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: You're listening to the HSBC Global Research Mac Review Point, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we assess the impact of the latest supply shock on Europe.
Speaker: We consider whether higher US interest rates could lead to a weaker dollar.
Speaker: And we find out what the latest PMI data can tell us about the global economy.
Speaker: This podcast was recorded on Thursday, the 7th of April, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline van Duyn.
Speaker: And I'm Piers Butler.
Speaker: We begin here in Europe, where the region's economies are battling a host of problems, from soaring energy prices and inflation to plummeting business expectations and consumer confidence.
Speaker: Simon Wells, Chief European Economist, and his team have just published our latest quarterly outlook.
Speaker: He joins me now.
Speaker: Simon, welcome to the podcast.
Speaker: Hi.
Speaker: So in essence, Simon, Europe is experiencing a huge supply shock.
Speaker: That's right.
Speaker: And let's not forget that this comes off the back of a previous supply shock in the form of Covid, which still hasn't fully worked its way through the economy.
Speaker: But what we have now is yet another sharp rise in energy prices, of course.
Speaker: There's also additional trade disruption and supply blockages, which had started to ease.
Speaker: But recent events obviously worsened that once again.
Speaker: But for Europe's economy, as a big net energy importer, it's obviously inflation, which is having the most acute effect here.
Speaker: So on our forecast, eurozone inflation remains above 7% through most of the year.
Speaker: UK inflation in April,
Speaker: could peak at 8.4% on our forecasts.
Speaker: And this, of course, entails a huge squeeze in real terms incomes for your average European household.
Speaker: So yes, a very big shock hitting Europe's economies.
Speaker: And how does that impact the outlook for growth in Europe?
Speaker: Well, as I say, the inflation squeezes real terms incomes because although wage growth might pick up a little bit for workers with strong bargaining power, it probably won't keep pace in aggregate.
Speaker: So we expect quite sizable falls in real terms household income this year.
Speaker: That should slow down growth alongside inflation.
Speaker: a greater uncertainty, and perhaps the impact of policy tightening as well.
Speaker: So all in all, we expect GDP to be a lot lower at the end of our forecast at the end of next year than we did three months ago.
Speaker: So we now forecast 2.6% growth for the eurozone this year, 1.8% growth for the eurozone next year.
Speaker: So what we're looking at relative to previous expectations is a very sharp slowdown
Speaker: But our central case is not for recession.
Speaker: Fair enough.
Speaker: But the word on everyone's lips at the moment when they talk about economics is stagflation.
Speaker: What are the risks of that?
Speaker: Well, absolutely.
Speaker: In this report, we run through various scenarios, including a stagflationary scenario.
Speaker: And what we show is even if energy prices were to go back to their early March peaks and remain there, the additional inflation that would generate and the additional income squeeze would probably be enough to tip Europe into recession.
Speaker: On top of that, you potentially have rationing of energy, you have a bigger uncertainty effect.
Speaker: So the point is, it's very easy to generate stagflationary scenarios for the European economy.
Speaker: I quite agree.
Speaker: And it's not our central case because energy prices have moderated off their highs, but very easy to do.
Speaker: And I would also say our central case of 2.6% growth, a lot of that reflects the base effect from the sharp COVID recovery last year.
Speaker: You'd still get nearly 2% growth, even if there was no growth in any quarter of this year.
Speaker: So what can policymakers do to avoid some of those risks, Simon?
Speaker: Well, that's the trillion euro question, isn't it?
Speaker: The central banks, of course, are caught between this very, very high level of inflation.
Speaker: But the knowledge that if they tighten too quickly or over tighten, they could intensify that income squeeze and be a trigger for potentially tipping the economy.
Speaker: into recession.
Speaker: Our central case is still that the central banks start raising rates through this year, but they will do so fairly cautiously, at least relative to the US Federal Reserve.
Speaker: For fiscal policy, that's the obvious tool to be used and indeed is being used to help households through this income squeeze.
Speaker: But even then, there are limits to what they can do.
Speaker: High debt burdens mean across Europe, governments are very sensitive now to rises in interest rates.
Speaker: And of course, borrowing costs are rising.
Speaker: So it's a tricky situation.
Speaker: Simon, thank you very much for joining us.
Speaker: Thank you, Pez.
Speaker: Let's get an update on the currency markets now with Paul Mackle, Global Head of FX Research.
Speaker: Paul, welcome to the podcast.
Speaker: Thank you very much.
Speaker: Paul, many now say that higher US interest rates should equal a weaker dollar.
Speaker: Do you agree?
Speaker: Well, the short answer is no, we haven't agreed with it for some time.
Speaker: I think many people were grabbing onto certain analogs and drawing comparisons to what would happen when the Fed lifted off in March this year.
Speaker: But we were pushing back against that view for a while, simply because there are periods in the past when the Fed started to raise interest rates, but the dollar actually stayed strong.
Speaker: We think very much that's the environment that we're in.
Speaker: There's been a lot of focus on interest rate curves and how certain segments have inversed recently.
Speaker: What do you think that means for the dollar?
