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 Aileen Van Dyne.
Speaker: Hi, Piers.
Speaker: Coming up on this week's program, we look at what to expect from Asia's recovery with Fred Newman, co-head of Asian Economics Research.
Speaker: India has been ravaged by a second wave of infections this year.
Speaker: We consider the outlook for the country with Pranjal Bhandari, Chief India Economist.
Speaker: We asked Simon Wells, chief European economist, whether the region's economies could emerge from the slump with economic growth running above pre-pandemic trends.
Speaker: And Harold van der Linde gives us a quick overview of our new report on Latin America's demographics.
Speaker: This podcast was recorded on Thursday, the 1st of July 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: We kick things off this week in Asia, where the economic recovery across the region has been uneven in recent months.
Speaker: Fred Newman, co-head of Asian Economic Research, has just published his latest quarterly report, and he joins us now from Hong Kong.
Speaker: Fred, welcome to the podcast.
Speaker: Thank you for having me.
Speaker: So, Fred, we've seen a resurgence of the virus in Asia.
Speaker: How is that impacting your second half outlook for the region?
Speaker: So we've really had a few tough months in Asia.
Speaker: We saw huge numbers of cases in India, of course, which took a massive human toll above all, but also had economic consequences.
Speaker: And the concerns are now shifting to ASEAN, where there are pockets where we see rising cases.
Speaker: And so when we think about the second half of the year, there will be a recovery.
Speaker: But in pockets, it's going to be halting because of the ongoing risk
Speaker: from the virus and also the need to maintain certain restrictions, travel restrictions in particular, which really weigh on economic activity.
Speaker: So it is a story about improvement, about a recovery, but not perhaps as fast just yet as we see in some of the Western economies, for example.
Speaker: Obviously, that recovery has been driven largely by China.
Speaker: What's your outlook for that economy in the near term?
Speaker: So China has had a very strong run over the past year.
Speaker: It was primarily driven by the construction and investment sector.
Speaker: There are now signs though that that is cooling because the Chinese government has started to tighten the reins a little bit on the construction and housing sector in particular.
Speaker: And we see the credit impulse, for example, turn negative.
Speaker: Now, what this means for the Chinese economy is that the real estate construction sector, property sector, will likely slow, and that's a headwind for growth.
Speaker: Now, there are some positives here, and that is increasing manufacturing investment.
Speaker: So China is in the midst of a capex boom.
Speaker: which is incidentally something we expect for the rest of the region.
Speaker: So it's steady as she goes in China, but there's a shift really in the drivers away from heavy construction towards more capex type of activity.
Speaker: One of the things that has markets concerned is a rise in inflation.
Speaker: Do you think central banks in Asia are going to need to tighten?
Speaker: Not anytime soon.
Speaker: So for virtually all of Asia, India is a little bit of an exception, but we see very few sustained consumer price inflation pressures coming through.
Speaker: There is certainly a rise in producer prices, and we know from surveys that producers are seeing rising cost pressures.
Speaker: But these are not really being passed on to consumers in Asia.
Speaker: And that has to do with the fact that we see a very gradual consumer spending recovery in Asia.
Speaker: So there's no pricing power for companies.
Speaker: And that means for central banks that they can really take the sweet time before they start tightening.
Speaker: So, you know, the big tightening wave, if you will, the first rate hike is only going to come through over the second half of 2022.
Speaker: There's one exception, interestingly, and that's the Bank of Korea, which we expect to hike this year, later this year, but not so much out of inflation concerns, but because of concerns of rising asset prices, real estate prices.
Speaker: So a slightly different set of challenges there.
Speaker: We've been reading a lot about supply chain disruption.
Speaker: How serious is that?
Speaker: And is there some light at the end of the tunnel?
Speaker: Well, we are seeing still enormous amounts of backlogs in terms of shipments.
Speaker: We just had the disruption in the Yantai port in southern China, which in terms of the magnitude of the disruption was about twice the disruption at the Suez Canal closure delivered.
