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The Macro Brief – Guarding against complacency
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With global markets seemingly unruffled by recent shocks, Janet Henry and Simon Wells look at the key risks that could surprise policymakers and investors over the next few months.
Disclaimer: https://www.research.hsbc.com/R/101/NJkrHwb
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Transcript
Podcast Series Introduction
00:00:02
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show.
00:00:23
Speaker
This podcast was recorded for publication on the 3rd of July 2025 by HSBC Global Investment Research. All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Global Financial Markets Overview
00:00:35
Speaker
And remember to like and subscribe to The Macrobrief wherever you get your podcasts.
00:00:42
Speaker
Hello, I'm Janet Henry, HSBC's Global Chief Economist, and welcome to The Macro Brief, where we look at the issues driving financial markets across the globe. And from tariffs to geopolitical conflicts to central bank divergences and US s fiscal discussions, there's been plenty for those markets to digest so far this year.
00:01:03
Speaker
Despite all of this uncertainty, risk assets, and particularly the S&P, have been remarkably resilient, bouncing back from their lows around Liberation Day in early April.
00:01:14
Speaker
But with plenty of key milestones on the horizon, are investors being too complacent about potential risks ahead?
Economic Forecasts with Simon Wells
00:01:22
Speaker
To help me discuss this, I'm joined in the studio by Simon Wells, Chief European Economist.
00:01:28
Speaker
Hi, Simon. Hi, Janet. So, Simon, we've just been through um a forecasting round. Obviously, last week published our global and our Asian economic quarterlies. um And earlier this week, you published your European economics quarterly. And I think in all of our reports, and particularly the global and the European, um we did discuss the the geopolitical um overlay and um some of these um upcoming milestones. and We're still waiting to hear what happens on the tariff front.
00:01:59
Speaker
And obviously, um in terms of, you know, what I wrote about in the quarterly was the fact that, you know, we've we've certainly learned that tariffs are a multipurpose tool, um that they are designed to, I guess,
European Tariff Discussions
00:02:12
Speaker
raise revenue. And and they did raise a certain amount of revenue um in in April, um in particular in the US.
00:02:18
Speaker
And I still think that that President Trump is keen to deliver tariffs as a means of ah generating government revenue. We also talked about them being designed to re-industrialize the US by you know reducing imports into the US.
00:02:33
Speaker
But you know despite all the different reasons for for driving tariffs, um I think we know first and foremost that probably they are not finished, even with a court case underway regarding the legality.
00:02:45
Speaker
ah some of these tariffs. So from a European perspective, you started off with the UK and and clearly there is some kind of framework deal in place, even if we're still waiting for the deals. um As we look towards next week and the all important 9th of July deadline, how are you looking at the situation in Europe? Do you think we'll get much? Will it just be extensions? Will we get a complex European deal? What are you anticipating?
00:03:09
Speaker
Yes, well, as you mentioned, the UK, Janet, obviously with the UK, we have that limited deal done. The UK has the baseline tariff, the 10% baseline. And it also has a roughly balanced goods trade position with the United States. So those are two important factors. And yet the UK still has the 10% baseline.
00:03:31
Speaker
Some EU officials recently have been saying that a 10% baseline is unacceptable um for the EU. Now, others have said, and particularly more recently, that perhaps the 10% under certain conditions can be acceptable.
00:03:44
Speaker
So there's still some disagreement within the EU on exactly how it should be approached. Now, in our view, of course, the 10% baseline is probably going to be there to stay.
00:03:58
Speaker
And the other thing that matters, of course, is that Trump wants the quick deal. And that's what he got with the UK. But nothing particularly quick ever happens in the European Union. You've got to form a consensus and bring it everyone on board.
00:04:14
Speaker
So I think it's going to be trickier. Of course, the US administration has talked about a run of deals ahead of the 9th of July. in our view, I think it's pretty difficult to see a comprehensive or ah maybe even limited deal um done with the EU. So yes, I think we are in for perhaps another burst of uncertainty, at least in the near term, around the 9th of July, that may well weigh on trade and investment sentiment in Europe once again.
