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The Macro Brief – Ready for rate cuts?
37 Plays1 year ago
With the major central banks poised to begin their rate cutting cycles, we assess the outlook for the world economy with Janet Henry, Global Chief Economist. Disclaimer: https://www.research.hsbc.com/R/101/TrQbThH Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn https://www.linkedin.com/feed/hashtag/hsbcresearch/ or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Global Viewpoint Podcast
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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.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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This podcast was recorded for publication on the 28th of March 2024 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
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And don't forget that you can follow this weekly podcast on Apple and Spotify or wherever you get your podcasts.
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Just search for The Macro Brief.
World Economy Prospects
00:00:39
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Hello and welcome to the Macrobrief.
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I'm your host, Piers Butler.
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On this week's programme, we're assessing the prospects for the world economy.
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In recent months, we've seen some green shoots in the data, and there are early signs that world trade may be picking up.
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However, it's the outlook for interest rates that is at the forefront of investors' minds.
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And while more central banks have started cutting, the key majors, notably the US Federal Reserve, the European Central Bank, and the Bank of England, are still waiting patiently in the wings.
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To discuss the outlook, I'm joined by Janet Henry, Global Chief Economist.
00:01:12
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Janet, welcome to the podcast.
00:01:13
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Thank you, Piers.
00:01:14
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It's a pleasure to be here.
00:01:15
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So, Janet, reading the data leaves is not getting any easier, is it?
00:01:19
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No, it's not.
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And obviously, central banks globally, particularly the majors, have told us that their future rate decisions are data dependent.
00:01:28
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And one, I think they've been subject to a lot of revisions.
00:01:31
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We've seen some quite volatile data on GDP in terms of revisions, particularly in those countries where they do provide monthly GDP.
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But even within individual indicators, I mean, in the eurozone, we've got three or four different wage indicators.
Economic Data and Global GDP Forecasts
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And actually, they're pointing in different directions.
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And even in the US, as much as we pay a lot of attention,
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to non-farm payrolls, which is still showing robust growth, the household survey measure of employment, especially on an adjusted basis, actually shows a much weaker growth in employment.
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So yes, it is a complicated picture.
00:02:06
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But is it fair to say that the data is no longer getting worse in overall terms?
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Broadly speaking, it is peers.
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As you know, one of the key indicators and main surveys that people look at to have a kind of real-time assessment of what's happening in the global economy are the purchasing managers' surveys.
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And, you know, the global composite and the regional composite PMIs are improving.
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And actually what was quite significant in the February release, the global manufacturing PMI actually rose above 50.
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So that's now an expansionary territory for the first time since the middle of 2022.
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So, yeah, it may not be great in many regions, but even some of those regions that have been quite disappointing over the course of the last six months or so, like mainland China and large parts of Europe, things are no longer getting worse.
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And there's even signs of life, some green shoots happening.
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happening in some of the mainland China and European data.
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Okay, so let's get to it.
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What are your new forecasts?
00:03:05
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Our new forecasts, well, globally, we've actually revised up our 2024 forecast from 2.4 to 2.6%.
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And it's a familiar story.
00:03:16
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It's what we've been doing over the course of the last few months, which is to revise up the US and India, mainly because of growth already delivered.
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Both economies had an even more robust fourth quarter forecast.
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than had been anticipated.
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So that's more than offset some downward revisions, the main ones being actually Saudi Arabia, which is very much an oil production cuts story, and Argentina.
00:03:43
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The shock therapy being delivered by President Milley is delivering a quicker deflation, but also a deeper recession than we'd previously anticipated.
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But the net effect was to revise out that global GDP figure, and that takes it to 2.6% for 2024.
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And for 2025, we've kept our 2.6% annual average growth for the global economy for next year.
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Now, last week I interviewed one of your colleagues, Shanela Rajanagam, our trade economist, about her report, The Great Relocation, and the winners and losers from the shifts underway in the world's trade corridors.
00:04:18
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How are you factoring that into your outlook?
World Trade and Supply Chain Shifts
00:04:20
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Well, the world trade
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The trade cycle is also showing some signs of green shoots.
00:04:27
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They are quite limited at the moment and they're mainly in specific areas of electronics and specific Asian countries.
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That's where you tend to see the biggest improvement.
00:04:39
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In terms of how we're thinking about trade and trade growth in the coming year, at the moment it seems to be primarily an inventory rebuild, especially in the US we get great data on a sector by sector basis and inventory to sales ratios have fallen back quite a lot because actually good spending in the US has picked up over the course of the last year.
00:04:59
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At the moment we're not confident of a sustained recovery in world trade growth,
00:05:05
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We really would need to see a meaningful acceleration in goods demand in some of the major economies.
