular, and of course, the age related spending, health care and pensions.
Speaker: And all of these new spending demands are happening at a time when the debt stock has more than doubled since the global financial crisis.
Speaker: And of course, interest rates are higher.
Speaker: Hopefully they won't stay at these levels indefinitely, but they don't look like they're going to get back to where we were over the course of the decade before 2020.
Speaker: the pandemic.
Speaker: So that combination means that they are going to have to make some significant choices.
Speaker: What are they going to cut on the spending side?
Speaker: Or what are they going to increase on the taxation side?
Speaker: And clearly, some of those spending decisions they make may impact future human capital, future productivity, and may also have some inflationary consequences.
Speaker: Janet, thank you very much.
Speaker: Thank you very much, Piers.
Speaker: So that brings us to the end of this week's program.
Speaker: Thanks to all of you listening.
Speaker: We'll be back again next week with another edition of the Macrobrief.