Impact of Tariffs on Europe
00:04:42
Speaker
It may, but you called your European Economics Quarterly, nothing ever happens. and There is a lot of uncertainty. and And even once we get through this July 9th, end of the 90-day pause on tariffs, we know that probably there'll be some kind of extension to those deadlines. And indeed, that we will probably not go below that 10% baseline because they are going to be a source of revenue.
00:05:05
Speaker
But I guess the other area where Europe could be vulnerable is on the the sector tariffs. We know in the following six months, um there will be the results of all of these different reviews that are still underway. Obviously, we've got auto tariffs in place. But the other key ones people are looking at are the chips. And I guess from European perspective, um pharmaceuticals. so So that's another potential um headwind for Europe.
00:05:27
Speaker
In terms of Europe's approach, are you anticipating much in the way um of retaliation? Because obviously for the US, we're concerned about the the inflationary consequences of US tariffs. It is making goods more expensive for US companies and US consumers.
00:05:44
Speaker
But you've argued from a European perspective, it'd be much more disinflationary. Does that still hold? Or are you concerned that Europe might actually retaliate to to some US tariffs?
00:05:55
Speaker
I mean, broadly, I think it does still hold. If we look at what we've learned over the past three months or so, it is probably that for Europe, it's unambiguously disinflationary.
00:06:08
Speaker
Weaker demand for exports from the United States, kind of reducing demand pressures on inflation, trade diversion potentially from China, and cutting prices.
00:06:19
Speaker
And of course, we've also seen a bit of euro strength since April, which is all are acting in the same direction. Now, back before the 2nd of April, the EU had been talking kind of tough, you know, yeah, we will we will retaliate if we if need be.
00:06:37
Speaker
But trying to get all the EU nations to agree on what that retaliation will be and how strict it should be, is of course really difficult.
00:06:48
Speaker
The EU struggled even to form a package of retaliation against the aluminium and steel tariffs, let alone the entire baseline tariffs. And they've even delayed what they'd planned um for aluminium and steel. So it is difficult for them. Yes, they may continue to to talk tough, but in reality, will they get the unity among European leaders?
00:07:10
Speaker
I'm pretty sceptical. Right.
Europe's Fiscal Challenges
00:07:12
Speaker
And so getting back to the point you're making about this ah broadly being very disinflationary for Europe, because obviously you've got the currency appreciation and and now that the the Middle East situation has calmed to some degree in terms of the impact um on the oil price, we're now back to having a lower level um of energy prices, even if they're not quite back at their um you know they low point um at the start of May.
00:07:36
Speaker
But what about the um the fiscal um outlook Again, you know, we we're seeing what's happening in the UK regarding the fiscal situation. But at the start of the year, there was enormous optimism about the German fiscal stimulus in particular. So how much do you see the fiscal support in Europe adding to the growth and the demand and the, I guess, the inflationary picture in Europe versus the headwinds coming from to world trade from these more sweeping US tariffs?
00:08:09
Speaker
I think there's a there's a couple of things to say on the fiscal side. The first is if we kind of look at our central case, what we've got in our forecast. Last year's fiscal consolidation within the EU was very short-lived.
00:08:21
Speaker
um We've already now got the escape clause for defence spending, Germany's ramping up spending. And if we... look over what we forecast. Yes, we have a degree of scepticism in terms of what can actually be done in the near term, but we've put in a fiscal expansion for next year, about half a percent of GDP. So depending on your view of multipliers, that could maybe add up to 0.4 to European GDP next year.
00:08:47
Speaker
Now, in that sense, it's welcome. Obviously, Europe's growth rates are pretty low, so that's ah that that's a positive. It's also uncertain, and that's something that the ECB will be considering. How how big will the will will the fiscal response actually end up being?
00:09:04
Speaker
So in the near term, I think it is supportive. We have seen a bit of a sea change in the mindset regarding fiscal policy in Europe. On the other hand, and going back to the kind of nothing ever happens thing,
00:09:17
Speaker
All of the resilience that we've seen of Europe's economies to various shocks, you know dating back to the financial crisis or Covid, they have all come at the cost of a huge ratchet up in public debt levels.
00:09:29
Speaker
So we are actually coming into this sort of unprecedented geopolitical time ah with very, very elevated public debt levels. And so I think there's two ways of viewing it. Yes, it's near term supportive.