Speaker: Well, again, I mean, we're encountering this thought process that this is something to worry about for the dollar from a cyclical perspective, but we don't agree with that.
Speaker: If you look back in time when the curve has been flattening, say something like twos, tens, or even inverted, actually the dollar was more likely to strengthen than weaken.
Speaker: You know, for us to get bearish on the dollar, we still come back to some of our key conditions.
Speaker: And that is we would need to see a much stronger reacceleration in global growth
Speaker: or perhaps a repricing lower of a Fed fund expectations or rate height expectations.
Speaker: But neither one of those two conditions are on the cards.
Speaker: So as I said, I think the dollar is going to stay stronger than probably people think.
Speaker: And commodity currencies have been on a strong run recently.
Speaker: Do you see that continuing?
Speaker: We're probably more cautious now because they've had such a powerful run over the last few weeks.
Speaker: Now, commodity prices, as we know, have really lifted a lot of commodity currencies, whether in the developed markets like the Aussie dollar or some of the emerging market currencies like the Brazilian real.
Speaker: But I think we need to be a little bit careful because there's been such a potent amount of strength lately.
Speaker: And it doesn't fit with the backdrop for global growth that is clearly showing downside risks, at least over the next quarter or so.
Speaker: And normally that's happening.
Speaker: Those type of commodity currencies tend to underperform.
Speaker: We take a closer look at the outlook for the Australian dollar in the latest currency outlook.
Speaker: We've liked it for quite a long time, but now we're beginning to think it's looking overstretched.
Speaker: Paul, thanks very much.
Speaker: Thank you very much.
Speaker: We end this week with a look at the latest PMI data.
Speaker: James Pomeroy, global economist, has been assessing the numbers and what they can tell us about the state of the economy.
Speaker: He joins us now.
Speaker: So James, what are the latest headline data showing?
Speaker: So the global PMIs in March looked still relatively decent in terms of the growth outlook.
Speaker: Things clearly softened a little bit, a combination of
Speaker: higher prices, geopolitical tensions, of course, and higher numbers of COVID-19 cases in Asia, all weighing on the outlook.
Speaker: But the pace of growth is still relatively robust, all of that being considered based on those PMI figures.
Speaker: The really interesting part, though, is more on the pricing side, where we saw another pickup in input price components in both the manufacturing and the services side.
Speaker: And we're starting to see a resurgence in those output price indicators too, particularly
Speaker: on the services side of the economy.
Speaker: So it suggests that whilst activity may be slowing down a little bit, inflationary pressures continue to build.
Speaker: Are you seeing any differences between services and manufacturing?
Speaker: So the manufacturing data almost universally softened just a little bit.
Speaker: Data still look pretty decent.
Speaker: There's still relatively robust demand for goods across the world.
Speaker: And those manufacturing numbers continue to reflect that.
Speaker: And those price increases are pretty evident in almost every single economy we get data for.
Speaker: The services side is a little bit more interesting.
Speaker: There's a little bit more divergence in the West, so in the US and in Western Europe.
Speaker: We've seen slightly better data actually in March, which would be a surprise given some of the cost of living squeezes and some of the uncertainty that's clearly increased in recent months.
Speaker: But most of this is because of the reopening of a lot of economies and the continued reopening of a lot of economies after restrictions came off at the beginning of the year.
Speaker: So there's still a little bit momentum.
Speaker: in the service sector in that part of the world.
Speaker: But we're seeing a very different story in China where things look a little bit softer.
Speaker: And let's look at China in more detail.
Speaker: COVID-19 cases have risen there, prompting further lockdown measures.
Speaker: What impact have these had?
Speaker: So the Chinese data have fallen off quite considerably in March, particularly in the service sector, where we saw the biggest drop in the PMI since the very beginning of 2020.
Speaker: So much, much weaker data on the service sector, manufacturing data a little weaker too.
Speaker: So clearly these restrictions that have come into place are having quite a big impact on the near term growth outlook, particularly affecting the service sector.
Speaker: as consumers either can't go out and spend or choosing to be much more cautious with their spending and that doesn't bode well for the near-term growth outlook.
Speaker: You mentioned some of these higher input cost indices.
Speaker: How worried should policymakers be?
Speaker: It's clearly a concern.
Speaker: A lot of these input costs are surging because of higher commodity prices but also higher wage costs, particularly in the service sector and policymakers across the world are already grappling
Speaker: We've got a whole range of different issues around inflation, high inflation, uncertain inflation.
Speaker: And these continued increases in these input costs are clearly going to add to that.
Speaker: For now, at least the spillover into output prices hasn't been quite as clear.
Speaker: But it's one of the big risks for inflation throughout 2022 is that businesses, given the relatively robust inflationary,
Speaker: demand outlook continue to pass more and more of these higher input costs on to consumers and therefore there is an upside risk to headline inflation rates from these very elevated input price and output price indices in the PMIs particularly in the service sector and where we're seeing costs rise very very quickly now.
Speaker: James thanks for the update.
Speaker: Thank you very much.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Simon Wells, Paul McEl, and James Pomeroy.
Speaker: 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.
