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: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our team of economists and strategists across the globe.
Speaker: Coming up on today's podcast, we look at how China is stepping up its monetary easing in an effort to support growth, even as other central banks stay focused on curbing inflation with rate hikes.
Speaker: We consider the outlook for global trade with COVID-19 related disruption still persisting.
Speaker: And we assess how the UK economy is faring a year into the post-Brexit era.
Speaker: This podcast was recorded on Thursday the 20th of January 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline Van Dyne.
Speaker: And I'm Piers Butler.
Speaker: We begin in China, where recent COVID flare-ups have increased the pressure on an already slowing economy.
Speaker: This week, the central bank responded by stepping up its easing measures with a number of cuts to key policy rates, a far cry from the tightening bias that other central banks have been exhibiting.
Speaker: Let's get the details from Jingyang Chen, Greater China Economist, on this policy divergence.
Speaker: She spoke to Graham McKay earlier.
Speaker: Jingyang, welcome to the podcast.
Speaker: Thank you for having me, Graham.
Speaker: So we've seen a number of key Chinese policy rates cut this Thursday.
Speaker: Would you say this was a direct reaction to the spread of Omicron and the continued threat that COVID poses to the economy?
Speaker: Oh, yes, you're absolutely right.
Speaker: COVID is definitely posing more challenges to China now.
Speaker: But it's not the only headwind that China needs to deal with.
Speaker: China's growth has already slowed quite a bit because of the property slump, energy consumption controls, and other regulatory tightening.
Speaker: Beijing recently said that China is now facing triple pressures, namely insufficient demand, supply disruptions, as well as a lack of confidence.
Speaker: So this all means that Beijing needs to give more aggressive policy support to offset these headwinds.
Speaker: So how do these latest rate cuts fit into the broader policy easing story?
Speaker: So basically, Beijing have been delivering a lot of different policy easing recently.
Speaker: So on Monday, Beijing cut its two key policy rates, namely a seven-day reverse repo rate and a one-year medium landing facility rate.
Speaker: So these two rates basically can help banks reduce their funding costs.
Speaker: as a way to guide banks to lower their lending rates to the real economy.
Speaker: That's why today we saw both one-year loan prime rate and a five-year loan prime rate dropped as a result.
Speaker: But besides all this broad-based policy easing, we have also seen Beijing providing more support for manufacturing sector and grain projects.
Speaker: So last year, Beijing provided specific relending program to give cheaper funding to decarbonization projects in the private sector.
Speaker: And also we think Beijing can do more on the fiscal side.
Speaker: We actually expect Beijing to expand its fiscal deficit this year to support infrastructure investment.
Speaker: All this policy easing points to Beijing's determination to shore up business confidence and credit demand.
Speaker: But again, we think the policy focus is still for the new economy sectors.
Speaker: Beijing is still quite prudent in terms of controlling liquidity or financing into the property sectors.
Speaker: Okay, so in terms of the prospect of further easing in 2022, it sounds like it would be fair to say it's more a case of when rather than if.
Speaker: Definitely.
Speaker: PBOC overall is rather dovish.
Speaker: They are concerned about the weakness in credit demand and signal that they want to front load more easing in the first quarter to address this issue.
Speaker: So we cannot rule out the possibility of more key policy rate cuts, especially if economic data continues to weaken in China.
Speaker: All right, and before you go, Jingyang, there's one more thing that I want to ask you about, and that's the prospect of further social distancing measures in China due to Omicron.
Speaker: There are some big events coming up in the not-too-distant future.
Speaker: Do you see measures being stepped up, and what sort of economic impact could that have?
Speaker: New cases are already falling, but yeah, because Chinese New Year's
Speaker: will come in about two weeks and Olympics is also approaching.
Speaker: So we think local authorities who are having incentives to step up some social distancing measures.
Speaker: But this time around, it may be a bit different from the last two years because local authorities now are trying to balance the short-term economic growth and also all these lockdown measures.
Speaker: And there is a very interesting observation here is that for smaller cities that contribute less to China's overall GDP, local authorities have been implementing overall lockdown and massive testing.
Speaker: But for cities that really matter for Chinese economy, such as Shanghai or Beijing, local governments have really been more cautious in terms of virus containment measures.
Speaker: They may just do lockdown for several neighborhoods that have been impacted by the virus.
