Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends and opportunities.
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Speaker: And now onto today's show.
Speaker: Hello and welcome to the Macrobrief from HSBC Global Research.
Speaker: If the final days of 2024 are anything to go by, 2025 will be filled with twists and turns on the global stage.
Speaker: For a glimpse of what may lie ahead, we're joined in London by our Chief Global Economist, Janet Henry.
Speaker: Janet, welcome.
Speaker: Thank you, Piers.
Speaker: So before we look at the outlook for 2025, maybe a recap on 2024, maybe three big takeaways.
Speaker: I guess one of them would be the strength of the US economy again.
Speaker: Again, you're absolutely right, Piers.
Speaker: I mean, you know, we've never been in the recession camp for the US, but I think even in 2024, more people moved away from their kind of hard landing view.
Speaker: But, you know, even for us, it has been a case of we persistently edged up our forecast further.
Speaker: for the US.
Speaker: We have seen that ongoing growth resilience.
Speaker: But I think one of the other features of the last year has been recently some of those other clear out performers like India, which is another one that we had revised up, has actually slowed a little.
Speaker: And Poland would be another one, which has recently slowed a little bit more materially.
Speaker: But some of the other things that have evolved in the global economy are
Speaker: ongoing geopolitical uncertainty.
Speaker: And of course, it was that massive election year.
Speaker: And certainly in the advanced economies, we saw a few administrations being replaced, where countries where inflation and immigration were particularly big concerns, we saw less change in the emerging economies.
Speaker: So we're going to come on to the
Speaker: fiscal outlook that is emerging from these new administrations.
Speaker: But firstly, in terms of rates, that continues to be a key determinant.
Speaker: And in that respect, is the term sticky inflation something that you've had to take into account?
Speaker: Yes, it is.
Speaker: Certainly inflation recently has been more persistent.
Speaker: Inflation came from a very high level, closer to targets.
Speaker: In many countries, certainly the advanced economies, it fell from at or close to 10% and then fell to 3% or so relatively swiftly.
Speaker: But in many ways, those early gains, improvements were the easy bit.
Speaker: Lower energy prices, global supply chains increased.
Speaker: improving more materially.
Speaker: And recently, the disinflation has slowed.
Speaker: You've obviously had more extreme examples like Brazil that's actually had to resume monetary tightening with some pretty hefty rate rises.
Speaker: And we expect that to continue in early 2025.
Speaker: But in other economies, it's been sticky.
Speaker: We've slowed down the prospect of rate cuts.
Speaker: And more recently, of course, even the Federal Reserve
Speaker: has highlighted the disappointing progress on inflation over the course of the last few months.
Speaker: The fact is some of those factors that are determined domestically, like the amount of labour market slack, the fiscal position, the productivity performance, all of these things matter for inflation.
Speaker: And actually, that's where it's been somewhat sticky.
Speaker: So let's get on to the fiscal position and let's start with the US.
Speaker: Obviously, a major change post the election of Donald Trump.
Speaker: Well, that's what we have to wait and see, Piers.
Speaker: It is a year of promise and it's not just in the US that we've had promises of big policies coming through from the new administration.
Speaker: We've obviously had some promises from China on the policy front as well.
Speaker: So what we do know is clearly that the Trump administration will want to extend the tax cuts that are due to expire at the end of 2025.
Speaker: for households in particular, and they'll be looking to use the budget appropriation process in order to do that.
Speaker: But that will relate to an extension in 2026.
Speaker: And during the election campaign, there were promises of corporate tax cuts, perhaps as low as 15%.
Speaker: That would seem somewhat ambitious.
Speaker: Even though the budget appropriation process will be used
Speaker: You do have some Republicans in the clean sweep administration that do think deficits matter.
Speaker: And while they may want to see corporate tax rates ideally come down at least a percent or two, they want some spending cuts in return from them.
Speaker: So it is still highly uncertain whether we get a very small fiscal stimulus.
Speaker: We think if we get anything in 2026, it might perhaps be a smaller fiscal impulse in the U.S.,
Speaker: than perhaps a lot of market participants have been hopeful for in the run up to the election.
Speaker: And what are we saying about tariff increases?
Speaker: Well, of course, President-elect Trump has highlighted that he does believe that tariffs could actually provide the US with additional government revenues.
Speaker: But actually tariffs amount to something of a tax increase.
Speaker: it will push up import prices.
Speaker: We really have no idea of the scale of tariffs, the timing of tariffs, but we do know that importers are already preempting them.
