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 Chris Brown-Hulmes.
Speaker: And I'm Mary Watkins.
Speaker: Coming up on this week's programme, following a volatile summer, Murat Ulgan, Global Head of Emerging Markets Research, tells us why there is both good and bad news for EM assets.
Speaker: China's economy has taken a hit from the recent wave of the Delta variant.
Speaker: We look at what the latest data releases can tell us about the slowdown with Jing Liu, senior economist for Greater China.
Speaker: And we assess the state of the UK's finances with Liz Martins, senior UK economist, and find out why attempts by Chancellor Rishi Sunak to impose fiscal discipline could face significant resistance.
Speaker: This podcast was recorded on Thursday, the 2nd of September 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: We begin this week with an update on emerging markets.
Speaker: Murat Ulgan, Global Head of Emerging Markets Research, is here to tell us what we can expect during the remainder of the year.
Speaker: Murat, perhaps we could just start with a bit of a refresher.
Speaker: How have EM assets been performing over the summer?
Speaker: Yes, Chris, the pattern
Speaker: of recent year hasn't changed.
Speaker: It has actually been quite a volatile summer.
Speaker: It's a roller coaster ride in risk sentiment for emerging markets, especially the high yielders.
Speaker: They've seen large swings.
Speaker: And when you look at the performance of EM asset classes, except for equities, they're pretty close or even below the watermark level, meaning either close to zero or negative.
Speaker: And also you might remember from our EM sentiment survey at the end of July, which has also revealed that investors are neutral on EM with lots of cash because they keep gyrating between growth and inflation concerns.
Speaker: Now, you tell me that you've got some good news and some bad news about emerging markets.
Speaker: Let's start with the good news.
Speaker: Yes.
Speaker: So in this piece, we took stock of the global liquidity environment for emerging markets and how it impacts EM.
Speaker: The good news is about the IMF's SDR, which is Special Drawing Rights.
Speaker: It is a basket of international currencies.
Speaker: It's a unit of account at the IMF, and IMF offered...
Speaker: pretty substantial SDRs to member countries, altogether $650 billion.
Speaker: But EM received $275 billion, which is about 0.6% of EM GDP.
Speaker: It is not a game changer for most of emerging market countries, but for some, like particularly in Africa, for instance, it matters because it provides the much needed breathing space on fiscal and external funding needs.
Speaker: And the bad news or the potential bad news is?
Speaker: Well, the potential bad news is about the looming Fed taper
Speaker: It's no surprise, it has been telegraphed very well, although we didn't get much details from Jackson Hole, but our economists are looking for some hints in September meeting and maybe an official announcement in December.
Speaker: It is important because it's going to impact the global liquidity backdrop.
Speaker: The way we measure it is the sum of the balance sheet of global center banks.
Speaker: And the pace of growth is already slowing since the second quarter of this year.
Speaker: It is still expanding.
Speaker: Global liquidity is still rising, but at a much, much slower pace.
Speaker: And clearly, the trajectory of taper will be very critical and important for this indicator.
Speaker: And we have also established a strong correlation between global liquidity growth
Speaker: and fund flows into emerging markets.
Speaker: It takes about three to four quarters of a lag.
Speaker: So considering that the pace is already slowing and the Fed taper will come on the back of that, I think that would be some headwinds for EM fund flows with a lag.
Speaker: And are there any other headwinds that you're anticipating in the autumn?
Speaker: I mean, there are obviously COVID-19 situation variants.
Speaker: They still remain a major headwind.
Speaker: There are downside risks to the global economy.
Speaker: There is still inflation uncertainty.
Speaker: And finally, a resurgent U.S. dollar.
Speaker: Our FX team, they've changed their forecast and they are looking for U.S. dollar to gradually gain ground.
Speaker: So these are all headwinds for emerging markets in the rest of this year.
Speaker: Murat, that's a very helpful summary.
Speaker: Thanks very much for your time today.
Speaker: Thank you, Chris.
Speaker: Let's stick with emerging markets and take an in-depth look at China, where the recent outbreak of the Delta variant has weighed on the economy.
Speaker: Jing Liu, senior economist for Greater China, spoke to Graham Mackay earlier.
Speaker: Jing, welcome to the podcast.
Speaker: Thanks for having me, Graham.
Speaker: So PMI in China seems to have weakened quite considerably at the latest reading.
Speaker: What do you put that down to and what does it imply for the state of the Chinese economy right now?
Speaker: Yes, you're right.
Speaker: We have seen quite some weakening of the PMI figures.
Speaker: In particular, we have seen that for the Caixin one, even the manufacturing PMI now is in the contractionary region.
Speaker: So this actually shows that the recent outbreak of the Delta wave in China has weighed on the economy.
Speaker: In particular, the service sectors have been hit badly because a lot of them may need certain kind of social interaction for the business to go on.
Speaker: As we know, Caixin's survey tend to have more small and medium-sized enterprises in their sample.
Speaker: So this basically illustrates they are actually facing quite a lot of pressure in the recovery.
Speaker: So services have taken a hit, as you say, but it's actually consumption that we expect to take the biggest hit.
Speaker: How significant and long lasting do you think that that's going to be?
Speaker: I think there are many reasons going into the soft consumption recovery.
Speaker: Like many developing countries, China's stimulus package target the enterprises.
Speaker: So without the same kind of helicopter money as in the developed countries, a lot of households are still trying to save more, like as a precautionary saving.
Speaker: So their propensity to consume tend to be lower.
Speaker: And also we have seen that the labor market recovery is also slow.
