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.
Speaker: And I'm Chris Brown-Hulmes.
Speaker: Coming up on this week's podcast, as countries seek to emerge from the pandemic, we speak to Stephen King, Senior Economic Advisor, to find out what he thinks it will take for economies to build back better.
Speaker: We look at the latest news developments around the AstraZeneca vaccine and the broader COVID-19 picture across Europe with Fabio Balboni, Senior European Economist.
Speaker: And we'll finish up with a look at what the latest PMI data can tell us about the recovery with James Pomeroy, Global Economist.
Speaker: This podcast was recorded on Thursday, the 8th of April 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: As countries look to emerge from COVID-19 enforced lockdowns in the months ahead, how can they build their economies back better?
Speaker: That's what Stephen King, Senior Economic Advisor, has been looking at this week.
Speaker: He joins us now.
Speaker: So Stephen, when you say build back better, build back better from what?
Speaker: Well, there are a number of areas where you could build back better.
Speaker: You could build back greener.
Speaker: You could build back fairer.
Speaker: But this particular piece focuses on building back stronger, really, because long before the pandemic, the Western developed world had a number of problems associated with very low growth, very weak productivity gains, excessively low inflation, very low wage growth and very low interest rates.
Speaker: So for all those reasons, you'd really want to see
Speaker: a lasting improvement compared with the experience of recent years.
Speaker: So how are we going to get this lasting improvement?
Speaker: Well, this is a major puzzle.
Speaker: There are two ways you can try to do it.
Speaker: The first is to try to boost demand and the other is to operate on supply.
Speaker: But I think you can also say, what would you hope to have achieved?
Speaker: Let's imagine we're 10 years into the future.
Speaker: What would look like success?
Speaker: And I think there are two things that you'd really hope to achieve at the end of the day.
Speaker: The first would be significantly faster productivity gains, because that's effectively the secret sauce that raises living standards over the long term, where it's been so disappointing in recent years.
Speaker: And the second is really to have a higher return on capital, which of course is consistent with faster productivity gains.
Speaker: That, of course, also implies you'd hope to end the period with significantly higher real interest rates than we have currently.
Speaker: So you kind of want to escape from this weird low interest rate trap that we've been experiencing in recent times.
Speaker: Now, there are two ways of doing that.
Speaker: The first is to operate on demand, which is effectively what Joe Biden and his team are doing in America.
Speaker: And the other is to try to focus on
Speaker: what's causing the shortfall of productivity by focusing on supply.
Speaker: So demand, first of all, I mean, one way you can try to lift productivity or lift interest rates is simply to go for a big fiscal, a monetary boost and hope you can kind of reboot the economy, set it to a higher sort of growth trajectory than would otherwise have been the case.
Speaker: And that's fine, but it comes with risks.
Speaker: And we've seen some of those risks already in the first three months of this year with rising bond yields.
Speaker: But the main risk really is that if you have a combination of rising bond yields and possibly higher inflation, and the markets begin to question whether the Federal Reserve, for example, really would keep interest rates low for a very, very long period of time.
Speaker: And then you've got the risk of some kind of reaction in riskier assets, you know, fall in stock prices or whatever it might be, which takes you back to square one.
Speaker: It basically means you can't really get going in the way that you would really want to get going.
Speaker: So you end up in a trap still of low growth and low interest rates.
Speaker: So that's the trap, as you mentioned, but what ways other than through monetary and fiscal policy could this be done?
Speaker: Well, there are some long-term solutions and some of these people talk about quite a lot, but of course they are difficult to fix in the kind of political cycle.
Speaker: But the long-term solutions really are mostly about improvements in education outcomes, trying to improve geographical and social mobility, so people who might be good at something have the opportunity to prove themselves as being good at something.
Speaker: perhaps also changes in regulatory and competitive environments to try to encourage better companies to come through and to thrive.
Speaker: But at the same time there's a peculiar sort of link between monetary policy and the supply side story which is possibly a perverse link whereby monetary policy particularly in the guise of QE and asset purchases more generally is actually a process of nationalizing capital markets
Speaker: giving false signals really within capital markets and therefore leading to a misallocation of capital.
