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The Macro Brief – Assessing the tariff turmoil
1k Plays8 days ago
Janet Henry, Chief Global Economist, and Murat Ulgen, Global Head of Emerging Markets Research, examine the fallout from US tariffs and how policymakers could respond.
Disclaimer: https://www.research.hsbc.com/R/101/rrnFsFj
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Transcript
Introduction to HSBC Global Viewpoint
00:00:01
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Pre-Tariff Announcement Context
00:00:23
Speaker
This podcast was recorded for publication on the 9th of April 2025 by HSBC Global Research. All the disclosures and disclaimers associated with it must be viewed on the link attached your media player. Please note that this podcast was recorded before President Trump announced a 90-day delay in some tariffs.
Market Volatility and Tariff Impact Discussion
00:00:49
Speaker
Hello, I'm Janet Henry, Global Chief Economist at HSBC. Welcome to The Macro Brief, our podcast that looks at the issues driving financial markets around the world. And clearly, there is nothing driving financial markets more right now than the sweeping tariffs that were introduced by the US on April the 2nd.
00:01:10
Speaker
It's been a brutal ride in stock markets. They've shed trillions of dollars. Currencies have been very volatile. Credit spreads have widened and we have seen the oil price fall as a consequence of supply and demand factors.
00:01:24
Speaker
um I'm here today with Murat Ulgan, Global Head of Emerging Markets Research, to assess the latest developments and where we go from here. So welcome, Murat.
00:01:35
Speaker
Thank you, Janet. So um obviously, ah um we've all been watching all the screens, all the headlines constantly over the course of the last week or so. um We have a president in the United States that spent six months before the election talking about tariffs.
00:01:50
Speaker
He was elected and immediately talked about tariffs. And then on on Liberation Day on April the 2nd, announced tariffs that sent global markets into something of a tailspin. Now, they they were a lot bigger.
00:02:03
Speaker
than expected, um weren't they, Morat? So um how do you how do you think about it I mean, this is a global supply shock.
Global Trade Order Shift: Questioning New Configurations
00:02:11
Speaker
Emerging markets, clearly they they react to to global developments.
00:02:16
Speaker
How have they changed um your thinking? At the start of the year, you always said it was too early to embrace global risk appetite. How are you thinking now? Thank you, Janet. Well, pretty wild moves in the market post the Liberation Day announcement. And obviously, emerging markets have taken their fair share from the volatility and obviously massive uncertainty. I mean, you might argue after a big set of markets bounced back a little bit, but I think if we if we try to look past true, the big question we need to ask ourselves is, is this really a complete reconfiguration of the global trade order?
00:02:48
Speaker
And is this on the back of a structural shift in US's trade policy? I mean, I'm going to ask the question back to you, because what matters to me is the health of the global economy.
00:03:00
Speaker
I mean, as you said, in the beginning of the year, we weren't really very sure this is time to fully embrace EM risk with all the impending uncertainties. And here we are, with tariffs much larger than expected, as you said.
00:03:12
Speaker
big market swings. And we have repeated the mention in the past, we published about it a couple of years ago, that the health of the global economy is the most important driver of EM financial returns.
Downside Risks to Global Economic Activity
00:03:24
Speaker
So, Janet, are we now seeing big downside risk to global economic activity? I think it's fair to say that that we are. Actually, at the end of the year, we now have the data. The world actually ended on a more synchronized note than it had for some time. The US actually had slowed a little bit.
00:03:40
Speaker
Europe had firmed a little bit. China had firmed a little bit. and And now this is something of a global supply shock. Clearly, um the the policies being pursued by President Trump very much focused on the goods side of the economy, the manufacturing side of the economy. And he does see tariffs as a multi-purpose tool, both in terms of achieving fair fair trade, as he describes it, um and as a revenue raising opportunity and as a bargaining tactic for for an array um of other options. And the US will be impacted by that.
00:04:16
Speaker
but It will mean a much worsening growth inflation trade-off and obviously add to the policy dilemmas um that are being faced by the Fed in particular. It's those economies in the world that are most dependent on goods trade and that are now seeing the biggest tariffs in Asia that potentially face um the biggest headwinds.
Emerging Markets: New Frameworks and Opportunities
00:04:38
Speaker
So, Murat, is this something um that you've thought about in terms of the focus in your your latest um emerging markets update that you've just published?