Speaker: So this is a port in southern China where container throughput was disrupted by 50 percent in the month of June, partly because of COVID-19 restrictions that were imposed.
Speaker: Fortunately, that's coming out now, so that should remove some bottlenecks.
Speaker: But the ripples will be felt for another three or four months.
Speaker: There are other concerns emerging.
Speaker: As I said, in Southeast Asia, there are now pockets of rising COVID-19 cases.
Speaker: and there could now be some disruptions coming through in Vietnam or in Malaysia, for example, in terms of shipments.
Speaker: It's brought a logistics issue more than the production issues.
Speaker: When we talk about supply chain constraints, it's a transportation issue at the moment, perhaps more than pure production.
Speaker: But we do think, by and large, it will abate over the second half of the year.
Speaker: Finally, what do you see as the next big growth driver?
Speaker: So it's not going to be a consumer-led recovery by and large, but it's going to be a CapEx-led recovery.
Speaker: So for us, the next big thing for Asia is a CapEx boom.
Speaker: And what we mean by this is that companies will expand manufacturing investments already happening in mainland China to some extent.
Speaker: We think that will accelerate, but it's also going to happen across the rest of the region.
Speaker: And the supply chain issues I just mentioned also revealed that we actually underinvested in CapEx in recent years, the capacity constraints.
Speaker: And now as we kind of tiptoe ourselves towards the exit of the pandemic, we think that corporations will dust off very aggressive spending plans on CapEx.
Speaker: And that really is going to be sort of over next year or so what drives Asia and gets Asia to roar back after we get rid of this virus.
Speaker: Fred, thanks very much for your time.
Speaker: Thank you.
Speaker: Fred mentioned India there and the huge second wave of the infection seen in the country this year.
Speaker: And although cases have fallen recently, there is plenty to be concerned about as the economy recovers.
Speaker: Pranjal Bhandari is our chief India economist and she joins us now.
Speaker: Pranjal, how bad was the impact of the second pandemic wave on the economy?
Speaker: Yes, so you know the good news first, the second wave seems to be receding.
Speaker: Just about a month and a half ago, India was seeing 400,000 new cases per day, and that's down to 30,000 new cases per day right now.
Speaker: Vaccination rates have also picked up quickly.
Speaker: Overall, the direct cost of the lockdowns that we've seen in 2021 is only likely to be about half of the direct cost that we'd seen last year in the first wave.
Speaker: The bad news comes when we think about the indirect cost, which I worry will be higher this time around, led by the uncertainties that are there in the system.
Speaker: For example, the emergence of a third wave in the next couple of weeks.
Speaker: And I think these uncertainties would keep the pent up demand pretty low.
Speaker: In fact, our senses that the pent up demand driven growth in September will perhaps be about half of the growth coming out of the first wave.
Speaker: Overall, we think GDP will grow 8% in FI22, which is the current fiscal year.
Speaker: This is lower than consensus expectations of 9.3%.
Speaker: But we do think there's going to be an improvement from an uncertainty-led sequential contraction in the first half to a vaccination-led expansion in the second half.
Speaker: So which sectors will lead the rebound?
Speaker: As the vaccination rates rise, our senses that the urban affluent may want to begin purchasing more services than goods, but the pace of vaccination has been slower in rural India.
Speaker: I think rural Indians won't go to services that quickly.
Speaker: They will focus on goods, particularly those that make them secure.
Speaker: Thankfully for them, agricultural wages have held on pretty well through the pandemic because of good monsoon rains.
Speaker: But moving away from consumption,
Speaker: There are a lot of expectations that the CAPEX cycle will be picking up soon, buoyed by the low interest rate environment and also a favorable global backdrop.
Speaker: Our sense is that even if this provides an initial push, only effective reforms will lead to a sustainable rise in the CAPEX cycle.
Speaker: You know, we're watching out for four reforms in particular.
Speaker: Number one, strengthening the insolvency and bankruptcy code.
Speaker: Number two, sustaining social welfare spending.
Speaker: Number three, getting the disinvestment drive of the government done quickly so it can get more revenues quickly.