00:05:11
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But as you say, there are relative winners and losers from this supply chain shift.
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And that's what's really difficult to try to anticipate in terms of quarterly or even annual GDP forecasts.
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We know what's happened in the last couple of years, which is obviously Mexico's overtaken China.
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to become the America's biggest import partner.
00:05:36
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But China's exports to Vietnam have been very strong and Vietnam's exports to the US have been quite strong.
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But also policy is constantly evolving and becoming more complicated by some of these shipping related disruptions and by government policy.
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We've got a lot of protectionism and industrial policy underway.
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And while that is encouraging a lot of FDI, for instance, to go back to the US, we're also perhaps seeing some retaliatory action, even from US allies, that's encouraging that FDI.
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which also links into what happens in trade flows.
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So the short answer to your question, how do we build it into our forecasts?
00:06:18
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We cautiously expect an extrapolation of some of the recent trends, but it's still going to be a volatile world for government policy and those ongoing geopolitical strains that have influenced some of these supply chain shifts.
Central Banks and Inflation Challenges
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I guess the order of the day in all of this is don't extrapolate too far.
00:06:38
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Another one of your colleagues, our senior economic advisor Stephen King, has written about the dangers of premature easing in the face of sticky inflation.
00:06:46
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How gradual is disinflation going to be?
00:06:49
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Well, we saw a rather rapid disinflation in the course of 2023, particularly in the second half of the year.
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And that's obviously when financial markets got extremely optimistic for the pace of rate cuts coming through.
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And the early part of 2024 was much, much more gradual in terms of the disinflation.
00:07:08
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And actually, on a kind of sequential basis, there were some upside surprises.
00:07:14
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You saw it in the Eurozone and you saw it in the US, but you also saw it in some of the emerging economies as well.
00:07:21
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But I think that central banks are alert to the risks.
00:07:24
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They were never indicating that they were going to be cutting interest rates anywhere near as quickly as financial markets had priced in at the end of last year.
00:07:33
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And their main concern at the moment is service sector inflation.
00:07:36
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You know, a lot of the disinflation was driven by energy, but that's unlikely to drive further disinflation and by core goods prices.
00:07:45
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But if they're already at zero, they're probably not going to go much lower, especially if goods demand is actually proving a bit more resilient.
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So really it is that service sector rigidity on inflation, which is why they are a bit concerned.
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They want to see a bit more rebalancing in labour markets, signs that wage growth is slowing down.
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But in particular, they need further evidence that the disinflation process is continuing to be confident that it's still eventually on track to get back towards 2%, even if it takes a little bit longer than they'd
AI and US Productivity
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hoped.
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Now, we can't have a podcast without talking about AI.
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And I know your team has written about the subject.
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And in particular, in the context of the U.S., is there an argument that the U.S. could benefit from improved productivity as they appear to be earlier adopters of applying AI in individual businesses?
00:08:37
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The short answer to that question is yes, and there are already some signs.
00:08:42
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To some extent, the US outperformance on productivity was even evident before the pandemic, especially relative to European economies.
00:08:51
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But it's been particularly strong over the course of the last year or two in particular.
00:08:56
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And I think one of the biggest reasons just broadly for the US outperformance on productivity has been much higher investment spending in the US broadly.
00:09:07
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And a lot of that has been driven by software and intellectual property, which, of course, you know, AI is a huge part of that.
00:09:15
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What you've also seen in terms of investment spending in Europe, the investment that there has been has also been to some extent in the similar sectors, just not been on the same kind of scale.
00:09:25
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But also when you think about productivity, there's a kind of structural story on productivity and AI is certainly benefiting that.
00:09:32
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But there's also a cyclical element.
00:09:35
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So actually, you know, it's it's it's almost easier to get that cyclical element when the economy, as it did in the second half of last year, was printing GDP prints of, you know, between three and five percent to get that stronger productivity lift.
00:09:49
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But but yeah, it is clear that at the moment, at least the U.S. is certainly on a stronger productivity performance.
00:09:56
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And as you mentioned, my team have written about this.
00:09:58
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Chris Hare wrote a particularly interesting point piece which compared the U.S. with the eurozone and the U.K.
00:10:05
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Yes, and we actually we had him on the podcast on that was very interesting piece.
Elections and Fiscal Policies 2024-2025
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Now, we've talked a lot about 2024 being a year of elections, half the world roughly going to the polls in some shape or form, and about what the impact that would be.
00:10:18
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But what about 2025 when all these elections are behind us?
00:10:21
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Will there be a sort of hangover effect?
00:10:23
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And will we see a lot of fiscal tightening?