00:04:49
Speaker
We did, indeed. i mean, there is clearly a big regional differentiation when it comes to the tariffs. But I think it's beyond that. We need to have a new look at EM if, again, we're talking about a big structural shifts here.
00:05:01
Speaker
I think emerging markets would require a new framework also to assess the opportunities in its financial markets. So what we have done in this report is we've been focusing more on economies where there are strong domestic fundamentals, on economies where household consumption a bigger share of GDP,
00:05:20
Speaker
Also in those markets where service exports make a bigger proportion of overall exports, given as you set the focus on on manufacturing, plus economies where there is some fiscal headroom, you know, manageable deficits and relatively low public debt.
00:05:34
Speaker
So if it comes to that, they can actually stimulate domestic demand using that fiscal headroom. Building on that framework, there are certain countries would probably be less impacted. you know Everybody was be impacted from what's happening globally, but those countries who tick the boxes in our new framework, like India, Philippines, you know the more domestic markets, higher share of service exports in their total exports.
00:05:57
Speaker
I would say Turkey also together with a low public debt, Poland similarly. And UAE in the Middle East, a very high share of services in total exports and very low public debt.
00:06:08
Speaker
I think those countries tick our boxes and we think they will be relatively less impacted from what's happening globally. As you say, they'll have some offset in terms of domestically, but a lot of these countries still undertake
Inflation Uncertainties and Market Impacts
00:06:20
Speaker
exports. And I guess the other overlay that we have from this this tariff related uncertainty is the impact on investor and consumer confidence. If you don't know what prices are going to be tomorrow, that would depend on and what happens regarding retaliation.
00:06:34
Speaker
But for companies trying to sell products, um they're not going to know what what prices are are tomorrow um to some degree. but But also in the US, because the US is but imposing the tariffs, there will be an immediate inflationary impact and that impact will impact on growth.
00:06:51
Speaker
How do you see the inflation variation across the emerging economies? Because obviously we have got some fallback in oil prices. Yes, it's a bit of a mixed picture.
00:07:02
Speaker
Obviously, as you said, the U.S. is raising the tariffs, but let's say if there is a retaliation and other countries raise their own tariffs or trade barriers, if that's an extra cost pressure, if there is an impact on global supply chains, that would probably lift goods prices where service prices were already sticky.
00:07:18
Speaker
But as you said, energy prices coming lower will be an offset. So I think the overall picture will be a bit of a mixed bag. I think emerging markets will try to take the coup on monetary policy related to inflation from the Fed, where you know I understand, obviously, that's my question to you, that the markets are not thinking there will be a bigger fallout on US growth than on inflation.
00:07:40
Speaker
So the Fed rate cut expectations have been actually increased even further, like, you know, more than 100 base points in the next 12 months. Would you agree with that view? Well, it's been a volatile ride for for market expectations for the Fed since the start of the year, barely pricing in one to suddenly pricing in four.
00:07:57
Speaker
We still think that the Fed is in a wait and see mode. Obviously, they do have a dual mandate between full employment um and inflation. At the moment, um they are still broadly at full employment and inflation is still a bit too high.
Fed's Response to Economic Pressures: Rate Cuts Discussion
00:08:10
Speaker
So I think they are firmly in wait and see mode. But what we still anticipate that it will be a rise in unemployment, it will be the slack in the labour market that ultimately does deliver, tilt the balance back towards rate cuts. So so we still have three rate cuts this year, um starting in June.
00:08:28
Speaker
But I guess when we think about it for an emerging market, context You have, as you say, got got a softer inflation outlook, but a lot of the emerging markets are also fearful that they are going to see trade diversion from China in particular, which does face the biggest tariffs.
00:08:45
Speaker
So they could potentially see some some disinflationary forces there as well. so So how important to the outlook for a lot of the emerging markets and capital flows into emerging markets do you think the the prospects for rate cuts actually is?
00:08:59
Speaker
That's a very good point. Clearly, certain economies, more export-dependent, will try to divert their exports out of U.S. s with the recent developments. But that raises some other issues and potential tensions with those who are recipients of these cheaper goods flooding their markets.
00:09:15
Speaker
They might erect their own tariffs or non-tariff barriers. But then when it comes to the inflation picture, there's also... this element of currencies. And um so far, the US dollar has been behaving relatively better, more benign than people had thought in the beginning, like you of tariffs and shrinking US trade deficit might actually strengthen the US dollar. But now it's more about the policy uncertainty and downside risk to growth.
