Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the past week by our team of economists and strategists.
Speaker: Hello and welcome to our final program of 2021.
Speaker: Coming up today, we look at the prospects for the global economy amid huge uncertainty about the growth and inflation outlook in 2022.
Speaker: And we assess the key macro themes that will shape China's economy next year and find out what's in store for the currency markets.
Speaker: This podcast was recorded on Thursday, the 16th of December 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Chris Brown-Hunes.
Speaker: We begin this week with the global economy, which is facing a whole host of challenges.
Speaker: Growth is slowing, inflation is accelerating, central banks are starting to rein in loose monetary policy, and of course the Omicron variant has brought uncertainty back into financial markets.
Speaker: So what's the outlook for 2022?
Speaker: Janet Henry is our global chief economist, and she joins me now.
Speaker: So Janet, as we head into 2022, what are the things that you're focusing on?
Speaker: Well, first and foremost, it's that the major central banks are now starting to normalise monetary policy.
Speaker: But there's lots of things out there that are very far from returning to normal.
Speaker: Not only do we have the Omicron variant, which is primarily a European issue currently,
Speaker: Delta is still the big problem globally.
Speaker: That's a reminder that the battle against COVID is still far from won.
Speaker: We've obviously got much higher than expected inflation, not least because of the ongoing supply shortages.
Speaker: And then there's some very unusual behavior currently in labor markets, particularly in the advanced economies.
Speaker: Some inexplicable demand strength.
Speaker: but a lot of issues on the supply side relating to very low labour market participation.
Speaker: Let's look at some of those issues in more detail.
Speaker: What's driving the labour market shortages?
Speaker: Well, there have been some similarities between countries.
Speaker: There have been some big differences, but most of the problems seem to be supply problems in the advanced economies.
Speaker: One of them is that the share of older workers has fallen, partly employees retiring earlier,
Speaker: But in the US, at least fewer older workers are actually returning to the labor market.
Speaker: We also have more people having caregiving responsibilities, more people having public health concerns regarding the pandemic.
Speaker: And for some, at least for now, they've seen asset price gains and they've seen transfers from these government stimulus payments.
Speaker: And of course, some countries have also seen restrictions on immigration.
Speaker: So all of that has affected the supply of labor.
Speaker: And for some of those sectors,
Speaker: where they have a lot of client facing responsibilities like leisure and hospitality in the US, that has been reflected in some quite big pay gains.
Speaker: So the risk obviously is that as inflation at such high levels that this might broaden out into something more persistent in terms of broader and higher wage growth.
Speaker: And are these big wage gains, are they the sole factors that's been driving inflation high?
Speaker: No, actually wages have not been that evident as a driver of inflation yet.
Speaker: We've seen some global factors driving inflation.
Speaker: Higher energy costs in particular pushed up producer and consumer prices.
Speaker: Higher food prices have played a role.
Speaker: And of course, global supply bottlenecks have also contributed to inflation.
Speaker: And in some countries, it is still the relative strength of demand that has allowed the pass through into consumer prices.
Speaker: So the US has had very strong consumer demand.
Speaker: So have parts of Latin America and CIMIA.
Speaker: And CIMIA has actually seen some fairly hefty wage gains.
Speaker: Whereas in Asia, of course, the recovery, the pace of domestic demand has actually been weaker.
Speaker: It's been a more export driven economy.
Speaker: So it hasn't fed through to consumer prices as much.
Speaker: So let's bring this back to central banks, because it does seem that they are really focusing on inflation and setting to one side all the uncertainties that you've just discussed, including, obviously, the pandemic.
Speaker: That certainly seems to have been the case at the December meetings.
Speaker: Yes, there are a number of uncertainties.
Speaker: The current situation regarding the pandemic is heightening once again, but inflation is now perceived to be the bigger problem.
Speaker: So we not only saw Norway in December actually continue its tightening, we saw the Bank of England, despite the Omicron uncertainty, actually responding to the stronger than expected labour market and inflation data
Speaker: by starting to raise interest rates.
Speaker: And we had this definite shift in Fed policy, which is to double the rate of the reduction in their asset purchases, which now appears set to conclude in the middle of March of 2022.
Speaker: And then their projections signalling that rate rises will follow soon after.
Speaker: So if central banks in the developed market, and particularly the Fed, are tightening at that sort of pace next year, what implications are there for emerging markets?
Speaker: Well, the emerging markets are faced with a number of challenges.
Speaker: Obviously, the pandemic itself, like the rest of the world, they also see a slower pace of growth in China, which has been a very important driver of their commodity prices and their exports in particular.
