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The Macro Brief - EM FX gets a dose of reality, Germany enters recession, Europe’s data surprises
42 Plays2 years ago
Paul Mackel examines the prospects for emerging market currencies, Stefan Schilbe looks at what’s behind Germany’s underperformance and Liz Martins explains why the latest European economic data are providing some welcome relief. Disclaimer: https://www.research.hsbc.com/R/51/9ZqtgD7 Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
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The following podcast was recorded on the 1st of June 2023.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Emerging Market Challenges and Currency Impacts
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Hello, I'm Peter Stegall.
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And I'm Mary Watkins and welcome to the Macro Brief.
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Coming up on this week's podcast, we assess the outlook for emerging market currencies with challenges from both the US and China complicating the backdrop.
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We look at what's behind the underperformance of one of the world's economic powerhouses.
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And we found out why the latest Europe economic data are providing some welcome relief.
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We begin this week in the FX markets where emerging market currencies have not been having an easy time, with Fed rate hikes, uncertainties about the US debt ceiling and disappointment over China's economy all presenting challenges.
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Let's hear the thoughts of Paul Mackle, Global Head of FX Research.
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He spoke to Graeme Mackay in Hong Kong earlier.
Asian Currencies and Economic Forecasts
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Paul, welcome to the podcast.
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Thank you very much.
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So the first thing I want to ask you about is actually the names, the titles that you've given to your last couple of editions of the Emerging Markets FX roadmap.
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We've gone from waiting in vain last month to a dose of reality this month, neither of which strike me as being particularly optimistic.
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Would that be a fair reflection of your views on EMFX at the moment?
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Well, I think there's certainly been good reasons to be cautious on some of them, and in particular, the Asian block or a number of Asian currencies.
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And a lot of that has come down to what's happening in China.
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The activity pulse has been surprising to the downside.
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So even go back towards the middle of April or towards the end of April, that's really when we thought a reality of check of sorts was needed.
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Right, and particularly for the Chinese currency, I take it.
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I mean, I know you recently raised your forecasts for dollar CNY.
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Well, that's right.
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I mean, we made a number of forecast changes going back a few weeks ago towards early May, very much revisiting the outlook, whether for the renminbi or other Asian currency, because as I said, it just wasn't living up to expectations and in part associated with signs of this sluggish Chinese economy.
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So now we are forecasting dollar CMY at 6.8%.
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for the end of 2023.
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So yes, in the near term, we fully understand the depreciation pressures on the currency.
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But what we are arguing from a longer term perspective, that won't be sustained.
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All right, so depreciation pressures in Asia.
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What about elsewhere in EM?
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Is there anywhere
LATAM Currency Outlook
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that you feel you could be a bit more optimistic on emerging currencies?
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Absolutely.
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My colleague Joseph in Calcutta has been arguing for quite some time that the outlook for a number of LATAM currencies is quite positive.
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The way that the central banks had responded to domestic inflationary pressures being a lot more proactive than other central banks, whether in developed markets or in the EM universe, is coming out to benefiting a lot of these currencies.
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High real interest rates, the flows are returning, perhaps in the form of FDI, etc.
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So yes, that's where the bright spot has existed, and we think that will continue to be the case.
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Alright, well obviously we can't talk about the outlook for EMFX without talking about the Fed and the dollar.
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Now I think everyone's more or less in agreement at this point that the end of the US rate hiking cycle is on the horizon.
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How's that making you feel about the outlook for the dollar, for risk appetite and for EMFX in general?
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Well, in our latest report too, when we're talking about a dose of reality, it sounds quite negative.
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But on the other hand, there are some positives that we shouldn't lose sight of.
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And that's one of them.
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The Fed is indeed, in our view,
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very much nearing the end of its rate hike cycle.
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And that should bring down some top-down relief to emerging market currency.
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So let's get over that hurdle.
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Ultimately, we think that the dollar is still going to be in a softer environment over the next couple of quarters.
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That's not been the case lately because there's been these concerns about China or repricing of Fed expectations.
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But we think that we're nearing the end of those concerns, at least for the Fed.
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And as I said, that should be filtering through more promisingly for emerging market currencies.
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All right.
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Well, always good to end on a reasonably more optimistic note.
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So we'll end it there.
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Paul, thank you very much indeed for joining us.
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Thank you very much.
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Let's
Germany's Economic Situation
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return to Europe now and its largest economy.
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While many of its neighbours have kept growing, Germany is now in a technical recession.
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Stefan Schilber, Chief Economist for Germany, is here to explore the outlook.
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Stefan, welcome.
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Thanks for having me.
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The first quarter GDP figures made for somber reading.
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What are the challenges that tip Germany into recession?
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Yeah, well, first of all, I have to say that it was the surge in energy prices over the winter, which caused real incomes to plunge due to high inflation.
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And this undermined consumer confidence and led to a sharp contraction in
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in private spending.
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On top of this, we also had very weak government spending in the first quarter, as some of the measures which were implemented at the end of last year ran out.
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So this was something which weighed on the economy.
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On the other hand, we had relatively strong private construction activity
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Investment spending was also relatively strong, and this has the reason that some of the material shortages have eased.
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So particularly machinery and equipment companies were able to produce and deliver the goods.
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And what about manufacturing?
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We had the end of the industrial recession in Q1 with a strong rebound in activity.
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And this was due to the fact that global supply chain pressures eased markedly.
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Those indices are now at the lowest level since the global financial crisis.
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And this had positive ramifications for the German economy because companies could get all the materials necessary for production.
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And we had a lot of pent-up
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production because of past order activity.
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So this supported industrial production, but the longer term picture is not as positive.
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What does this mean for the labour markets?