Speaker: And if this is happening, and I think there is some evidence to support this idea, then of course what you're doing on monetary policy is counterproductive in terms of boosting productivity.
Speaker: And that I think is a serious problem for policymakers in the years ahead.
Speaker: Stephen, this is a fairly downbeat message coming at a time when actually things are looking up a bit, vaccines are rolling out, world economies are improving.
Speaker: You're throwing a cold shower on everything.
Speaker: Well, I'm trying not to.
Speaker: I'm simply looking beyond the next few months.
Speaker: There's no doubt that with the vaccine process coming through this year and unlocking taking place, there's a very, very good chance of seeing very, very powerful recoveries coming through.
Speaker: And after all,
Speaker: everything fell off a cliff.
Speaker: Last year, we got the opportunity this year to climb back up the cliff.
Speaker: That's genuinely very good news.
Speaker: But we shouldn't lose sight of the fact that the pandemic comes after many, many years of disappointing economic outcomes, particularly in growth,
Speaker: inflation, productivity and wages and so on.
Speaker: And if you really want to build back better, it's not just a case of dealing with the near term unlocking, you've got to deal with these longer term issues as well.
Speaker: And that's where I think there are still some significant dangers ahead that we may well find a very strong recovery coming through in the next year or so, but simply leads to complacency with regard to the longer term challenges.
Speaker: Stephen, thanks very much indeed for that summary.
Speaker: Thank you.
Speaker: Let's turn to the latest developments on the COVID-19 front, where here in Europe, the news flow this week has been dominated by rising concerns over the safety of the AstraZeneca vaccine.
Speaker: Let's get the details from Fabio Balboni, senior European economist.
Speaker: Fabio, let's start with the AstraZeneca vaccine.
Speaker: What's the latest there?
Speaker: This has been dominating the headline.
Speaker: So the European Medicine Agency has confirmed a possible link between the AstraZeneca vaccine and rare blood clots.
Speaker: And however, the EMA has also reiterated that the risk benefit ratio remain in favor of using the vaccine as recommended.
Speaker: It's used with no age restrictions.
Speaker: Despite that, however, we have seen countries continuing to have restrictions in some cases related to age.
Speaker: In other cases, like the Netherlands, suspending the use of the vaccine altogether.
Speaker: And even in the UK, which has used AstraZeneca extensively so far, the regulator has recommended that people aged between 18 and 29 should be offered an alternative to the vaccine.
Speaker: So obviously that could have implication in terms of the rollout of vaccine going forward and the ability of countries to hit their targets in terms of herd immunity.
Speaker: What's the broader COVID-19 picture across Europe?
Speaker: Well, over the Easter break, we've been a bit of a slowdown in terms of pace of vaccination and also new COVID-19 cases have eased off a little.
Speaker: But that might be a one-off.
Speaker: So we need to see what happens in the coming weeks to have...
Speaker: a more stable picture of what's going forward.
Speaker: But what's important in hospitalisation rate and in particularly intensive care units across the continent continue to increase, putting pressure on the health sector.
Speaker: And that means that countries are still maintaining restrictions in place.
Speaker: And for example, most recently, the Italian Minister for Regional Affairs confirmed that there won't be any meaningful loosening of restrictions before May.
Speaker: Otherwise, when we look at the UK, actually the UK has confirmed the planned loosening of restrictions from the 12th of April and so far remains on track for meeting the following steps in terms of loosening restrictions.
Speaker: So the situation in the UK is still looking better.
Speaker: What's the latest economic data showing us?
Speaker: Well, the latest data have been fairly positive over the last few days.
Speaker: We've had the final PMIs for March and in particular we saw an upward revision to the services PMI, which was quite surprising considering the renewed lockdown extended in some cases, in some cases even tightened up over the Easter period.
Speaker: So that shows the underlying resilience of the economies and in particularly the forward looking indicators were looking strong across both the services and the manufacturing sector.
