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 Piers Butler and I'm joined by Chris Brown-Humes.
Speaker: Hi Piers, coming up this week, we look at what could be the key drivers of the currency markets in the months ahead with Paul Mackle, Global Head of FX Research.
Speaker: We speak with Chu Hongbin, Chief China Economist, to find out whether China's slowing population growth is a cause for concern.
Speaker: At the global level, the COVID-19 situation remains challenging, particularly in regions with only nascent vaccine rollouts.
Speaker: But in Europe, infection rates are falling, the vaccine rollout is accelerating, and restrictions are starting to ease.
Speaker: With looser travel rules on the way, how much of a boost could tourism provide to the recovery?
Speaker: We speak to Chris Hare, Senior European Economist.
Speaker: This podcast was recorded on Thursday the 13th of May 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Inflation is one of the forces that has been affecting the currency markets in recent months, alongside prospects for interest rates and global growth.
Speaker: So how should investors view the outlook for the dollar?
Speaker: Let's speak to Paul Mackle, Global Head of FX Research.
Speaker: He joins us from Hong Kong.
Speaker: So Paul, the dollar has been weakening recently.
Speaker: Why do you think that is?
Speaker: And how does it fit into your broader view of where the dollar is headed?
Speaker: Well, I think there have been different sequences this year in terms of how things have played out in the FX market.
Speaker: First, we had a lot of rapid repricing in terms of Fed fund, future expectations, backup and treasury yields, which was pretty rapid.
Speaker: And that spilled over and caused the dollar to get stronger almost across the board.
Speaker: But what we've seen over the last few weeks is some consolidation on that interest rate angle.
Speaker: And the tide has been working against the dollar in part because expectations are beginning to
Speaker: rise elsewhere that opening or reopenings of economies could lift activity in other places.
Speaker: And in turn, that's more consistent with the synchronized global growth story that should be reflected by a modestly weaker dollar.
Speaker: We've discussed the idea of the shifting anchors in the currency market previously.
Speaker: Remind us what's at play and what it means for FX rates moving forward.
Speaker: Well, for most of 2020,
Speaker: The ebb and flow of risk appetite was very much the dominant feature in the FX market and it had an inverse relationship with the US dollar.
Speaker: So if risk appetite was very strong, the dollar would tend to be weaker and vice versa.
Speaker: As I said, I mean, we've had some different forces impact the FX market over the last few months.
Speaker: A lot of that has been associated with the interest rate angle playing a bigger role.
Speaker: We can see that there's been a lot of repricing in terms of the forward rate expectations for many major central banks.
Speaker: And there's been a fairly strong pattern or pecking order of currency performance associated with that.
Speaker: I think that over the next few quarters, the sensitivity to exchange rates to these future interest rate expectations or interest rate differentials will become a more prominent feature.
Speaker: Yet, I still think that there's the dominant force, which is more to do with global growth recovering, which implies a modestly weaker dollar.
Speaker: Yes, interest rates will become more dominant over time, but not quite yet.
Speaker: There have been some developments around the digital euro recently.
Speaker: What's the latest?
Speaker: Well, the ECB has been spending more time looking and thinking about a digital euro or a potential digital euro.
Speaker: Nothing's exactly formalized just yet.
Speaker: But in April, they came out with a survey that revealed the information of what different participants thought, whether they should proceed with a digital euro.
Speaker: So what's up next?
Speaker: It's going to be a more formal investigation, which is likely to take place by the middle of this year.
Speaker: And if that gets the green light, there could be another couple of years of an investigative process.
Speaker: which we could then formalize how to design a digital euro and eventually a potential launch of that.
Speaker: But that is not looking like it'll happen until at least sometime in 2025.
Speaker: Paul, thanks very much for the update.
Speaker: Thank you very much.
Speaker: China has just published the results of its latest census, and it shows that population growth has slowed to a record low.
Speaker: This week, Xu Hongbin, our chief China economist, has been looking at how this could affect China's longer-term growth outlook.
Speaker: He joins us now.
Speaker: So, Hongbin, should we be worried that China's population is ageing and its labour force is shrinking?
Speaker: Yeah, a lot of our clients indeed worry about the ageing population and the shrinking labour force as a kind of a drag on the economical growth in the future.
Speaker: But I believe this kind of concern has been overplayed simply because the growth in the labor force is no longer the major contributor to the China GDP growth rate in recent years.
Speaker: And more importantly, we're going to see improvement in education of the labor force, which is going to more than offset the negative impact from the aging population on the economical growth.
Speaker: So basically you're saying that we shouldn't worry because China's getting smarter.
Speaker: What sort of evidence do we have for that?
Speaker: Sure, there's plenty of the numbers, but I just want to highlight one simple fact, which is that there is a huge gap in education between the old generation and the younger generation in China.
Speaker: In the next 10 years, for instance, the generation which was born in the 1960s is going to exit the labor market.
Speaker: But for this generation, the average years of education is only around six to seven years of schooling.
Speaker: For every two of those older generation to retire, there will be only 1.9 new generation to fill in.
Speaker: So therefore, the total labor force is going to shrink.
Speaker: However, the younger generation on average have a much better education.
Speaker: Their average years of education is above 12 years.
Speaker: As a result, the labour force, of course, will become smaller, but they will be much smarter.
Speaker: And what sort of role will urbanisation play in driving China's labour productivity growth?
Speaker: Sure, which has already happened in the last three decades.