Speaker: We fully anticipate a degree of front loading of some shipments.
Speaker: But when tariffs are applied on incoming products, companies can see how much they're going to pass on to consumers.
Speaker: how much they're going to absorb or have to absorb in profit margins.
Speaker: And indeed, we're seeing a stronger dollar at the moment.
Speaker: So actually, some of the impact of tariff increases could be offset by a stronger currency.
Speaker: But broadly speaking, putting all of that together, it points to a higher inflation rate than we would have had for a lower growth rate than we would have had.
Speaker: It's a worsening in the growth inflation trade-off.
Speaker: So a lot of uncertainty in terms of the outlook for the US, but the picture is also very uncertain in Europe with two of the major economies, Germany and France, facing challenges.
Speaker: How is that going to play out?
Speaker: Well, it's certainly going to be an interesting year.
Speaker: I mean, actually, the eurozone itself did not too badly at all in the third quarter.
Speaker: Better than feared, despite a dismal industrial performance.
Speaker: But GDP actually surprised on the upside in the third quarter,
Speaker: But the recent data has been a lot softer and it is the largest economies and particularly Germany that's been very, very weak.
Speaker: Germany will head to the polls in February and it's quite clear that we probably will get a new leader in Germany and it will be another broad coalition that takes hold.
Speaker: And then we will see what happens at the European level, whether there is going to be any scope for more
Speaker: any kind of joint borrowing, whether there's going to be any scope for more public investment or indeed industrial policy, perhaps taking a leaf out of President Biden's book in terms of incentivising industry and industrial investment.
Speaker: But as you mentioned, you know, it's not just Germany.
Speaker: We've had some uncertainty in France as well, particularly in relation to
Speaker: to the fiscal side in France.
Speaker: And we have to see what happens on the budget.
Speaker: And it is a possible scenario that France too could potentially be heading to the poll for parliamentary elections before the end of 2025.
Speaker: There was a chart in your latest Global Economic Quarterly that really caught my eye, which was the one on French government bond yields being on a par with Greece.
Speaker: How did that happen?
Speaker: Well, I think a lot of that is something of a fiscal risk premium.
Speaker: I mean, I should say Greece has actually been one of the growth outperformers, admittedly coming from a lower base.
Speaker: But actually, if you look at where the level of GDP is in Greece relative to pre-pandemic,
Speaker: It's actually increased by more than even the US.
Speaker: You know, it really has been a strong growth performance, but it still has a very high debt level.
Speaker: But there has been a real change in the debt dynamics in Greece, even though debt levels are very high.
Speaker: Whereas clearly, if you've got a mixture of large budget deficits and political uncertainties that's led to a stage where you can't actually pass a budget and even deliver tightening if you wanted to, then it's
Speaker: Obviously, financial markets have to price in some kind of risk premium into the outlook for OAT yields in France.
Speaker: One of the features of 2024 was, of course, the disappointment around the pace of the Chinese economic recovery.
Speaker: Do you see the recent government measures addressing this?
Speaker: Will consumer spending start to recover?
Speaker: Well, you're right.
Speaker: 2024 was a bit disappointing and we did see a little bit more in the way of policy, but it was quite incremental.
Speaker: It was not a big bazooka by any means.
Speaker: And we have seen a bit more urgency on the policy front recently.
Speaker: in recent months, both because domestic growth has been so weak, despite quite strong industry and quite strong exports, actually, globally.
Speaker: But the recent announcements are that more is going to follow.
Speaker: We had the specific announcement of the debt swap, which reduced financing costs for local governments.
Speaker: So that should allow them to do the more
Speaker: in the way of fiscal support.
Speaker: And we have seen some impact, although it may already be starting to falter, in terms of some trade-in schemes.
Speaker: We did see a bounce in spending on household goods.
Speaker: So I think what will be important is that the policy stimulus continues to come through.
Speaker: So there has been a promise, but we wait for the announcements of a loosening of monetary policy and more on the fiscal side.
Speaker: That should help to bolster consumer confidence, which has edged a little bit higher.
Speaker: But also we will need to see a broader improvement in the economy to lift employment prospects.
Speaker: One of the challenges in China is the very high household savings rate and the fact that is weighing on consumer confidence is employment prospects.
Speaker: So the policy stimulus needs to continue and it appears maybe in anticipation of potentially larger tariffs being imposed on China that maybe they are readying a little bit more on the policy stimulus front to ensure that they do meet their growth targets in the year ahead.