Speaker: But right now, we don't really see this kind of massive lockdown in tier one cities.
Speaker: Very interesting.
Speaker: Jingyang, thank you very much again for joining us.
Speaker: Thank you, Graham.
Speaker: One of the biggest economic concerns of the past year was the supply chain bottlenecks that severely affected global trade.
Speaker: Shanela Rajanayagam, our trade economist, has been looking at what we can expect this year.
Speaker: More of the same or a return to normal?
Speaker: Shanela, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So Shanela, we saw widespread disruption to global trade last year.
Speaker: Are things looking any better for 2022?
Speaker: Yeah, that's right.
Speaker: So over the past two years or so, we've had a lot of trade disruption.
Speaker: Dr. Nima El- And things haven't really changed considerably so supply chains are still very tangled logistics are disrupted and shipping costs are very high.
Speaker: Dr. Nima El- But what we had last year and through the end of 2020 was a very strong recovery in global goods trade.
Speaker: And as we enter this year, we think that world trade growth will moderate as economies start to lift their movement restrictions and as consumer spending rotates away from goods towards services.
Speaker: But that recovery is still expected to be quite uneven across countries and regions.
Speaker: According to our calculations, some economies like the US, Thailand and the Philippines will only return to their pre-pandemic export levels in 2023.
Speaker: And for other economies like the UK, France and Australia,
Speaker: it could take even longer.
Speaker: And looking more closely at goods trade, when do you expect disruption to start to ease?
Speaker: So it is very difficult to answer that question precisely.
Speaker: We are coming up to the Lunar New Year and it is likely that we'll see some relief in logistics pressures after that holiday period.
Speaker: But I think trade disruptions will only start to ease more broadly in the second half of this year.
Speaker: And even then, it would still take many months for supply chains to fully normalize, especially as companies look to build up their inventories, to build up buffer stocks, and also as pent up demand for certain goods starts to come back.
Speaker: The key risk at the moment is the spread of Omicron in Asia, and that coupled with China's zero tolerance COVID-19 strategy,
Speaker: risks disrupting supply chains further, particularly if we see widespread factory or even port closures.
Speaker: Are you expecting a revival on the services side?
Speaker: Yeah, so the trade recovery is set to be more about services rather than goods this year.
Speaker: but that will almost entirely depend on when international travel will resume because typically international travel has comprised around one quarter of total exports.
Speaker: But unlike the very sharp recovery in global goods trade that I spoke about earlier, it's likely that the recovery in services trade will be a bit more drawn out.
Speaker: It will depend on when exactly economies start to lift their border controls, how confident consumers are to actually travel again,
Speaker: And also the very nature of services, because they are intangible, it means that some consumers may not necessarily want to consume even more this year just to make up for lost consumption in previous years.
Speaker: What should we watch out for this year with regards to trade policy?
Speaker: So there is a lot going on with trade policy this year.
Speaker: We do expect trade policy uncertainty to continue, particularly with US-China trade tensions and ongoing Brexit-related negotiations.
Speaker: There's also the risk of new tariffs in North America if the US proceeds with its plan to implement tax credits for American-made vehicles, something that Canada and Mexico are against.
Speaker: We do expect advanced economies to also take more of an assertive stance in tackling ESG issues via trade policy, so potentially more progress around designing carbon border taxes.
Speaker: Dr. And also around mandating due diligence for corporates and supply chains and then we do expect efforts to shore up supply chains to continue.
Speaker: Dr. Particularly in the wake of the pandemic, so there could be more diversification of suppliers and also near shoring.
Speaker: And lastly, also trade liberalisation is set to continue.
Speaker: The Regional Comprehensive Economic Partnership, which is a very big trade deal, took effect in the Asia-Pacific at the beginning of this year.
Speaker: There are many UK trade deals in train and also new India and EU trade deals in the pipeline.
Speaker: So all this should really help to support the trade recovery post-pandemic.
Speaker: Shanala, that's a great summary.
Speaker: Thanks very much.
Speaker: Thank you.
Speaker: Shanela mentioned Brexit there, and it's now just over a year since the end of the post-Brexit transition period.
Speaker: And in a new report this week, Liz Martins, senior UK economist, has been taking stock of how the UK is faring outside of the EU.
Speaker: She joins me now.
Speaker: Liz, let's start with exports.