Speaker: One of the key drivers for the high labor productivity growth in China is the continuous process of reallocating the labor resources from the agriculture sector towards the high productive sectors like manufacturing and service sectors in cities.
Speaker: And the urbanization ratio, you know, as of last year, is around 63%.
Speaker: You know, still have room to continue to move the labor force from rural area to urban area.
Speaker: That will continue to be a key driver for the overall labor productivity growth in the years ahead.
Speaker: So essentially, a smarter population plus a higher rate of urbanization equals improved human capital.
Speaker: Definitely.
Speaker: I think what really matters more for growth in the economy is not so much about the quantity of labor force, but it's about the quality.
Speaker: In other words, about the human capital.
Speaker: So from a human capital perspective, the growth in the human capital pool in China is
Speaker: is going to accelerate rather than decelerate in the years ahead.
Speaker: So as a result, we think that the concerns about the shrinking labor force and the aging population on the long-term economic growth in China has been overplayed.
Speaker: Hongwin, thanks very much.
Speaker: My pleasure.
Speaker: Now, with lockdowns and restrictions starting to ease across Europe, many people are hoping to get away for a summer holiday.
Speaker: But with vaccines still being rolled out and cases still elevated in some countries, how much of a recovery in tourism can we expect?
Speaker: And what could be the impact on the growth outlook?
Speaker: Let's speak to Chris Hare, European economist.
Speaker: So Chris, it looks like we might be able to get back to the beach this summer.
Speaker: Well, fingers crossed, we're going to get some rule changes from the EU and the UK, which should hopefully make travel easier over the coming months.
Speaker: Now, from the EU's perspective, the European Commission put out some guidance whereby fully vaccinated travellers
Speaker: Essentially, wherever they come from, will be able to travel into and around the EU.
Speaker: And also with regards to non-vaccinated travellers, well, a lot of non-vaccinated travellers should be able to travel into and around the EU as long as they come armed with a negative test result.
Speaker: Now, with regards to the UK, it's recently announced a green list of quarantine free travel destinations.
Speaker: Pretty short at this point.
Speaker: It only includes Portugal among EU countries.
Speaker: But the hope is that that's going to become longer over time.
Speaker: And the hope is that with these sorts of rules, which will hopefully liberalise further over the coming months, that should allow a significant chunk of tourists to start booking holidays with a bit more confidence over the summer season.
Speaker: Quite apart from our sort of holiday hopes, this is actually quite important from a macro perspective.
Speaker: Can you give us a sense of that?
Speaker: Yes, it's a big deal from a macro perspective, particularly for Southern Europe.
Speaker: When we think about tourism as a share of GDP, if you include not only direct tourism effects, but also broader spillovers, it's worth around 20 percent of the economy of Greece, for example, and not too much less than that in Spain and Portugal.
Speaker: And if we look at what happened last year,
Speaker: If you look purely at the current account data, the tourism slump in Greece is subtracted, we think, around six percentage points from GDP growth there and subtracted around three percentage points from growth in Spain and Portugal.
Speaker: So a really big impact last year to the downside.
Speaker: So what we're hoping is that some of that weakness should unwind through this year and next.
Speaker: So it's a pretty key part of our recovery forecast through this year and next.
Speaker: So before we get too carried away, this recovery has a number of factors associated with it, which adds a bit of uncertainty to the outlook.
Speaker: Can you expand on that?
Speaker: Yeah, the recovery is going to depend on various different things.
Speaker: For example, the vaccine rollouts, particularly for those economies which are the high tourist demand countries, including the UK and Germany.
Speaker: It's also going to depend on testing costs for those unvaccinated travellers.
Speaker: And of course, it's going to depend on the broader COVID backdrop and the extent of pent up demand that's out there.
Speaker: When we add all that up together, you know, we would point out that the vaccine rollout is still ongoing.
Speaker: Testing costs can be actually pretty material.
Speaker: And there's still a fair degree of uncertainty with regards to COVID-19.
Speaker: So when we add all that up together, we only really think there's going to be a partial recovery in tourism this year, such that tourism flows may only get back to about 50% of 2019 levels through this summer.
Speaker: And you mentioned the southern European economies and the significance for them.
Speaker: What is the impact of potentially a quicker bounce back of the sector?
Speaker: Yeah, so in our central case, when we think about 50%-ish tourism recovery, what we think is that this year tourism should boost GDP growth in southern Europe by the order of one to two percentage points, depending on which country you're in, bigger upside impacts in Greece.
Speaker: But if there are upside risks that come along, if the reopening happens more quickly, well, we should get a bigger boost to that, maybe even double that upside impact.
Speaker: So we certainly are hoping for that boost because the stronger the recovery, the less that we should see in terms of broader scarring effects from tourism having yet another bad year.
Speaker: So this really matters for Southern Europe.
Speaker: But I should mention it also sort of matters for Northern Europe as well, because the stronger the recovery, the stronger that might mitigate staycation pressures in Northern Europe, which in particular might be pushing up quite a lot on hotel prices.
Speaker: So it really does matter a lot for Europe as a whole.
Speaker: Well, I don't know about you, but I'm packing my suntan lotion.
Speaker: Chris, thank you very much for joining us.
Speaker: Fingers crossed.
Speaker: Thank you.
Speaker: So that's it for another week.
Speaker: Thank you to our guests, Paul Mackle, Xu Hongbin, and Chris Hare.
Speaker: From peers and me, 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.
