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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we find out why Europe could be heading into recession.
Speaker: We discuss what's driving the dollar's performance.
Speaker: And we look at what the latest data are telling us about the global economy.
Speaker: This podcast was recorded on Thursday, the 11th of August, 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 this week in Europe where inflationary pressures are building, growth momentum is slowing, and possible gas shortages are looming.
Speaker: All of this has led our economics team to forecast an even gloomier outlook.
Speaker: Simon Wells, Chief European Economist, joins us to explain.
Speaker: Simon, welcome to the podcast.
Speaker: Hi.
Speaker: So back in June, you weren't forecasting a Eurozone recession.
Speaker: What's changed?
Speaker: Well, towards the end of June, of course, was a time that Russia greatly reduced its flows of gas into Europe.
Speaker: That caused a big spike up in the oil price.
Speaker: And it looks like that lower flow is going to be sustained.
Speaker: Futures curves point to the high gas price being sustained.
Speaker: And of course, that means a lot higher inflation for Europe as well.
Speaker: So we now see eurozone inflation peaking at 10 percent
Speaker: in October, and it is likely to average 6% through next year.
Speaker: And that's up from 3.9%, which is what we saw three months ago.
Speaker: So it's really a story about higher gas prices feeding through to inflation.
Speaker: And that, of course, squeezes real terms, household incomes even further.
Speaker: So what does that mean for your GDP forecasts?
Speaker: Well, we think this household real-term income squeeze, incomes in aggregate will probably fall 1% this year, maybe around 2% next year now.
Speaker: So this is a very big fall in incomes for consumer.
Speaker: Despite that, we've got more fiscal support coming, but it probably isn't going to be enough and therefore household spending will fall and the economy is likely to slip into recession.
Speaker: So we assume there'll be a stagnation in the third quarter of this year, a few quarters of contraction before we get to the second half of next year when inflation starts to fall, wages perhaps start to pick up and we see a recovery.
Speaker: So all in all,
Speaker: Our calendar year growth forecast for the eurozone next year is now zero, and that's down from one and a half percent growth three months ago.
Speaker: And despite these negative revisions, you do think that there are risks to the downside.
Speaker: Unfortunately, that's the case.
Speaker: The energy situation is extremely uncertain with lots of factors coming together.
Speaker: We think it's possible for Europe to get through the winter without active gas rationing.
Speaker: If there's a degree of voluntary or encouraged reduction in usage, that this is by no means guaranteed.
Speaker: And of course, any enforced energy rationing on industry could exacerbate the downturn quite severely.
Speaker: And finally, what about ECB monetary policy?
Speaker: How does the central bank there navigate this environment?
Speaker: Well, it's extremely difficult for the ECB, of course, as it is many central banks.
Speaker: The nature of this downturn is very much supply driven.
Speaker: There's not much the ECB can do about shortages of energy.
Speaker: Nevertheless, with inflation so much higher now, it's very worried about what that might do to expectations and whether this higher inflation mindset gets entrenched.
Speaker: So with that in mind, I think it's going to continue to raise interest rates this year, perhaps with a 50 basis point rate rise in September and then a couple of 25 basis point rises later in the year.
Speaker: But as we get into the first quarter of next year and the impact of the recession is being more widely felt,
Speaker: Plus, inflation will be on the way down.
Speaker: I think politically, it's going to be very difficult for it to continue to tighten.
Speaker: And therefore, we think the tightening cycle is probably over at the end of this year with rates on hold through 2023.
Speaker: Simon, thank you very much for joining us.
Speaker: Thank you.
Speaker: We move now to the FX market, where our team has been looking at what the latest market developments mean for the dollar.
Speaker: Let's speak to Dara Ma, head of FX strategy in the US.
Speaker: Dara, welcome to the podcast.
Speaker: Thanks very much.
Speaker: We've had the latest FOMC meeting and July inflation numbers.
Speaker: Do these point to a Fed pivot?
Speaker: And how will this affect the dollar?
Speaker: Well, the market would like to say yes.
Speaker: We would argue it's perhaps premature.
Speaker: You know, from the market's perspective,
Speaker: They looked at the July FOMC and saw it in the context of slowing growth.
Speaker: And then we saw the July inflation printed.
Speaker: And of course, that came in below expectations.
Speaker: So from a market's perspective, you put those two together, you've got grounds for the Fed slowing the pace of tightening and perhaps, say, the market now believes potentially cutting rates in 2023.
Speaker: That just seems premature to us.
Speaker: You know, we've had the Fed already push back on the market's response to their FOMC meeting.
Speaker: And I think the Fed will want to see more than a month's data of inflation coming in below expectations.
Speaker: But we've got months with inflation coming in above expectations.
Speaker: So they'll need more evidence.
Speaker: And also this idea of a pivot extending to rate cuts as early as the middle of next year seems tricky.
Speaker: The Fed, I think, will want to keep policy tight to ensure inflation is going to continue its move back towards 2%.
Speaker: So I think, look, in summary, I think the market's gotten ahead of itself.
Speaker: Should we be thinking about inflation implications beyond the US?
Speaker: Yeah, yes, I think so.
Speaker: And this is the danger that when people think about the US dollar, they frame it only in the context of US growth and US inflation.
Speaker: The inflation we're seeing in the US is not American, if you like, it's global.
Speaker: We're seeing high inflation prints across many economies.
Speaker: And of course, that's having the same kind of impact, constraining impact on activity that we're seeing in the US and
Speaker: That includes prompting interest rate increases elsewhere.
Speaker: So the U.S. economy slowing has been echoed elsewhere.
Speaker: This is a global economic slowdown.
