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: This edition of the Macro Brief was recorded for release on the 9th of February, 2023.
Speaker: All the disclosures and disclaimers must be viewed on the link attached to your media player.
Speaker: Hello and welcome everybody to The Macrobrief, our weekly spotlight on the latest insight and ideas hot off the digital press from a team here at H&P C Global Research.
Speaker: I'm Piers Bartlett in London and I'm joined by our Managing Editor in New York, Eileen van Dyne.
Speaker: Eileen, welcome.
Speaker: Thanks, Piers.
Speaker: This week we're focusing on the connections between the slowdown in the US economy, the reopening of China and relative weakness in international trade.
Speaker: Plus, can the lion roar again?
Speaker: We're looking at scenarios for a happier, wealthier United Kingdom and the outlook for the British pound even amid some rather gloomy economic indicators.
Speaker: And finally, it is now snowing in the Alps after a rocky start to the European ski season.
Speaker: We take a longer view of climate change and its impact on mountain ecosystems.
Speaker: Two substantial reports tied to China, the United States and global trade this week from Janet Henry, our global chief economist, and her colleague James Pomeroy on the 2023 global trade outlook.
Speaker: Janet joins us from London.
Speaker: Piers, over to you.
Speaker: Janet, welcome.
Speaker: Thank you, Piers.
Speaker: A pleasure to be here.
Speaker: So, Janet, whether we are in a quote unquote official recession or not, the reality is the U.S. economy is slowing.
Speaker: And that in turn is having an impact on imports and therefore global trade.
Speaker: Can we start with that?
Speaker: Yes, there's a lot of discussion about whether the US is heading for a recession or indeed already in one.
Speaker: And over the last year, we have seen various parts of the economy go through periods of contraction.
Speaker: The housing market story has led to some kind of residential construction recession.
Speaker: And now the latest data, although we've had really strong labour market releases, is consistent with the beginning of an industrial recession.
Speaker: Goods demand has been weakening for well over a year now.
Speaker: It's in volume terms been flatlining.
Speaker: And so the rest of the world is starting to feel it.
Speaker: No single country accounts for a larger share of global trade than the US.
Speaker: But there is a global weakening underway as well.
Speaker: So even some of those Asian economies that perform very well on exports earlier on in 2022 have seen their exports decelerate sharply towards the end of the year.
Speaker: And give us a sense of how soft trade has been since the start of the year.
Speaker: I'll bet with some pockets of strength.
Speaker: Yes, there have been some relative areas of resilience, I would call it.
Speaker: So, you know, I mentioned some of those Asian economies.
Speaker: China actually first half of the year was pretty strong on the export front.
Speaker: But by the end of the year, we were seeing most of Asia see quite a marked deceleration because the global electronic cycle,
Speaker: has been turning down.
Speaker: A lot of that has been related to the weakening in consumer goods as economies reopen.
Speaker: Inevitably, they've been spending more on services.
Speaker: So when you look at a lot of the trade data, it does look like relative to Asia, actually parts of Europe and Brazil and other parts of Latin America
Speaker: had been a little bit more resilient.
Speaker: But I think we do need to be careful.
Speaker: Actually, a lot of this is nominal.
Speaker: And what we saw at the end of the year in volume terms was that pretty much every economy in the world was seeing a significant softening in the final months of the year.
Speaker: I thought that was a really interesting point in your report, that actually, because of inflation, the real weakness in the trade numbers is somewhat concealed.
Speaker: Yes, it does, because, you know, trade data is reported quite often just in annual terms where it's very much flattered.
Speaker: And you can see it in the U.S. consumer spending data.
Speaker: Since the middle of 2021, volume of U.S. consumers spending on goods has basically been zero.
Speaker: But in nominal terms, it's up over eight and a half percent.
Speaker: So, yeah, inflation still making its presence felt in all of the metrics that we tend to focus on.
Speaker: So the big question, Janet, is whether China's reopening that we're all talking about is going to be able to offset this weakness in global trade.