00:09:40
Speaker
So if that's the case, perhaps that would help emerging markets to stay on an easy course. But definitely for Asia, where inflation hasn't been an issue anyhow. And there are growth risks, given that they've seen the highest tariffs.
00:09:54
Speaker
The central banks will probably stay on the easing course, where every now and then the currency volatility might intervene. But I do expect it's probably much clearer for Asian central banks to keep reducing interest rates.
00:10:05
Speaker
But how about Europe, Janet, if I can ask the question now back to you?
Europe's Growth Risks and Tariff Retaliation
00:10:09
Speaker
Yes, well, I guess in the European context, we already incorporated quite a lot of ah tariffs in in our in our report that we published in late March.
00:10:19
Speaker
But if we do get sustained tariffs of 20% across the board on Europe, that's you know more than we incorporated in our latest report. um set of forecasts. And so far, Europe's been very, very cautious regarding ah retaliation. But certainly, um there there are some downside risks um to the growth outlook in Europe as well.
00:10:39
Speaker
um But certainly, the lower oil price, particularly if they don't retaliate, um should be helpful for the inflation backdrop, as as might the recent um appreciation on the euro.
00:10:50
Speaker
Bidding your your last EM sentiment survey that you published not so long ago, you suggested that there had now been a kind of rewarming of attitudes in Latin
Latin America's Investment Interest Amidst Tariffs
00:11:00
Speaker
America. Relatively speaking, um not getting those really hefty tariff influences, a bit like the UK, just getting the baseline 10% increase in tariffs.
00:11:11
Speaker
Where does that leave you thinking um on Latin America? is Is it your preferred region? Absolutely. I mean, it looks like Latin America is back in fashion. And as you pointed out, we've already seen the signs in the latest EM sentiment survey, because if I rewind back a little bit, like 2022, 2023, Latin America was the top region, really significantly outperformance across financial markets ah versus the rest of emerging markets. And in 2024, last year, investors have progressively reduced their positions in Latin America.
00:11:42
Speaker
They backed away. Politics intervened. The overlay with fiscal. already very heavy position again, they move towards EMEA Asia, especially with the stimulus measures out of China.
00:11:54
Speaker
But now, since the beginning of the year, maybe in anticipation that Latin America might be spared or would be would receive lower tariffs, in the expectation, the anticipation of that, we've seen already interest being rekindled by investors.
00:12:09
Speaker
It's a high-carrier region, and looks like politics is also sort of behind us. Yeah, we are seeing interest in Latin America. And obviously, compared to the other regions, smaller tariffs helps that thesis.
00:12:21
Speaker
Mexico has a very special, obviously, see position here, given that it's been spared even from the universal tariffs. Obviously, there are other tariffs going on, USMCA noncompliant and autos, et cetera.
00:12:33
Speaker
But I think the the assumption of investors is if this is really a big rupture of the global trade order, I think US and the supply chains are shifting.
00:12:44
Speaker
I think the US would probably still want to keep Latin America relatively warm and continue to try to eke out deals with them. Maybe that's why the beginning of tariffs much lower for them.
00:12:55
Speaker
But as you said, we've already seen interest ah rising for Latin America. And I think with the latest tariff announcements, they'll probably do a little bit better in comparison.
Global Tariff Uncertainties and Conclusion
00:13:04
Speaker
Yes, but as you say, Morat, this is just the beginning.
00:13:08
Speaker
um And it's hard to be confident on the exact path of tariffs in different countries around the world, as well as the the investment and confidence implications of them um as they come through. So certainly going to keep us all very busy um in terms of making economic forecasts and forming investment conclusions.
00:13:28
Speaker
So thank you very much for the conversation.
Further Resources and Engagement Encouragement
00:13:32
Speaker
Thank you, Janet.
00:13:37
Speaker
If you'd like to know more about the impact of tariffs on Asia, then tune in to our sister podcast, Under the Banyar Tree. This week's episode features a discussion with our Asia team on how the region is responding.
00:13:49
Speaker
That's available wherever you get your podcasts. HSBC clients can keep up to date on our latest research on tariffs by downloading our app from Apple's App Store or Google Play.
00:14:02
Speaker
And if you have any questions or comments about anything we've talked about today, please email askresearch at hsbc.com.
00:14:12
Speaker
So that's all from us this week. If you've enjoyed listening to the podcast, then please like and subscribe and share it with friends and colleagues. From all of us here, thanks for listening. We'll be back next week with another edition of The Macro Brief.
00:14:47
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.