Speaker: And therefore, historically, when we've seen global economic slowdowns, the dollars generally thrive safe havens like the dollar generally do.
Speaker: And so you're right.
Speaker: Yes, let's look beyond the U.S. for what this high inflation means.
Speaker: So what does all this mean for the dollar?
Speaker: Look, I still think the scope for dollar upside from where we are now, perhaps even better levels than we had a couple of weeks ago.
Speaker: And the reason for that is the main drivers remain in place, which are the Fed continues to tighten and I think won't match the market's dovish expectation for an easing in 2023.
Speaker: So you've got the rate side supporting.
Speaker: You've got a global economic slowdown as well, which, as I've just mentioned, is historically
Speaker: dollar supportive and neither of those dynamics have changed.
Speaker: So yes, I think we still have the ingredients for dollar upside.
Speaker: It is going to be more constrained.
Speaker: It's harder going now because people are contemplating when might the Fed pivot ultimately.
Speaker: And so we'll just have to see how that plays out.
Speaker: Thanks so much for your time.
Speaker: Thanks very much.
Speaker: Before we move on, we just want to invite you to join HSBC's Global Emerging Markets Forum, which will take place online from the 13th to the 30th of September.
Speaker: Policymakers, thought leaders, corporates and our team of experts here in global research will be sharing their views on the outlook for emerging markets.
Speaker: If you're interested in attending, please contact your local HSBC representative for more details.
Speaker: We finish this week with a look at what the latest economic data are telling us about the state of the world economy.
Speaker: We're joined by James Pomeroy, global economist.
Speaker: Hi, James.
Speaker: Hi.
Speaker: So the markets are debating whether the U.S. is in recession or not.
Speaker: the data paint a confusing picture.
Speaker: What's your view?
Speaker: That's exactly the case.
Speaker: We've had a real mixture of data in the US over the course of the last couple of months.
Speaker: We've had GDP data that suggests that the first two quarters of 2022 saw a contraction.
Speaker: But the odd thing is this is completely against all of the monthly data we get.
Speaker: The economy is still creating more jobs, more people are getting employed, consumers are spending more, industrial production is up.
Speaker: So really, it's a hard one to get a true sort of sense of.
Speaker: But that broad set of data that we can look at suggests that the US currently isn't in a recession.
Speaker: Of course, the risks are growing that such an event could happen later this year.
Speaker: But for now, at least, that US data appear to be holding up remarkably well.
Speaker: well and much, much better than we might expect, given what's happening with the surge in inflation, higher interest rates and the uncertainty surrounding the economy.
Speaker: And what about other parts of the global economy?
Speaker: So that situation isn't necessarily the case everywhere.
Speaker: And going forwards, clearly the biggest risks are going to be in Europe, where the energy crisis with either extremely high energy bills and a massive cost of living squeeze for consumers, or simply the shortage of gas and the lockdowns or shutdowns that we have to see within certain industries over the course of the fourth quarter could be a huge problem.
Speaker: And that in itself creates the biggest risk, we think.
Speaker: There's other worries that people have got, particularly around the housing market and around some of the industrial data more broadly.
Speaker: But it's more geographically the weakness and most likely to be concentrated in Europe.
Speaker: James, you mentioned the housing market.
Speaker: How concerned are you about a downturn?
Speaker: So the global housing market is in a slightly odd place where house prices in most parts of the world have gone up remarkably over the course of the pandemic, 15-20% gains in most developed markets where we get reliable data.
Speaker: And so there's clearly some concern that a pick up on interest rates, a slowdown in consumer spending and all of these things together means a big downturn coming in housing markets.
Speaker: there's a slightly odd set of things happening at the moment we've seen a lot of the data in terms of housing transactions drop off quite materially but because of a shortage of supply of homes essentially the houses that haven't been built in recent years or people are being unwilling to sell we haven't seen quite the same impact on prices now house prices in many parts will probably come off the boil we'll either see
Speaker: small falls and we'll see prices stagnate in nominal terms but this in itself doesn't necessarily need to be a derailer and for the economy household debt levels are relatively low and the sector in itself is a relatively small part of employment and if essentially the labor market keeps ticking along and we don't see a sharp slowdown there and we don't see unemployment rates rise then actually we could see the global economy continue to tick along at a relatively
Speaker: steady or sort of mediocre pace of growth rather than necessarily a slowdown in the housing market causing a bigger downturn.
Speaker: And are there any signs that inflation could be coming down?
Speaker: So there's some really good things happening on the inflation front at the moment, mostly with input costs that businesses are facing starting to come down quite quickly.
Speaker: So some of that is commodity prices, but also we're seeing a lot of global supply chain bottlenecks start to ease quite quickly.
Speaker: And that's meaning the cost of shipping is falling very quickly too.
Speaker: Now that in itself will hopefully feed through into lower goods prices in the course of the coming year.
Speaker: We may not see it immediately, but it's just something to keep an eye on.
Speaker: But there is upside risks too, and they come from the service sector where we're continuing to see services inflation move higher.
Speaker: This is partly because of stronger demand, partly because of
Speaker: robust wage growth, but also firms across all sectors are still trying to rebuild margins from the costs that they've seen surge over the course of the last year or so.
Speaker: So there's upside risks and downside risks, but quite clearly some of the underlying data for inflation look much, much better today than they did a couple of months ago.
Speaker: James, thanks very much.
Speaker: Thanks very much.
Speaker: So that's it for today.
Speaker: Thank you to our guests, Simon Wells, Dharamar and James Pomeroy.
Speaker: We're taking a short break for the summer.
Speaker: So from all of us here, thanks for listening.
Speaker: We'll be back in September.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