Speaker: Well, we are looking for a significant bounce in China growth.
Speaker: Some of the economy has got off to a rockier start, as inevitably happens when economies reopen and you do get some resurgence in Covid cases.
Speaker: But as the year progresses and from the second quarter onwards, we are looking for a bounce in activity and we're looking for growth to rebound above 5% in the course of the year.
Speaker: But we need to bear in mind that this is going to be a different mix of growth to previous strong rebounds in the Chinese economy.
Speaker: 2009 was vitally important, a huge fiscal stimulus in China.
Speaker: You need to remember that this followed the global financial crisis.
Speaker: We saw fiscal spending across the board, a massive surge in infrastructure spending, broad-based demand for commodities around the world.
Speaker: and strong demand for capital goods from the likes of Germany.
Speaker: And it really was a case that the China rebound floated all boats.
Speaker: But we know from other economies that have reopened after a pandemic that it tends to be a little bit different.
Speaker: The rebound, the pent up demand tends to be more focused on services.
Speaker: Yes, as labour markets improve, there will be some areas of good spending that revives too.
Speaker: especially amongst the lower income people.
Speaker: But more of the rebound will be driven by consumer services.
Speaker: So in terms of how the rest of the world feels that it will be to a large extent through tourism.
Speaker: So economies like Thailand automatically move to the top of the list as potential beneficiaries from an improvement in China demand.
Speaker: And then the other part of the Chinese economy that's going to be rebounding or certainly improving is the property sector.
Speaker: We've had a deep property recession over the last year, but a raft of measures to support property demand will be feeling through into property construction that will support certain areas of commodities like metals prices, for instance, and iron ore prices have already risen.
Speaker: in anticipation.
Speaker: But some of the other areas of the economy that were actually pretty solid in 2022, so manufacturing investment and infrastructure investment, if anything, they are likely to slow a little bit.
Speaker: So a very different mix of countries and regions that will be the biggest beneficiaries from this China rebound than was the case in 2009 or indeed in 2015, 2016.
Speaker: Janet, alongside your report, our colleague James Pomeroy also published a report looking at the long-term drivers of global trade and asked the question of whether trade will remain a boost to global economic growth or whether global trades are at risk of becoming a headwind.
Speaker: What's he exploring there?
Speaker: Well, when people talk about headwinds to global trade, they are often thinking about globalisation or should I say de-globalisation related issues.
Speaker: And in my report and in James's report, we both discuss this whole concept of trade diversion rather than trade destruction.
Speaker: Because in my report, I looked at changes in trade shares, what you've seen in terms of imports from the US trade.
Speaker: over the course of the last five years, China has not gained market share in the US, but Vietnam and the rest of the ASEAN countries actually have.
Speaker: So China's been investing a lot in those countries.
Speaker: So there has been some diversion in those trade flows.
Speaker: And you've also seen similar changing relationships in terms of China's import mixes.
Speaker: And in James's report, he does highlight actually in 2021 and 2022, trade share of global GDP has has risen again, having fallen back dramatically during the pandemic and even a little bit before that.
Speaker: So that's one of the key influences.
Speaker: And of course, we've also seen some changes in policy by various governments, which could be classified as protectionists.
Speaker: So anything that adds friction to the global trading system, the growing concern would be that it would lead to less efficiency and potentially be more inflationary for any given growth rate in the global economy.
Speaker: But we shouldn't get too negative about the outlook.
Speaker: There are other developments which potentially could offset some of the shorter term negative influences, aren't there?
Speaker: Yes.
Speaker: I mean, obviously, in terms of the de-globalisation effects, often we think about the protectionism angle and some of the difficulties now of having more diversified supply chains.
Speaker: We hear a lot about reshoring and nearshoring and obviously not having all of your eggs in one basket to some degree.
Speaker: Having a selection of production bases, not just one, and perhaps having some at home as well.
Speaker: So a lot really depends on how high tech and how advanced and how productive those new plants are elsewhere in the world.
Speaker: Obviously, automation is a theme that we've all written about, including James, quite a lot in recent years.