Speaker: We noticed that the youth unemployment rate stayed elevated at 16.2% in July.
Speaker: That's the same level as July 2020.
Speaker: And as we know, the younger generation tend to consume more.
Speaker: So the weak use labor market point to the weak consumption recovery.
Speaker: And of course, the new wave of Delta spread in China also restrict the consumption.
Speaker: In particular, we have seen during the summer holiday season, some of the traveling just started to pick up.
Speaker: And then the travel bans associated with the containment measure
Speaker: hit this sector.
Speaker: So we expect the consumption to remain weak going forward.
Speaker: And where do you think we are in terms of the delta wave?
Speaker: Is the worst behind us or is it still to come?
Speaker: I think from the data, it looks like the worst has been behind us.
Speaker: At the peak, the daily new cases was like a three digit number around 150.
Speaker: And now the daily cases are around 20 to 30 and majority of them are imported cases.
Speaker: So that basically means that for this round of measures a lot of local government have adopted, it has effectively detained the spread of the cases.
Speaker: However, we expect some of the containment measures to remain in place maybe for the next couple of weeks because Chinese government is very cautious and they still hold the zero tolerance stance.
Speaker: And obviously the effects of the Delta wave are going to be felt for some time.
Speaker: But do you think we're at the point now that we can start to look towards a more positive economic outlook with the worst of the Delta wave behind us?
Speaker: Right.
Speaker: So this is kind of tricky in the sense that actually in the second half of this year, we have seen more headwinds for China's economic growth.
Speaker: We have seen property investment due to regulatory tightening will likely continue to soften for the months to come.
Speaker: So definitely the growth rate will be lower than the first half of the year.
Speaker: And in terms of the export growth, last year, actually, the second half came in with a very strong number.
Speaker: So due to the high base effect, the year-on-year growth will likely soften.
Speaker: At the same time, we also see the tailwinds.
Speaker: which can offset some of the pressure, such as we are expecting to see the rebound of infrastructure investment now that we have seen the government bond issuance start to pick up in the second half of August.
Speaker: And also probably the manufacturing investment will also pick up alongside the capex uptick cycle.
Speaker: All right.
Speaker: So a lot of forces at play there.
Speaker: Jing, thank you very much for that excellent wrap of the state of the Chinese economy.
Speaker: Thank you.
Speaker: Here in the UK, we're heading towards the autumn spending review from Chancellor Rishi Sunak.
Speaker: And with the pandemic severely damaging the public finances, could he be set to enforce greater fiscal discipline?
Speaker: Let's speak to Liz Martins, Senior UK Economist.
Speaker: So Liz, the Office for Budget Responsibility is set to provide an update on the UK's fiscal position on the 27th of October.
Speaker: What are you expecting?
Speaker: We're expecting some good news in the near term for the Chancellor.
Speaker: So the OBR has already told us that GDP is about 5% higher than where it thought it would be.
Speaker: by this time, borrowing is considerably lower.
Speaker: So we think the OBR will allow Mr Sunak to not only announce lower borrowing for the current fiscal year, 21-22, by about £25 billion, but also announce
Speaker: some short-term giveaways as well, perhaps in the form of an extension to the Universal Credit uplift and maybe a few green measures as well ahead of the COP26 summit, which takes place, I think, the week after the Office of Budget Responsibility produced their forecast.
Speaker: So there may not be a full budget this time.
Speaker: The Chancellor certainly hasn't announced one, but there could still be some giveaways in the spending review.
Speaker: Nevertheless, the Chancellor remains concerned about balancing the budget over the long term.
Speaker: Will he be looking to cut back on spending soon?
Speaker: Well, the current profile, the fiscal forecasts, already include some tightening.
Speaker: So we've got the corporation tax hike that comes in in 2023.
Speaker: There are implicit cuts to departmental spending.
Speaker: Actually, departmental spending rises over the forecast period, but that is more than swallowed up by promised spending on the NHS and education.
Speaker: So for the rest of the departments,
Speaker: there could well be cuts and the spending review will lay out exactly where those cuts will take place.
Speaker: The current forecast also sees the tax burden as a percent of GDP rising to its highest since 1970.
Speaker: So there's already some fiscal consolidation
Speaker: in this forecast, but of course the Chancellor will look at it and say, yes, but debt to GDP rises to 109% of GDP on this forecast, and that is unsustainably high, and therefore we need more measures.
Speaker: Now, whether he is able to implement more measures, and we know that he's considered a couple of
Speaker: or reconsidered a couple of the Conservatives' manifesto promises, like not raising national insurance rates, like upholding the pensions triple log.
Speaker: Whether he's allowed to take controversial steps like that is really a political question.
Speaker: And particularly as we get closer and closer to the 2024 election, there will be those who argue that these steps aren't really necessary with borrowing costs as low as they are.
Speaker: So what does all this mean for growth and monetary policy?
Speaker: Well, I think, you know, the existing tightening that's already in the forecast will start to exert a drag on growth.
Speaker: If Mr. Sunak is able to implement even more tightening measures, then that drag on growth could be really quite sharp.
Speaker: So what that could mean for the BOE is that if the government sector is dragging on growth at a time when the private sector maybe hasn't fully recovered from the pandemic, then it will need to keep its own monetary policy stance more accommodative.
Speaker: In other words, basically keep rates lower for longer.
Speaker: Thanks very much, Liz.
Speaker: Thank you.
Speaker: That brings us to the end of another edition of the Macro Viewpoint.
Speaker: Thank you to our guests, Morant Ulgan, Jing Liu and Liz Martins.
Speaker: From Chris and me, thanks 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.