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The labour market so far has held up reasonably strong.
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Employment is at record high levels currently, but there are some cracks below the surface, particularly the vacancy numbers have eased.
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The hiring intentions of corporations have also weakened somewhat.
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So we can see that the labor market won't be as strong in the coming month anymore.
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This does not mean that we expect a surge in unemployment rates, but it means that possibly the positive, let's say, circumstances for labor unions, which were able to get high wage increases, are easing a bit against the background of falling inflation.
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And staying
Inflation Trends and Impact
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with inflation, what do the latest figures tell us about the outlook?
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I suppose that inflation will go down over the coming months, mainly due to the fact that we will see base effects on the energy side.
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We compare it to the very high energy prices of 2022, be it gas prices, electricity prices or oil prices.
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We have also seen lately that food prices have passed the peak.
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We were above 22% in March.
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We are now below 15% in year-over-year terms.
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And there is a good chance that this trend will continue.
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The third aspect which kept inflation lower and surprisingly lower in May was the 49 euro ticket for public transport.
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This was something which knocked off more than 0.1 percentage points from inflation.
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But this is something which will not come back in the next couple of months.
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And on top of that, with regard to June inflation, we have to anticipate a large rebound because in 2022,
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We had this 9 euro ticket for public transport and we had the subsidy for gasoline prices.
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So this will run out of the equation and push inflation higher temporarily.
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But over the longer term, we expect inflation to fall.
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So our expectation for the HICP for 2024 is just 2.8 percent compared to 6.2 percent this year.
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Looking ahead, can we expect Germany to bounce back quickly?
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quickly
Economic Recovery in Europe
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would be too much of a stretch.
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There will be a rebound in our view because real incomes will recover a bit as inflation falls and we see the effects of the wage negotiations.
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But I think it's more likely that we see a very gradual recovery as we have serious headwinds from the tightening of financial conditions.
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We have seen that the global environment, particularly in manufacturing, is quite weak.
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And you can see this, for example, also in the PMI data, which are now below 50 for a full year.
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So I think overall we will stagnate this year and only see a relatively slow recovery of 0.8% next year in GDP terms.
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Stefan, thanks very much.
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It was a great pleasure.
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Thank you very much.
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We stay in Europe now, where the latest inflation figures came in lower than expected for many countries, providing welcome relief for policymakers.
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Liz Martins, senior economist, is here to tell us more.
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So Liz, where were the biggest inflation surprises this week?
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Well, the surprises on the downside were in three out of the big four Eurozone economies.
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So first of all, Spain came in 0.4 percentage points, lower than expected at 3.2.
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France was another 0.4 downside surprise at 5.1%.
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And Germany, yet another 0.4 percentage point downside surprise at 6.1%.
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So quite widespread, really.
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Is it all good news, though?
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Did anywhere have a surprise on the upside?
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Well, yes, Italy was the major exception.
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And actually, the surprise to the upside was 0.4 percentage points there.
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That took us to 7.6%, still down on the previous month of April, but higher than expected.
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And actually, another interesting piece of evidence was from Ireland, where the core inflation rate now stands higher than the headline inflation rate.
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And that actually accelerated from 5.2 to 5.7.
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But broadly speaking, this is good news for policymakers?
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I mean, the lower inflation is definitely good news.
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Some of it was driven by food prices, manufactured goods, where we see inflation being stickier, still in services, still in labour markets.
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So I don't think, you know, the ECB can breathe a sigh of relief and say it's all over.
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But certainly, you know, any downside news is very welcome.
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And of course,
UK Migration and Job Market Effects
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those European figures stand in contrast to the UK.
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It's a different picture there, isn't it?
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Yeah, I mean, the UK, we saw the third consecutive upside surprise in the April numbers.
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Although to be fair, the month that we're talking about for Europe is May and we haven't seen the data yet for the UK.
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But yeah, I mean, considerably higher on the core inflation measure in the UK.
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You've been looking at UK migration figures too, where net inflows reached record highs last year.
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What are some of the factors that led to that very high figure?
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Yeah, it's interesting.
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So net inflows of 606,000 in the year to December 2022, that comprises net outflows of EU nationals offset by greater net inflows from people from other parts of the world.
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What's comprised it?
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Well, it's people coming to work, it's people coming to study.
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It includes asylum claims and it also includes the people who arrived under the special programmes for Ukraine nationals and Hong Kong nationals as well.
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And do you think there was a catch-up effect after 2020?
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Yeah, definitely.
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I mean, arrivals dropped very low by historical standards in 2020 for obvious reasons.
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So even if 2021 and 2022 numbers look quite high, actually, if we average out the three-year period overall, they look much more normal.
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But even with this net inward migration, the UK still has a very tight job market with vacancies in many sectors.
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Why is that?
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Yes, I think part of it is people who are arriving here and not working.
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So that would be students, it would be inactive people like elderly, children, stay at home parents.
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And you might see more of that if people are arriving because of geopolitical reasons, as opposed to sort of economic incentives.
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That's part of the story.
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And then the other part is that, you know, with the end of free movement from the EU, we've seen a shift from inflows of unskilled migration from the EU to skilled migration from
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outside of the EU, which of course is still welcome, makes a strong economic contribution, but it goes into certain sectors and most particularly the healthcare sector.
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So very good news for the health service.
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It's helped to ease some of the pressure there, but it does nothing for, say, a hospitality business or a construction business.
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Liz, thank you very much.
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Thank you.
Conclusion and Listener Engagement
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So that brings us to the end of this week's Macro Brief.
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Thanks to our guests, Paul Mackle, Stefan Schilber and Liz Martins.
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We'll be back again next week with another edition of the Macro Brief.
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Join us then.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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