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 and I'm joined by Mary Watkins.
Speaker: Hi Piers, coming up this week, with the UK's growth outlook improving, we discuss the key talking points from the latest Bank of England meeting,
Speaker: with Liz Martins, senior UK economist.
Speaker: International trade has been severely disrupted by the pandemic, leading to surging freight prices.
Speaker: So could higher rates be passed on to consumers?
Speaker: We speak to Shanela Rajanayagam, trade economist.
Speaker: And economist Shantana Sam joins us to explain why the COVID-19 picture is looking a bit brighter across Europe.
Speaker: This podcast was recorded on Thursday, the 6th of May 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We begin this week's podcast here in the UK, where the Bank of England has just held its latest Monetary Policy Committee meeting.
Speaker: And with the growth outlook improving, talk has turned from negative rates to policy tightening.
Speaker: Let's get the details from Liz Martins, senior UK economist.
Speaker: Liz, welcome to the podcast.
Speaker: Thank you.
Speaker: So is it fair to say that the tone of this last meeting was on the hawker side?
Speaker: Yes, I think it's very fair to say that.
Speaker: And there's three key reasons why we view this as hawkish.
Speaker: The first is that the Bank of England has tapered the rate at which it's buying assets.
Speaker: So it's reduced the rate of the purchase pace from 4.4 billion a week previously to 3.4 billion.
Speaker: Now, it's not a huge step downwards.
Speaker: It's not unexpected.
Speaker: We'd highlighted it as a very strong possibility in our preview.
Speaker: But it is saying the economy needs just a little bit less support, perhaps, than it did previously.
Speaker: The second reason is that the chief economist, Andy Haldane, has gone a step further than that and voted to decrease the QE target, the gilt purchase target, from £875 billion to
Speaker: to £825 billion.
Speaker: Now, if the majority of the committee had voted with him to do that, then that would mean that the QE programme would end not at the end of the year as currently planned, but as soon as August.
Speaker: Now, of course, they didn't vote with him.
Speaker: He was in the minority.
Speaker: He's actually leaving the Bank of England anyway in June.
Speaker: But nonetheless, the fact that he's voting in that direction gives a little bit of a hawkish flavour.
Speaker: And the third reason is the still pretty strong growth forecast for the VOE.
Speaker: So on those growth forecasts, can you expand a little?
Speaker: Absolutely, yes.
Speaker: So first of all, the growth forecasts for this year have been revised up from 5% to 7.25%.
Speaker: So a considerable upward revision.
Speaker: Now, that's largely processing from the data.
Speaker: We had a much better Q4 2020 than the MPC had expected and a better Q1 2021 as well.
Speaker: But that also means that the MPC now sees a little less slack in the economy
Speaker: this year than it did in February.
Speaker: So it's still feeling pretty upbeat about this consumer rebound that it expects on the back of all of the accumulated savings since the pandemic began.
Speaker: So the MPC broadly is still in very optimistic spirits.
Speaker: And what about the topic du jour, which is inflation?
Speaker: What can we say about that?
Speaker: Absolutely.
Speaker: Well, the BOE still sees inflation pushing higher, peaking a little bit higher than it thought in February.
Speaker: So now expecting CPI inflation to peak at 2.5% year on year in Q4 this year, which is up considerably from 1.9%, which expected back in February.
Speaker: But it then sees it coming back down.
Speaker: And it actually sees inflation very close to the 2% target over the medium term.
Speaker: So what's interesting about that is it's saying the market expects 50 basis points worth of rate rises over three years.
Speaker: And actually, we need those rate rises to keep inflation down to target.
Speaker: You know, it's essentially endorsing the market's expectations of rate rises.
Speaker: So putting it all together, what's the impact on your forecasts?
Speaker: Well, look, we're not forecasting any change in BOE policy this year and next.
Speaker: And I think much will depend on how right the MPC turns out to be about this strong rebound in GDP growth, particularly over the summer and beyond.
Speaker: But the indications from the communications today, I think very much suggest that the next time the MPC does act, it will be in a hawkish direction.
Speaker: In other words, there's still question marks over the sequencing, but either the reduction of the balance sheet or a rate rise.
Speaker: Liz, thanks very much.
Speaker: Thank you.
Speaker: Let's assess the outlook for trade now, where the effects of the pandemic continue to weigh on international freight.
Speaker: Shanela Ranjanaigam is our trade economist, and she joins us now.
Speaker: Shanela, can you start by explaining how trade has been affected by the pandemic?
Speaker: Yes, sure.
Speaker: So we're now more than one year into the pandemic and container volumes are back above trend.
Speaker: Goods trade is recovering, but unfortunately, international freight does remain disrupted.
Speaker: Now, over the past year, there's been issues around container availability, there's been shipping bottlenecks due to lockdown restrictions, labour shortages have caused congestion at major ports, particularly in the west coast of the US, and there's been really strong demand for goods, particularly from Western economies.
Speaker: So all these factors have basically served to push up container freight rates.
Speaker: So, for example, along the China to Europe route, container freight rates were up over 300% between June last year and January this year.
Speaker: And of course, that was before the recent Suez Canal blockage, which has added to the disruption.
Speaker: Delayed vessels are only now arriving at ports, essentially exacerbating the congestion there.