00:09:41
Speaker
But on the other hand, um the scope for really serious fiscal support were there to be another big negative shock to the economy. That, of course, is is quite limited, particularly in the high debt countries.
00:09:56
Speaker
ah The UK, of course, being one of those of these days, as you mentioned. Yes. and And I mean, you know, this week, you know, there's there's been a lot of focus on the UK with with the welfare bill, um but also um on the US because of the um One Beautiful Bill Act.
00:10:15
Speaker
ah which seems to be reaching some type of conclusion. um And obviously, President Trump is keen to get it through before um Independence Day. and we'll We'll know shortly um whether that's going to be the case.
Global Policy Rates and Strategies
00:10:27
Speaker
and And let's just finish up with it with with a quick chat um on what all of this means for for policy rates from the majors um over the course of the next year, because, you know, we've seen, you know, recently quite a big shift in in market expectations for the Federal Reserve back towards pricing in more than two rate cuts um for this year and and quite a lot next year. And it seems to me for next year, really part of the the expectation of of more aggressive rate cuts next year is one, that there are some signs that the the data
00:10:59
Speaker
are softening a bit, particularly now even in areas of the labour market, but also in anticipation of a new chair of the Fed who might be more amenable um to cutting interest rates um a little bit more swiftly. Now, we don't necessarily buy that. We're still expecting fewer rate cuts. Then the market is pricing. We've still only got three Fed rate cuts by the end of 2026 because we do see higher inflation um and and lower growth and rising unemployment.
00:11:28
Speaker
um What about the ECB? As President Trump likes to remind us, the ECB has already done a lot more than the Federal Reserve. But, you know, with with the fiscal happening in Europe, um you're you're still not convinced um that the ECB needs needs to rush into doing any more rate cuts. Is that fair?
00:11:45
Speaker
I think that's fair. 2% is pretty much in their range of middle of the range that they offered for neutral. Underlying inflation seems to be coming down and converging to target.
00:11:56
Speaker
Strategically, if you can stop at 2 and leave something in the tank, why not do so? And it's also this week, of course, released its strategy review, which let's face it, wasn't earth shattering. But um Insofar as what it said, it was it sort of hinted at the fact that, well, fine-tuning inflation around the 2% target isn't necessarily what we're about anymore. We need to react to big deviations of inflation from target.
00:12:25
Speaker
So even though they're projecting a bit of an undershoot, it suggests that the bar to moving from where we are here is potentially quite high. So we are on hold at 2%. There is a decent risk that come September they decide decide to go one more, but um they're pretty much at the bottom of the cycle, I think.
Market Risks and Global Conflicts
00:12:44
Speaker
So, Simon, just to conclude on ah on where we started, um there are a lot of milestones ahead. Tariff deadlines still, um trade uncertainties, fiscal um uncertainties um against a backdrop of a lot of debt.
00:12:58
Speaker
And um are markets being too complacent? Well, Janet, I mean, you or i might think that if there's major conflicts in the Middle East and at the same time there's a fairly major global trade war going on, we might have expected risky assets to come down a little bit and maybe the oil price to go up.
00:13:19
Speaker
So I guess my answer is if you think that we now have a lasting peace in the Middle East, then probably markets aren't being complacent. But outside of that scenario, I guess it's got to be a risk.
00:13:31
Speaker
But where do you stand? Well, I guess our view has got higher inflation and it's got lower growth um and it's got fewer rate cuts. So it seems to me at the moment um market expectations are for some pretty aggressive rate cuts um that we do not have in our forecast. So either if growth is more resilient, they won't be getting the rate cuts or indeed um growth and therefore profits are quite likely to be somewhat weaker.
00:13:58
Speaker
um in the broad economy than might currently be anticipated. But I'm just an economist. Simon, thank you very much. Thank you, Janet.
Episode Conclusion
00:14:12
Speaker
So that's it for this week's macro brief. If you have any questions or comments about anything we've talked about today, then please email us at askresearch at hsbc.com.
00:14:26
Speaker
And don't forget to like and subscribe to the macro brief wherever you get your podcasts. Thanks very much for listening. And we'll be back again next week.
00:15:02
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.