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.
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Speaker: This podcast was recorded for publication on the 30th of January, 2025 by HSBC Global Research.
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Speaker: Hello, I'm Peter Stegall and welcome to the Macrobrief.
Speaker: Now when it comes to the European economy, there's been little to get excited about recently, with slow growth, weak investment and political uncertainty just a few of the challenges.
Speaker: But with some of the latest data ticking up, are we past peak pessimism?
Speaker: We're also going to be looking at the diverging interest rate paths between the ECB and the US Federal Reserve.
Speaker: I'm joined in the studio by Simon Wells, Chief European Economist.
Speaker: Simon, welcome back to the Macrobrief.
Speaker: Hi Peter.
Speaker: Why did the ECB cut today and were you surprised?
Speaker: I wasn't in the least bit surprised and I don't think anyone else was either.
Speaker: The ECB cut today basically because it is confident or increasingly confident that the disinflation process is on track so that regardless of maybe some of the near term energy moves, underlying measures of inflation all seem to be moving in the right general direction and it thinks that inflation is going to return sustainably to target
Speaker: Meanwhile, monetary policy, it thinks, is still restrictive.
Speaker: So it wants to continue easing policy a little bit and head towards a more neutral level.
Speaker: So when you say they'll continue easing, do you see another cut again soon or will they pause a bit like the Fed?
Speaker: I think all the mood music coming out of the meeting today is that March, another 25 basis point cut, is pretty much a done deal.
Speaker: Thereafter it might start to get a bit more interesting.
Speaker: There'll be a more heated debate on at what point policy becomes neutral or put another way, where is the equilibrium or neutral rate of interest which increases
Speaker: is a question that today and so far the ECB has tried to dodge.
Speaker: Our view is that they'll cut again in April.
Speaker: So we'll see two more cuts this year and then we'll get the pause.
Speaker: The market maybe is a little bit less convinced on that sequencing.
Speaker: And I think that's right.
Speaker: It does get more uncertain from April.
Speaker: But for March, yeah, done deal, I think.
Speaker: So for the time being, with the Fed holding this week and the ECB cutting, we're seeing a divergence opening up between those two central banks.
Speaker: What does that divergence mean for Europe?
Speaker: Well, there's a divergence between the central banks because there's a massive divergence in economic performance.
Speaker: The data on the US economy continues to be pretty good.
Speaker: Plus, you've got potential upside inflationary risks, depending on what happens with tariffs in the US.
Speaker: You've got potential upside growth risks in the US, depending on what happens with fiscal policy.
Speaker: In Europe, the mood is pretty gloomy.
Speaker: Productivity is weak.
Speaker: Demand is fairly weak.
Speaker: It's a very different economic outlook.
Speaker: So for now, at least in the near term, it's clear the ECB is going to carry on cutting almost regardless of what the Fed does.
Speaker: We'll circle back to the European growth outlook in a minute.
Speaker: But before that, Bank of England next week.
Speaker: What are your expectations there?
Speaker: We think they're going to cut as well.
Speaker: 25 basis points is pretty much priced in.
Speaker: We think it will be another 8-1 votes.
Speaker: But there's a chance that there's a bit more of a dovish messaging around the Bank of England's cut, given what we've seen in some of the UK data.
Speaker: And again, in the UK, a kind of bit of a gloomy mood as well.
Speaker: So it's possible that we get a unanimous vote and Catherine Mann is also voting for a cut.
Speaker: It's possible that some of the more dovish members go for a 50 basis point cut or even that the majority, just the tone and the mood music is a little more dovish as well.
Speaker: So I think that's the way that risks rise.
Speaker: But in terms of what the Bank of England is going to do, the 25 basis points seems fairly certain.
Speaker: Thank you, Simon.
Speaker: So, I mean, I think you've said the word gloomy a few times already, talking about the European outlook, but you published a note earlier this week called Peak Pessimism, and you mentioned a few data points that seem to be picking up.
Speaker: Do you think Europe is turning a corner?
Speaker: Well, in the weekly tracker, it was called peak pessimism question mark.
Speaker: Ah, OK.
Speaker: So I think that sort of gives you an idea.
Speaker: Yes.
Speaker: So we had the PMIs in January.
Speaker: They picked up a little bit.
Speaker: And for once, there was some better news coming out of manufacturing as well.
Speaker: So in that sense, perhaps alongside a slight tick up in consumer confidence in the eurozone as well, and perhaps a feeling that this inflation is continuing against a backdrop of stronger wage growth.
Speaker: So perhaps people will have a bit more money to spend.
Speaker: There is a chance that we have seen the worst, not least because, as I say, in January, the mood was particularly gloomy.
Speaker: But there are also some other indicators, if we want to look for them, that are less favourable.
Speaker: Obviously, we had Eurozone GDP out recently, and that was a very slight disappointment.
Speaker: The ECB's credit survey showed that credit conditions had retightened as banks got more concerned about their risk perception and their risk tolerance.
Speaker: So there is still unfortunately some bad news out there if you want to look for it.
Speaker: But on the other hand, there is a chance that we have passed the worst.
Speaker: And taking a step backwards, you've written a few papers recently talking about the longer term reasons to feel optimistic about Europe.
Speaker: What are the reasons that we might feel a bit more positive about the future in Europe?
Speaker: Well, yes.
Speaker: I mean, this came out of largely just being fed up with being doom and gloom all the time.
Speaker: And Europe is still, or the EU as a bloc, is still the world's largest economy.
Speaker: Surely there are some opportunities buried within that.
Speaker: And one of the points this makes is if you look in terms of
Speaker: purchasing power parity, so trying to look across economies and adjust for exchange rates and prices and things like that.
Speaker: Europe's underperformance isn't quite as stark as it appears if you just look at GDP itself.
Speaker: So that's the first positive point, if you like.
Speaker: But then if we look across the diverse countries within Europe, there are regions that are doing better.
Speaker: So Poland has recently been one example.
Speaker: So to have the southern economies of Spain and Greece.
Speaker: So a bit of Europe sort of turning itself on its head there.
Speaker: And we think there are still opportunities in sectors like tourism.
Speaker: And then also on the sectoral story, pharma has been a relative bright spot for Europe.
Speaker: So this is all about saying, well, yes, the overall trend growth in Europe may still be pretty weak.
Speaker: And given some of the structural headwinds, that may not change in the near term.
Speaker: But within that, there are some opportunities that investors can look at.
Speaker: So silver linings all round.
Speaker: If you like.
Speaker: Simon, thank you very much.
Speaker: Thank you, Peter.
Speaker: As we just mentioned, the Fed kept US interest rates on hold at their meeting this week.
Speaker: And in the press conference afterwards, Chair Jay Powell indicated that policymakers are in no hurry to cut.
Speaker: As a result, Ryan Wang, our US economist, now expects the next cut in June.
Speaker: Ryan anticipates 75 basis points of cuts in total this year, with no change in 2026.
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Speaker: So that's a wrap.
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