Speaker: If they are more productive, they could lead to greater efficiencies.
Speaker: And also some of these diversion of trade flows could be important as well.
Speaker: For instance, if the US is introducing incentives
Speaker: for electric vehicles and all parts of them to be manufactured in America or certainly North America, so Canada and Mexico could benefit as well, then China may not benefit from the growth of the American market, but they may benefit from growing demand for electric vehicles for Chinese cars in large parts of the emerging world.
Speaker: So
Speaker: There are always a variety of these factors, even if it seems quite simple in terms of the outcome at the surface.
Speaker: There will always be relative winners and losers.
Speaker: Janet, thank you very much.
Speaker: Thank you, Piers.
Speaker: Now, it's not the best of times for the UK economy, and it's easy to see why.
Speaker: Growth is slowing, inflation remains uncomfortably high, and the Bank of England has hiked rates from nearly 0% to 4% in a little over a year.
Speaker: And, of course, households and businesses have faced a surge in energy bills, food prices and mortgage costs.
Speaker: But we still see reasons for hope.
Speaker: And a new report published this week entitled Could the British Line Roar Again?
Speaker: looks at two scenarios where growth might surprise on the upside.
Speaker: One of the contributors to that report is our head of currency strategy in Europe, Dominic Bunning.
Speaker: Dominic has turned increasingly positive on the outlook for the pound, and he joins us now.
Speaker: Dominic, welcome.
Speaker: Hi, Aline.
Speaker: Hi, Piers.
Speaker: So, Dom, you've actually been positive on sterling dollars since mid-November, but that was probably more to do with expectations of a weaker dollar.
Speaker: Yeah, absolutely, Piers.
Speaker: So, you know, back in November, we were seeing the signs that the things that had driven the dollar stronger for most of the previous 18 months, weakness in global growth, weakness in risk appetite and higher US rates, those things were starting to turn.
Speaker: And that was going to undermine the support for the dollar, which had gotten to quite overvalued levels.
Speaker: So that was really behind our thinking as to why we were going to start to see that dollar weakness come through and why we would start to see sterling benefit.
Speaker: You know, sterling is...
Speaker: very much driven by external factors foremost.
Speaker: So as we see that increase in risk appetite around the world, as we see that improvement potentially in global growth dynamics, those things we think should start to benefit sterling a bit more and should start to weigh on the dollar three months ahead.
Speaker: So turning to these potentially positive scenarios, you think, firstly, that local factors could come into play, such as the stabilisation of external balances.
Speaker: Can you expand on that?
Speaker: Yeah, absolutely.
Speaker: Look, the UK has suffered for a long time from a big current account deficit.
Speaker: But what we've seen in the last six months or so is actually that the trade deficit has started to narrow again.
Speaker: And that narrowing, we think, is partly a consequence of
Speaker: somewhat soft growth in the UK, so limiting the demand for imports, for example, but also a function of a weak currency.
Speaker: So the cheaper your currency gets, the more competitive you are, and therefore actually the currency can start to actually rebound.
Speaker: So there's a little bit of a sort of circularity there, but actually what we're seeing is that the things that were weighing on sterling, like we say, that big external deficit, that's showing some signs of improving.
Speaker: And also what we've had just in the last month is an increase in foreign inflows in terms of
Speaker: So that's a sign actually that foreign investors are regaining a little bit of confidence in the UK potentially.
Speaker: And those things we think can actually propel sterling even higher.
Speaker: And also, interestingly, you think that on an inflation front, we could see some positive surprises.
Speaker: Yeah, I mean, we've seen this trend actually in a few different economies.
Speaker: The work we've done shows that when inflation moves in either direction, it tends to surprise in the same direction.
Speaker: So when inflation is going up, it tends to go up faster than expected.
Speaker: And when it comes down, it tends to come down faster than expected.
Speaker: And I think if you buy into the story as we do, that inflation has indeed peaked, then based on the historical data we've looked at, you would expect to see inflation now come down potentially a little bit faster than the consensus is expecting.