Speaker: But yes, Fed policy is important.
Speaker: Now, a number of economies in Latin America and CIMIA have already been raising interest rates quite aggressively.
Speaker: We expect them to continue to do so, at least through the first half of 2022.
Speaker: And for Asia, much more gradual tightening, most of it not beginning until the middle of 2022.
Speaker: So there will be some disruption as the Fed tapers its asset purchases and starts to raise interest rates.
Speaker: But to some extent, they are a bit more prepared.
Speaker: The bigger problems emerge in the emerging economies if the Fed itself finds itself behind the curve and actually has to step up.
Speaker: the pace of tightening, then we would be looking at a growing number of these economies, most likely facing much bigger asset price declines and actually a growing number even facing outright recession.
Speaker: Janet, thank you very much indeed for that summary.
Speaker: Thank you very much, Chris.
Speaker: Before we move on, an important announcement.
Speaker: Our managing editor and my co-host on the podcast for the past five years, Chris Brown-Humes, is retiring from HSBC at the end of the year.
Speaker: As this is his last appearance on the podcast, we couldn't let the occasion pass without a few words of thanks.
Speaker: And to help us with that, we're joined by David May, our global head of research.
Speaker: David.
Speaker: Thanks Piers and yes apologies for interrupting but I do have that one more critical item to add to the agenda of today's podcast it relates to your long-time co-host as you say Chris on behalf of everyone at HSBC Global Research and all the loyal podcast listeners we have out there I want to thank you Chris for your 11 and a half years of significant contribution to the franchise
Speaker: and the business of producing quality research and healthy debate like we find on podcasts like this.
Speaker: We do wish you a very happy and healthy retirement.
Speaker: And it goes without saying, we will obviously all miss you.
Speaker: And I know that even in retirement, you will become a loyal follower of the podcast content from HSBC Global Research.
Speaker: So we will miss you, Chris, but we wish you a very happy retirement.
Speaker: Thank you very much indeed, David.
Speaker: And I certainly will be an avid listener to these podcasts.
Speaker: On that note, let's take a more in-depth look at the prospects for China's economy next year, where our team have been looking at five key themes for investors to watch out for.
Speaker: We're joined by Chu Hongbin and Jing Liu.
Speaker: So Hongbin, if we can start with you, what's the outlook for policy?
Speaker: On the policy front, we expect Beijing to step up the policy easing on four fronts, monetary, physical, as well as the property lending and the regulation.
Speaker: We expect PPUC to deliver a couple of the cheaper cards in the coming months.
Speaker: At the same time, they're going to also to increase the relending
Speaker: to give the support to the green project as well as SMEs.
Speaker: We also expect increased spending on technology development and also given the local government more room for borrowing in order to support their spending in the new infrastructure facilities.
Speaker: You also see pickup in high-end manufacturing investment.
Speaker: We already see the bank credit has been reallocated away from property sector towards the manufacturing sector.
Speaker: We also see the capacity utilization rate has been improving in the recent months.
Speaker: And also Beijing's big push in terms of technology development is also giving more support to the expansion in the high-tech sector in the coming quarters.
Speaker: Jing, turning to you, how is China going to kickstart green investment?
Speaker: China has made a commitment for the 3060.
Speaker: It's a formidable task, but not mission impossible if China start to invest now.
Speaker: Basically, we have looked at the numbers, the conservative estimation,
Speaker: expect 200 trillion renminbi from now to 2060.
Speaker: And then the Green Finance Committee of China estimate 487 trillion investment in the next 30 years.
Speaker: That's a lot of investment and China can start now by building the green infrastructure projects such as grid upgrading as well as industrial sector
Speaker: energy efficiency improvement.
Speaker: We take a look at the current outstanding green investment that's already more than 15 trillion RMB and we expect the green investment to grow by 30% per year in the upcoming years.
Speaker: China's property market has been in the headlines in recent months.
Speaker: What do you see happening in that sector?
Speaker: Hongbin has mentioned that actually Beijing is now going into the fine tuning stage.
Speaker: We noticed the moderation of the hawkish stance, and we expect the property investment to bottom out gradually next year.
Speaker: In that sense, Beijing will focus on healthy development of the housing market, including to step up the support for public housing.
Speaker: And finally, what about inflation?
Speaker: Everywhere, the inflation has become the buzzword.
Speaker: But we want to point out that the situation in China is slightly different.
Speaker: Although the PPI inflation is still quite elevated at a double-digit number, it will gradually go down next year.
Speaker: On top of that, the CPI inflation, especially the core CPI inflation, will stay muted in China.