Speaker: How is the UK doing?
Speaker: Well, one thing we can say is that UK exports are performing particularly poorly relative to other parts of the economy, but also relative to other European economies.
Speaker: So total exports in Q3 2021 were still 22% below where they were pre-pandemic.
Speaker: And that compares with about 1.5% of a shortfall in overall GDP.
Speaker: And that's much lower in comparison to pre-pandemic periods than other exporters.
Speaker: So UK exports are very weak, but it's hard to pin down the exact reason and certainly to attribute it to Brexit.
Speaker: And that's because, at least in terms of UK goods exports...
Speaker: shipments to non-EU destinations are actually down by quite a lot more than shipments to the EU.
Speaker: So it's not immediately clear what's going on there.
Speaker: On the services side, the opposite is true.
Speaker: So exports to the EU are down by more than
Speaker: than those two outside of the EU.
Speaker: But again, that data actually is for Q2 of 2021.
Speaker: So it really is too soon to say with any certainty what the impact of Brexit has been.
Speaker: But what we can say is that UK exports are certainly underperforming.
Speaker: And what's the impact been on the labour market?
Speaker: Well, again, it's very hard to tease out an impact of Brexit per se on the labour market.
Speaker: Now, we know the UK labour market is suffering from shortages of staff in many sectors across the economy.
Speaker: And for some people, Brexit is a key reason for that.
Speaker: However, it's very difficult to
Speaker: prove that because migration fell across developed markets in the pandemic.
Speaker: So we actually think the impact will become clear as global migration flows start to recover.
Speaker: If the UK sees less migration than other countries, then that probably does reflect the tighter restrictions on inward migration.
Speaker: And that can be inflationary because that can push up on wage growth and company costs as well.
Speaker: You've also highlighted Article 16 as a possible complication.
Speaker: Can you remind our listeners what it is and what the risks are?
Speaker: Yeah, sure.
Speaker: So Article 16 is a so-called safeguard clause in the Northern Ireland Protocol.
Speaker: Either side can trigger it, annulling all or part of the agreement if they are not happy with how the agreement is playing out and consider it to be damaging and detrimental.
Speaker: In this case, the UK is not happy because the Northern Ireland Protocol means that there are checks on trade internally within the UK, namely on goods moving between Great Britain and
Speaker: and Northern Ireland.
Speaker: So the UK has said the conditions for triggering Article 16 have already been met.
Speaker: The UK government would like to find a negotiated solution, but if that isn't the case, then they are prepared to trigger Article 16.
Speaker: If they do trigger Article 16, the EU then has the right to take retaliatory action, and that could be through an arbitration panel imposing fines, or it could be up to and including, in a worst-case scenario, cancelling the entire trade and cooperation agreement or the trade component of that.
Speaker: Now, if that happens, then we're kind of back to no-deal Brexit territory, the thing that everyone was so worried about between 2016 and 2019.
Speaker: or at the very least a protracted period of uncertainty while negotiations continue to try and avoid that outcome.
Speaker: So, you know, I said at the beginning, UK exports are already weak, quite clearly, a further deterioration in relations with the EU, and particularly if the trade deal was no longer in place, would make things even more challenging.
Speaker: mentioned inflation earlier.
Speaker: We've just had the latest UK inflation numbers and they showed the highest readings since the early 1990s.
Speaker: How do you expect the Bank of England to react?
Speaker: Well the Bank of England is already worried about inflation.
Speaker: We know that because they raised interest rates on 16th of December.
Speaker: We expect them to do it three more times this year.
Speaker: But as well as those three rate rises, the Bank of England is also talking about balance sheet reduction, which is an alternative form
Speaker: of monetary tightening.
Speaker: So they've told us that when bank rate gets to 0.5%, they will cease reinvesting maturing assets in the QE portfolio.
Speaker: And when bank rate gets to 1%, they will consider active sales of assets in that portfolio.
Speaker: So on our timeframe, these thresholds will be reached 0.5% in February, 1% in August.
Speaker: For the QT, we do expect that to kick in.
Speaker: But in August, the active sales, that is a much more difficult question and the threshold perhaps there is a little higher.
Speaker: Liz, thanks very much for explaining all of that to us.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Jingyang Chen, Shanela Rajanagam and Liz Martins.
Speaker: From all of us here, thanks 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.