Speaker: And the reason that's a positive for sterling is that it means there's a little bit less of a squeeze on households in terms of consumption than we might have previously expected.
Speaker: And actually, it paves the way for a slightly stronger growth story, potentially a bit further down the line.
Speaker: And we think that could be a bit more of an uptick for Sterling as we look ahead.
Speaker: Well, let's hope those scenarios play themselves out.
Speaker: But before I let you go, can you give us a quick update on the euro?
Speaker: Yeah, absolutely.
Speaker: I mean, we've just published our currency outlook as well, and we've updated our views a little bit around what we're thinking and what we're seeing in the euro.
Speaker: And one theme we've touched upon is this increase potentially in portfolio inflows into the eurozone.
Speaker: So we touched on a few technical factors around the yield that investors can get when they look at FX hedge products.
Speaker: So there's a few technical arguments in there, but actually the big picture story that we're seeing here is that there is a bit more room for capital inflows to keep coming back into Europe.
Speaker: And that's a trend we've seen actually over the last few months.
Speaker: We think there's a lot of room for that to extend.
Speaker: And that's something that we think can actually support the Euro moving higher against that weak dollar that we mentioned earlier during this podcast.
Speaker: Tom, thanks for the update.
Speaker: Thanks very much.
Speaker: Now here in the Northern Hemisphere, the ski season is underway, but it hasn't been without a rocky start, as many parts of Europe were without snow.
Speaker: Environmental, social and governance analyst Amy Tyler has been looking at the implications.
Speaker: Amy, welcome.
Speaker: Thank you very much.
Speaker: So what went wrong at the start of Europe's ski season?
Speaker: So we have seen numerous reports of a lack of snow over the last few months, specifically in the European Alps, and it's getting more and more of a worry for holiday makers and becomes an issue for local communities as well that rely on this tourism for income.
Speaker: So for example we had 19 resorts closed in France, Austria had 37, Switzerland 16 and Italy 11 going into the new year.
Speaker: Those are significant numbers.
Speaker: What do you put that down to?
Speaker: Is it bad luck or something bigger like climate change?
Speaker: Well, we have seen a trend.
Speaker: So over the 20th century, the European Alps has seen a temperature rise of two degrees.
Speaker: Now, this is greater than the French average of 1.4.
Speaker: And into the future, we do expect a median warming of 1.5 until mid-century.
Speaker: So this pattern of increasing winter temperatures has already been seen since the 90s.
Speaker: And for example, when you take the Winter Olympics, it's estimated that of the 21 venues that are used, just 10 will have this climate suitability by 2050 with these rising temperatures.
Speaker: Of course, at the start of the season, this was unfortunate for skiers.
Speaker: But beyond those experiences and the impact on tourism, what are the other impacts of this?
Speaker: Yes, so the impacts of climate change, so the temperature increases and the changes in rain is impacting both the physical environment and biodiversity as well.
Speaker: So some of these impacts include reduced snow cover, glacier retreat, soil drying and increased risk of natural disasters as well.
Speaker: So additionally, we are seeing some social impacts, water scarcity, health risks and migration as well.
Speaker: And this is not just in the European Alps, this is across many mountain regions.
Speaker: So Amy, what action needs to be taken in the world's mountainous regions?
Speaker: Absolutely.
Speaker: So we believe that adaption, restoration, capacity building and global coordination are key to facing these challenges.
Speaker: So as forest covers more than 40% of mountain areas, investment in nature-based solutions, for example, and restoration projects are vital for protecting the environment from these impacts of climate change.
Speaker: So raising knowledge and awareness as well of the issues is key to sustainable mountain development.
Speaker: And the transboundary nature of mountain regions really warrants coordination on policy and actions, as well as sharing information amongst organisations, governments and researchers as well.
Speaker: Amy, thanks so much.
Speaker: And I do hope you get onto the slopes this season.
Speaker: Thank you very much.
Speaker: So that is all the time we have for this week.
Speaker: Thanks for joining us.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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