Speaker: Is there likely to be a knock-on effect for other modes of transport?
Speaker: Yeah, that's right.
Speaker: So because of port delays and high shipping costs, a number of traders are turning to other modes of transport.
Speaker: So for instance, the number of annual freight trains running between China and Europe
Speaker: actually exceeded 10,000 for the first time last year.
Speaker: And traders are also paying a bit more to send goods via air just to get the products there quicker.
Speaker: But the fact remains that these alternative modes of transport, rail and air, they do pale in comparison to the scale of shipping.
Speaker: And at the same time, air freight rates do remain elevated due to limited capacity with that mode as well.
Speaker: You've teamed up with our European and US economists to look at how all this could affect the inflation outlook.
Speaker: What did you conclude?
Speaker: That's right.
Speaker: So there is evidence to suggest that shipping costs are affecting business costs.
Speaker: And analysis by our European economists found that the 200% rise in container freight rates over the past year could lead to an increase in producer prices of around 2%.
Speaker: although that is likely to affect some sectors more than others.
Speaker: And similarly in the UK, the PMI surveys show that business input and output costs are rising, and the analysis there suggests that this is due to factors beyond what would traditionally drive the rise in producer input costs, so beyond currency, beyond
Speaker: oil prices, suggesting that shipping disruption is playing a role there as well.
Speaker: However, the pass-through into consumer prices is less clear, and that will really depend on how persistent shipping disruption is, and also the extent to which businesses will actually pass on these higher costs to consumers.
Speaker: Given all this disruption, what is the outlet for trade?
Speaker: Sure.
Speaker: So ongoing freight disruption and strong demand for containerized imports from the U.S. are likely to keep container shipping rates high in the near term.
Speaker: There is also a risk that these higher container swap rates are feeding through into the longer term contract rates.
Speaker: Plus, ongoing shipping disruption could increase prices in other parts of the logistics chain as well, like trucking or warehousing.
Speaker: But on the other hand, there could be some respite for goods price pressures as lockdown restrictions start to unwind over the course of this year and as consumer spending shifts away from goods into services.
Speaker: Shanela, that's a great summary.
Speaker: Thanks for your time.
Speaker: Thank you very much.
Speaker: After months of high infection rates and lockdowns, the COVID-19 picture across Europe looks to be finally improving.
Speaker: Let's get the latest from economist Shantana Sam, who joins us from Paris.
Speaker: So Shantana, can you bring us up to date on infection rates across Europe?
Speaker: Well, European Covid-19 case numbers continue to fall across the largest European economies over the past week, with the exception of Netherlands.
Speaker: Actually, there was a strong drop in infection rates for countries like Sweden and France, which is encouraging.
Speaker: But we also saw some decline for other big countries like Germany or Italy.
Speaker: With infections falling in the big economies, are lockdowns now beginning to ease?
Speaker: Yes, that's true.
Speaker: Actually, in Italy, in several regions, restrictions have been relaxed last week, with, for example, the reopening of restaurants, cinemas or theatres.
Speaker: In France, secondary and high schools partially reopened.
Speaker: Last week it was already the case for kindergartens and primary schools.
Speaker: And there was also a lift on the domestic travel restrictions like the ban on international travel.
Speaker: President Emmanuel Macron recently outlined a tentative agenda for the relaxation process with three additional steps by the end of June.
Speaker: And the next steps will be on the 19th of May with the possible reopening of shops, cultural places and the outdoor power of bars and restaurants.
Speaker: What are the prospects for an easing of restrictions on foreign travel?
Speaker: Yes, indeed.
Speaker: The Euro-Iran Commission opened the door this week to an easing restriction on non-essential travel to the EU, including allowing entry for all fully vaccinated tourists.
Speaker: So at the same time, there will be a new emergency brake mechanism in order to address the risk of new variants entering the EU.
Speaker: But it's still good news for countries that are most dependent on foreign travel for summer holidays, like Spain, Portugal or Greece.
Speaker: Is the pace of vaccinations picking up?
Speaker: Yes, it's clearly picking up across the main European countries.
Speaker: It was particularly the case last week for Hungary, but most of the European countries are also experiencing a significant pick up in the pace of the vaccine rollout.
Speaker: For example, in Germany, the government managed to administer more than 1 million doses on specific days over the past week.
Speaker: So it's quite encouraging.
Speaker: And finally, what's the latest economic data telling us?
Speaker: The main highlight of the past week was the Q1 GDP in the eurozone, which showed another decline with a drop of 0.6% Q1Q.
Speaker: It was not surprising even the restrictions, the significant restrictions held since the start of the year.
Speaker: In Germany especially, GDP fell by 1.7% due to the restrictions and there was also a drop in Spain and Italy.
Speaker: Only France managed to post a rebound after a fall in Q4, and it was especially due to the strong investment.
Speaker: That said, we expect some return to growth in Q2 due to the relaxation of measures that have started for some countries.
Speaker: And also the fact that the recent surveys were quite strong in April, especially if you look at the service PMI in April,
Speaker: There was a jump in Spain, which was a way for a solid rebound of economic activity in the second quarter.
Speaker: Shantana, thank you very much.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thanks to Liz Martins, Shanela Ranjanegam and Shantana Sam for talking to us.
Speaker: From all of us here on the team, 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.