Speaker: We then add more data pointing to the resilience of the labour market in particularly March data for Germany and Spain show that short-term work compensation schemes coming down and the underlying labour market data looking a little bit better.
Speaker: So that bodes well for
Speaker: a relatively quick recovery once restrictions will be lifted.
Speaker: And similarly, in the UK, the labor market is looking healthy.
Speaker: And finally, retail says these are looking weaker, particularly through to February, but that's largely expected against the background, of course, of renewed sales.
Speaker: restrictions.
Speaker: So far the data is looking good but of course in terms of data going forward much will depend on the pace of vaccination and that will really drive when countries might be able to lift the restrictions and with that economic activity returning to normal levels.
Speaker: Fabio thank you very much.
Speaker: Thank you.
Speaker: Fabio mentioned the PMI data there.
Speaker: The latest global numbers are out and James Pomeroy, global economist, is here to bring us up to speed with what they can tell us about the recovery.
Speaker: So James, those PMI numbers were good.
Speaker: How good were they?
Speaker: Yes, so the global PMIs in March were incredibly strong.
Speaker: The composite PMI here at a six and a half year high, the manufacturing PMIs up at a
Speaker: decade high in the service sector, even that the part of the economy that suffers most from restrictions and higher cases up at a three year high on a global basis.
Speaker: So all the activity numbers looking pretty good.
Speaker: But it's also interesting that that's feeding through into prices.
Speaker: And we know there's a lot of input cost pressures facing companies across the world at the moment, be that higher commodity prices, be it higher shipping costs, semiconductor shortages,
Speaker: or pandemic related expenses.
Speaker: And we're seeing those numbers shoot up.
Speaker: And that's both on the manufacturing side and the services side, particularly in the US, where those input price numbers are considerably higher than they have been at any point in history.
Speaker: So we are looking at an environment here where there's a strong rebound in activity, but clearly a lot of pricing pressures coming through for companies across the world.
Speaker: So let's break it down.
Speaker: The services sector looks strong, even in places where we've had lockdowns.
Speaker: Yes, that's exactly right.
Speaker: And as Fabio sort of alluded to on the Eurozone side of things, we had this pick up in the service sector PMIs in Europe, even where we've had more restrictions come in or restrictions extended as COVID case numbers have picked up.
Speaker: And that is a little bit surprising.
Speaker: But what's not quite as surprising is how you've seen in those parts of the world where the outlook in terms of reopening is looking more positive, so notably the US and the UK, where vaccine rollouts have been much quicker, and therefore there's a clearer path maybe towards reopening in the course of the coming months.
Speaker: The US number is incredibly strong.
Speaker: with the ISM services figure hitting a record high.
Speaker: So clearly, these are incredibly strong numbers.
Speaker: It is worth highlighting, though, two countries did see their PMI services rolled back, and they're India and Brazil, two countries where we have had to pick up in cases that clearly has weighed on a little bit of sentiment in the sector.
Speaker: And when it comes to manufacturing, the strength there is really broad based.
Speaker: It really is.
Speaker: And now only a handful of economies have got a manufacturing PMI that's still in contractionary territory, Mexico, Thailand and Malaysia.
Speaker: And even those improved in March, too.
Speaker: And then you've got some parts of the world, particularly in Europe, where we've got extremely strong manufacturing PMI.
Speaker: Germany's is now at a record high.
Speaker: And this is really sort of broad based improvement in the manufacturing data that's been building over the past few months, as we've seen a continued resilience of demand for goods in the global economy.
Speaker: And the one economy where there is a slightly weaker manufacturing PMI is mainland China.
Speaker: But it's also worth noting that we saw a stronger recovery there in the second half of 2020.
Speaker: So this may be a little bit of a normalisation.
Speaker: But by and large, the global manufacturing sector is looking in pretty good shape right now.
Speaker: James, thanks very much.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thanks to Stephen King, Fabio Balboni and James Pomeroy for talking to us.
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.