Speaker: The reason is basically because the consumption recovery
Speaker: still seems quite sluggish and we are still seeing the negative output gap.
Speaker: So the muted CPI inflation will actually be a good news when China is ready to do more easing as the PBOC will not be tied up by the inflation target.
Speaker: Hongbin and Jing, thanks very much for your time.
Speaker: We finished this week's podcast in the currency markets, where our team have been looking at the key themes set to dominate FX in the coming year.
Speaker: Paul Mackle is our global head of FX research, and he caught up with Graham Mackay earlier.
Speaker: Paul, great to have you with us.
Speaker: Thank you very much.
Speaker: So here we are at the end of a long and at times frustrating 2021 for the FX markets.
Speaker: What's 2022 got in store?
Speaker: Well, for the dollar itself, indeed, 2021 has been a confusing one.
Speaker: That is, the dollar has transitioned from a weak state to being stable to then strengthening.
Speaker: And we were of the view that this type of transition would happen.
Speaker: I'd say it occurred a little bit faster than expected.
Speaker: But I think the outlook for 2022, one is that policy divergence will remain a very central theme for currency, so driving the differentiation.
Speaker: Two, we expect that the broader dollar will remain relatively resilient.
Speaker: It won't be able to repeat the same degree of strength that occurred in 2021.
Speaker: But nonetheless, as I said, I do expect the dollar to remain strong overall.
Speaker: And on that subject of policy divergence, obviously, we've just changed our outlook for Fed rates in 2022.
Speaker: We're now looking at three hikes over the course of next year.
Speaker: Is that going to bring further dollar strength, do you think?
Speaker: On the one hand, yes, I mean, from a levels perspective with the short-term yields rising as the Fed raises rates, then that should support the dollar.
Speaker: But we also need to bear in mind that a lot has already factored into the outlook for the Fed and its rate hikes over the next few years.
Speaker: So it may not be able to benefit as much as was the case in 2021.
Speaker: That is in terms of an expectations component.
Speaker: Okay, so you believe that the dollar is going to be reasonably strong next year.
Speaker: Does that mean the opposite for EM currencies?
Speaker: Well, what we've been saying is that the dollar should have the upper hand versus most major currencies.
Speaker: it's going to be a headache for emerging market currencies too.
Speaker: But on the other hand, we also think that emerging market currencies whose central banks have been more proactive at raising interest rates, eventually there should be a change for the better.
Speaker: That hasn't been the case in 2021, but ultimately we think that that interest rate move by certain EM central banks will come through to benefit their currencies more concretely.
Speaker: And where does the outlook for China fit into all of that?
Speaker: The renminbi has been incredibly resilient this year.
Speaker: It's been an absolute rock.
Speaker: You've had very strong inflows coming through the current account and also the capital account.
Speaker: Ultimately, we believe that some of these inflow pressures will begin to moderate later next year.
Speaker: So in the second half of 2022, when the Fed is actually raising interest rates, that may start to cause some cyclical depreciation on the renminbi versus the dollar, but very modestly speaking.
Speaker: Over the next couple of quarters, however, I think this concept or image of the rock and the renminbi is one that's probably going to remain very valid.
Speaker: And of course, the ECNY is also something that investors are interested in.
Speaker: What do you see as the outlook for that in 2022?
Speaker: Well, the trials and testing have been accelerating over the last few months.
Speaker: That's very clear.
Speaker: And I expect that to continue next year.
Speaker: There's also a lot of expectation that there could be a more official launch of the ECNY around the Beijing Winter Olympics.
Speaker: So that's the focus point for that digital currency.
Speaker: Beyond that, though, again, it's about trying to identify what's the next step.
Speaker: It's not just about the technical rollout and trials.
Speaker: It's going to be whether it can go cross-border.
Speaker: And will that happen in 2022 and where?
Speaker: Well, I think a lot of focus will be potentially with Hong Kong.
Speaker: Could there be some greater collaboration and testing again across border?
Speaker: I think that's something that we'll be on the watch for.
Speaker: Very good.
Speaker: Well, we will watch this space.
Speaker: Paul McEl, thank you very much indeed for joining us.
Speaker: Thank you very much.
Speaker: So that wraps things up from us today and indeed this year.
Speaker: Thank you to Janet Henry, Xu Hongbin, Jing Liu,
Speaker: and Paul Mackle for talking to us this week, and to all our guests who have spoken on the podcast throughout the year.
Speaker: We hope you found the podcast interesting.
Speaker: From all of us here, thanks for listening.
Speaker: Some of us will be back again in the new year.
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.