Speaker: And number four, focusing on export promotion and moving away from import substitution.
Speaker: These are the four reforms that we are focusing on.
Speaker: And what's the latest on inflation?
Speaker: Yeah, inflation has been high.
Speaker: You know, it's been running higher than RBI's 4% target for the last 20 months.
Speaker: And in May, it even overshot the upper tolerance limit of 6%.
Speaker: And, you know, it may stay in the 6% range for the next couple of months.
Speaker: As some of the logistics led disruptions abate, some pressure could come off.
Speaker: But, you know, we are worried that new pressures could come back on in the second half of the year.
Speaker: You know, things like cost push inflation, higher services demand leading to services inflation.
Speaker: So overall, we remain worried about inflation.
Speaker: So given that backdrop, how do you expect the central bank to react to?
Speaker: Yes, you know, in the next meeting, which is in August, we think the commentary will turn a little more hawkish around inflation worries.
Speaker: And then starting in the December quarter, we think the actual gradual normalization of monetary policy will begin.
Speaker: You know, three steps to start with gradually draining out of the surplus liquidity, raising the reverse repo rate, which is currently at 3.35%.
Speaker: and eventually changing the stance from accommodative to neutral, perhaps sometime in early 2022.
Speaker: So these are the steps we think the RBI will start with.
Speaker: Over time, it may also want to increase the benchmark repo rate, which is currently at 4%.
Speaker: We think it'll happen in the second half of 2022.
Speaker: We're penciling in a 50 bps rise in the repo rate in the second half of 2022, and more 50 bps hike in the repo rate in early 2023.
Speaker: Pranjal, that's a great summary.
Speaker: Thanks very much.
Speaker: Great to be here.
Speaker: Thank you.
Speaker: Let's switch to Europe now, where COVID-19 restrictions are gradually being eased.
Speaker: And with the recovery gathering pace, some forecasts are implying that economies are set to emerge from the pandemic in good health.
Speaker: Let's get the view of our chief European economist, Simon Wells.
Speaker: So, Simon, let's kick off with all these headlines on COVID-19 and its latest Delta variant.
Speaker: How big a risk is that to the outlook?
Speaker: It's certainly the case that Europe's economic recovery has gathered pace.
Speaker: That reflects the unlocking of economies and the advancement of the vaccination programmes.
Speaker: But yes, there is a risk from the Delta variant.
Speaker: Cases are on the rise in the UK and almost all of those cases are Delta variant cases.
Speaker: And we're starting to see incidents of Delta variant pick up on the continent too.
Speaker: That's perhaps a bit more of a concern there because in some countries in particular, vaccination rates among the elderly are a lot lower than
Speaker: than they are in the UK.
Speaker: And so far in the UK, although we've seen cases rise, we haven't seen hospitalisations rise to anything like the same extent.
Speaker: So COVID is the big downside risk.
Speaker: There is still upside risks as well, not least from the huge amount of savings that households accumulated through last year.
Speaker: If those were spent quickly, growth could still surprise us on the upside.
Speaker: So can you sum up what you've done to your forecasts?
Speaker: We've raised our Eurozone growth forecast from 3.6% to 4.4% for this year and kept next year unchanged at 4%.
Speaker: Whereas for the UK, we've nudged up further.
Speaker: We now see 7.1% growth this year, though, of course, the UK had a deeper contraction in 2020 and 5.1% growth in the UK in 2022.
Speaker: Now, Simon, I was struck by something you said in your latest economic quarterly, and I'll quote, some forecasts suggest the global pandemic could be good for growth.
Speaker: Can you shed some light on this?
Speaker: Yes, absolutely.
Speaker: So what typically happens after a recession is that economies never quite get back to the trajectory that they were on before that recession.
Speaker: There is a degree of permanent economic scarring as a result of the downturn.
Speaker: Now, despite a very deep recession last year for the eurozone, we assume that this lost output now by the end of 2022 is going to be very small, around 0.4% of GDP lost.