Speaker: One economy that seemed a little bit out of sync has been Japan.
Speaker: What is our stance there?
Speaker: Well, it's interesting because, you know, in our latest set of global forecasts, because we did raise our global inflation forecast, not a lot, but it was all driven by the advanced economies.
Speaker: And within that was actually Japan.
Speaker: You know, we made a significant upward revision to our Japan forecast.
Speaker: Things are changing, have been changing in Japan.
Speaker: They have been starting to normalise policy.
Speaker: I don't think anyone's calling it tightening.
Speaker: You know, these are not big hikes, but we do look for further normalisation of rates.
Speaker: And we see rates rising in the course of 2020, 2025.
Speaker: Obviously, they stayed on hold in December.
Speaker: But we think by the end of 2025, you could see the Bank of Japan lift rates up.
Speaker: to 1%.
Speaker: So not high, but a long way above the negative rates that we became used to for a very long time.
Speaker: So you mentioned your forecast.
Speaker: Maybe just recap on what your global economic forecast and inflation are now.
Speaker: Our global inflation forecasts have actually risen from 3.3 to 3.4%.
Speaker: But as I say, that did all come from the advanced economies that rose from 2.3 to 2.5.
Speaker: But the emerging market aggregate was the interesting one because China has had low inflation.
Speaker: And that reflects the weakness of demand, but also a different food inflation story.
Speaker: You know, one of the things we talk about in our global economics is the impact of food inflation.
Speaker: In India, that's had a big impact.
Speaker: In China, you've had food disinflation.
Speaker: And actually, we've lowered the China forecast from 1.1 to 0.6 for this year.
Speaker: But for the emerging markets, that was offset to what's been a hefty revision to our inflation forecast for Brazil.
Speaker: So to finish, Janet, looking at 2025, what are the big events that you think might change your outlook?
Speaker: I guess one of them would be when we see the inauguration of President-elect Donald Trump, whether some of the statements he's made on tariffs and other economic policy are actually implemented?
Speaker: Absolutely.
Speaker: Absolutely.
Speaker: That is probably the single key area of focus soon after the inauguration.
Speaker: So I think we will hear some noises on tax cuts, but whatever happens through the budget appropriation process.
Speaker: That will more impact in 2026, even though market participants will obviously have to price it into their expectations a bit sooner than that.
Speaker: On the tariffs, he can actually do quite a lot immediately through existing legislation and executive powers.
Speaker: So we look for how big they are.
Speaker: what products they extend to, because, you know, even during the first Trump administration, there are a large number of Chinese products, about a third of them, that did not get elevated tariffs.
Speaker: So it'd be interesting to see what happens there and indeed to the rest of the world.
Speaker: And then...
Speaker: how the rest of the world retaliates, because it is through retaliation that you might therefore get some price effects elsewhere in the world as well.
Speaker: And of course, in all of this, we should find out how much of the tariffs will be used as a bargaining tactic to achieve other
Speaker: policy priorities in the US, whether that relates to drug or border control and market access and such like.
Speaker: But it's not just what we hear from the incoming administration in the US.
Speaker: We'll still be looking very closely on what is happening in the broader economy, particularly in regard to labour markets.
Speaker: Broadly speaking, employment growth has been slowing down in many places, but labour markets are still tight.
Speaker: And, you know, we've got some conflicting labour market data in the US and the UK at the moment, with some suggesting there's a bit more slack emerging and some are not.
Speaker: So, you know, that will have implications for growth.
Speaker: Is growth going to be weaker or stronger?
Speaker: And indeed, whether if tight labour markets are still going to keep inflation a bit sticky.
Speaker: And then the other area I would highlight is the evolution of the major conflicts that are underway in the world.
Speaker: It's impossible to say how they will progress from here, but I think there is a sense that the status quo can't persist forever.
Speaker: Janet, thank you very much.
Speaker: Thank you very much, Piers.
Speaker: That is all the time we have today.
Speaker: Special thanks to Janet Henry for joining us.
Speaker: I will be talking to Janet again on the 14th of January on our LinkedIn Live Insights.
Speaker: And that's your opportunity to ask her your questions.
Speaker: Follow us on hashtag HSBC Research.
Speaker: We'll be back in the new year with the macro brief, as well as our sister podcast from Hong Kong, Under the Banyan Tree, with our chief Asia economist, Fred Newman, and our head of Asia equity strategy, Harold van der Linde.
Speaker: I'm Piers Butler.
Speaker: Thank you very much for joining us in 2024.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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