00:10:26
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A lot of fiscal tightening, I suspect, is unlikely, Piers, unless, of course, the markets force a little bit more in the way of fiscal tightening.
00:10:36
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The UK had its own experience of that, recall, not so long ago.
00:10:41
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So I think 2024 is not going to have a lot of fiscal tightening, partly because of the elections and the role that that's playing.
00:10:49
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Europe has...
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obviously going to return to the fiscal rules.
00:10:53
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I suspect they won't be strictly adhered to ahead of the European parliamentary elections, but policy should be mildly restrictive in 2025.
00:11:03
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But remember in Europe, there's still the impact of the next generation EU fund.
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So it's really whether governments in Europe can offset what they're doing domestically with their budgets, but use the next generation EU fund to support government spending in that regard.
00:11:19
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They haven't been particularly good at execution.
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And in the US, obviously, it will be influenced by the election outcome.
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The polls are pretty tight still at the moment, but it seems unlikely that either a party will win a clean sweep.
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which will limit what they can do on the fiscal side.
00:11:39
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Obviously, both of the major candidates are quite happy to spend, but they've got very different views on taxation and whether they're going to increase or be cut.
00:11:48
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Actually, it may end up 2025 in the US, more policy being undertaken with executive order, which probably means more in the direction of trade and more protectionism type measures rather than a broad fiscal move.
00:12:01
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But at the moment, no significant tightening in the US, even in 2025.
Interest Rate Forecasts and Market Sentiments
00:12:06
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So let's finish with where that leads you on policy rates.
00:12:10
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And also I was curious as to your sense of how optimistic the market is.
00:12:15
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It obviously started the year, very optimistic.
00:12:18
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And our team was led by you, was right in being a little bit more cautious.
00:12:23
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Has the market adjusted?
00:12:24
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The market has adjusted.
00:12:26
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We have not changed our forecasts for some time.
00:12:30
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We said in December that the Fed and the ECB would start cutting interest rates in June.
00:12:36
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That's still our view.
00:12:37
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I guess if there's a risk, it could be that the ECB possibly even goes a little bit earlier.
00:12:43
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But we think that they do want to wait for a bit more data.
00:12:47
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And that's certainly been the messaging that's come through.
00:12:50
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The Fed, if there's a risk, it could be that it comes in July rather than in June.
00:12:54
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But we still think that as long as the inflation data do not surprise on the upside over the next couple of months, that we will still get the start of the easing in June.
00:13:05
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The Bank of England is the one that we have changed.
00:13:07
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We previously thought that they would cut rates in August.
00:13:11
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But obviously, Liz Martins and other members of the team put out that the change in the UK rate view was
00:13:16
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last week in the wake of the latest decision by the Monetary Policy Committee in the UK and it was a dovish read, no longer having anyone voting for rate increases and the UK inflation data
00:13:30
Speaker
should show some disinflation.
00:13:32
Speaker
It might be quite short-lived, but actually they see UK inflation over the next few months, mainly because of utility price changes falling below 1.5%.
00:13:41
Speaker
So yeah, broadly speaking, our views on the majors are unchanged from three months ago.
00:13:48
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And we look for the Fed and the ECB to cut rates by 150 basis points by the end of 2025.
00:13:54
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Janet, on that note, thank you very much for joining us.
00:13:56
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Thank you very much, Piers.
00:14:01
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Elsewhere in global research, we published two of our proprietary surveys this week.
00:14:05
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Our EM sentiment survey shows that investors are turning modestly bullish on EM assets.
00:14:11
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Risk appetite has improved and cash levels are down, and the global rates outlook is perceived to be both the key upside and downside risk.
00:14:19
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Meanwhile, our survey of UK consumers finds that their spirits have improved somewhat.
00:14:24
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With inflation falling back, respondents are slightly less worried about the cost of living.
00:14:28
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And when it comes to how they spend their money, holidays are the priority.
00:14:32
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But eating out appears to be under pressure.
00:14:35
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Also this week, we've just published the latest edition of Talking Points, our monthly look at the reports covering our nine key themes.
00:14:42
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In this edition, we look at supply chain shifts, 3D printing, and green transport to name just a few topics.
00:14:48
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Do take a look for our view on some of the long-term trends reshaping the economy.
00:14:53
Speaker
Finally, we're getting very close now to the first HSBC Global Investment Summit.
00:14:57
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More than 3,000 delegates will come together in Hong Kong this April to hear insights into global trends from a stellar lineup of experts, political leaders, and decision makers.
00:15:07
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For more details on that or any of the research that we've talked about on today's podcast, please email askresearch at hspc.com.
00:15:18
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So that wraps up another edition of The Macrobrief.
00:15:20
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Thanks very much for listening.
00:15:22
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We'll be back again next week.