Speaker: Now, that means if some upside risks crystallise, we could end up above the pre-pandemic trajectory.
Speaker: And indeed, the ECB's mild scenario from its June forecast do indeed put GDP above the pre-pandemic trend in 2023.
Speaker: Now, how can this be?
Speaker: Well, for one thing, we've had loose fiscal policy, loose monetary policy.
Speaker: And in Europe, the EU has its next generation EU fund, which is going to raise investment.
Speaker: And the recovery and resilient plans associated with that should also drive some reform of labour markets and tax systems.
Speaker: So over the longer term, this investment could raise capital levels and capital deepening in the economy.
Speaker: And we could also see improved productivity from more flexible labour markets.
Speaker: So in that sense, it is possible for Europe to build back better.
Speaker: But we shouldn't forget some of these structural headwinds that challenge Europe in terms of political situation,
Speaker: aging populations and rather rigid labor markets.
Speaker: It's possible that it could happen, but there are still several obstacles.
Speaker: Now, I can't let you go without talking about inflation.
Speaker: And it's fair to say that a lot of commentators express a lot of concerns about the resurgence of inflation.
Speaker: We think it's more of a temporary risk.
Speaker: Why is that?
Speaker: Well, a lot of the pressures that we're seeing should be one-time cost shocks.
Speaker: So yes, supply bottlenecks, rises in shipping costs and so on have produced some eye-watering rises in survey measures of input and output costs.
Speaker: But as these bottlenecks eventually ease, we should start to see this unwind.
Speaker: And within a year, these effects should drop out of the annual inflation rate.
Speaker: So we should see it come back a bit.
Speaker: Of course, there is a risk that this feeds through into expectations and it feeds through into higher pay deals.
Speaker: But for the eurozone, we're really seeing no evidence of that happening.
Speaker: That said, our faster growth forecasts do mean a little bit less slack in the economy in 2022.
Speaker: So we have raised inflation by about 0.2 for next year on average.
Speaker: But in the eurozone, that still means well below the ECB's target.
Speaker: So the ECB, we think, can keep policy loose.
Speaker: For the UK, it's a slightly different story.
Speaker: There seems to be a bit more evidence of labour market tightness.
Speaker: We now see UK inflation a little above the Bank of England's target next year.
Speaker: And just to finish, how do you think the Bank of England will respond to that?
Speaker: Well, we now think it's going to respond with a tightening cycle.
Speaker: We forecast the first UK rate rise in May of next year, followed by another one in November of next year, taking bank rate back to half a percent by the end of 2022.
Speaker: And we forecast at least one further rate rise in 2023 as well.
Speaker: Simon, thank you very much.
Speaker: Thank you.
Speaker: Before we end, we've just got time to tell you about the latest in our series of reports on global demographics, this time focusing on Latin America.
Speaker: Harold van der Linde is one of our regional coordinators on the demographics theme, and he's here to give us a quick overview of the report.
Speaker: So Harold, what are the key issues in Latin?
Speaker: The issue with Latin America is that it's at its peak of what we call the first demographic dividend.
Speaker: That is the number of working people in an economy.
Speaker: that is going to decline over the next couple of years so the dividends typically associated with this are going to come down as well.
Speaker: It's not good for growth.
Speaker: However, there's also a second demographic dividend.
Speaker: As societies age and therefore also less people work, very often the societies can accumulate wealth.
Speaker: There are all sorts of wealth effects that can play a major role.
Speaker: And the real challenges and the opportunities for Latin America lie right here to capture the savings and refund them into the rest of the economy and investments.
Speaker: The question is can these countries do that?
Speaker: In the report we look at this in considerable detail.
Speaker: More details on healthcare, education, trends, data, all of that is available in the report.
Speaker: It's available on the research website.
Speaker: Thank you.
Speaker: That brings us to the end of another edition of the Macro Viewpoint.
Speaker: Thank you to our guests, Fran Newman, Pranjal Bhandari, Simon Wells, and Harold van der Linde.
Speaker: From peers and me, 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.
