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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: This podcast was recorded for publication on the 5th of May 2023.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Hello, I'm Piers Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: Coming up on today's program, we look at whether China's economic recovery can sustain its momentum and the implications for growth.
Speaker: We assess the path for U.S. monetary policy following another rate hike by the Federal Reserve.
Speaker: And we find out why it could be a good summer for the euro and sterling.
Speaker: We begin this week in Asia, where China's economic recovery is well underway.
Speaker: Growth in the first quarter came in stronger than expected, prompting our economics team to raise their forecast for this year.
Speaker: Jing Liu is chief economist for Greater China.
Speaker: She spoke to Graham Mackay earlier.
Speaker: Jing, welcome to the podcast.
Speaker: Great to have you.
Speaker: Thanks for having me here again.
Speaker: So a new GDP forecast for mainland China.
Speaker: What have you done?
Speaker: Have you gone up, down?
Speaker: We actually revised up our forecast for 2023 to 6.3% from 5.6%.
Speaker: And next year, we're now seeing a 5.0% revised down from the previous forecast of 5.5%.
Speaker: Okay, so up for this year, down for 2024.
Speaker: Why is that?
Speaker: So we can see this is a more front-loaded recovery than we previously thought.
Speaker: The first quarter GDP number and activity data in general basically confirm the recovery is swifter than we thought before.
Speaker: So first quarter already registered 4.5% GDP growth and largely driven by the performance from the consumption, the survey sector in particular.
Speaker: Okay, and is this still an almost exclusively consumption-driven recovery?
Speaker: I mean, I know things like, for example, property are never too far away from the conversation, but is it really about consumption as the focal point of this recovery?
Speaker: We see this more like organic growth in the sense that after reopening, similar as in other economies, we see that the service rebound almost instantaneously.
Speaker: And because the service sectors are booming, it start to recruit more people.
Speaker: Jobs are back, stable income is back, so people start to consume goods as well.
Speaker: We have seen the green shoots on the property sector, in particular, March we have seen in the year-on-year terms,
Speaker: transaction volume as well as the prices in some big cities already see the upward trend so after many months of contraction so that's a positive and also we see the property investment still in the contraction but less than before we have also seen in certain cities the land auction start to
Speaker: hit the upper bound, indicating the developers start to become more positive about the outlook.
Speaker: So we remain constructive by seeing the mild rebound as a base case for this year.
Speaker: So at least the property sector will no longer be a drag to the GDP growth.
Speaker: Okay, so would it be fair to say overall that the recovery is still very much focused on domestic demand rather than, say, exports?
Speaker: Yeah, that's fair to say.
Speaker: We see the upside surprise in March on export, but overall we think this year most of the driver would come from the domestic force, including the consumption we have discussed.
Speaker: And on the infrastructure and manufacturing investment side, we are forecasting around 5% of the growth this year for both categories.
Speaker: So domestic driven recovery is playing out in China.
Speaker: And do you see this more, as you put it, more front-loaded consumption recovery having any implications for how monetary or fiscal policy could play out?
Speaker: Or are your expectations there much the same as they were before?
Speaker: Our expectation is pretty much the same.
Speaker: We still see the lockstep policy support and then the pro-growth mentality was confirmed again in last week's Politburo meeting.
Speaker: Basically, we expect the policies to stay constructive because we still see the pressure in different perspectives, such as still elevated youth unemployment rate
Speaker: And also the external demand likely will continue to soften along the years.
Speaker: Jing Liu, thank you very much indeed, as ever, for joining us.
Speaker: Thank you.
Speaker: Now here in the U.S., the Federal Reserve continued its tightening cycle with another 25 basis point rate rise, taking the Fed Fund's target range above 5 percent for the first time since 2007.
Speaker: Will policymakers now pause or could we see even more hikes?
Speaker: Ryan Wang, U.S. economist, can tell us more.
Speaker: Ryan.
Speaker: Fill us in with exactly what the tone was from the FOMC this time.
Speaker: Hi, Aline.
Speaker: Well, I think the clearest message came from Fed Chair Jerome Powell during the press conference.
Speaker: He talked about the sense of the policymakers on the FOMC being that perhaps we are closer to the end of the rate hike cycle rather than to the beginning.
Speaker: Now,
Speaker: That doesn't necessarily mean we're done with rate increases.
Speaker: It will depend on the incoming economic data.
Speaker: It will depend on various developments and risks.
Speaker: And for our own part, we continue to expect a final 25 base point rate hike in June.
Speaker: Ryan, let's get into that a bit more because parts of the market are already pricing in rate cuts this year.
Speaker: You're not expecting that.
Speaker: What exactly is the reason?
Speaker: Right.
Speaker: Well, this question about not only the peak for policy rates, but also the prospect of rate cuts potentially later this year is a complicated one because it depends on the interaction
Speaker: of an FOMC that's still trying to bring inflation lower.
Speaker: Inflation has remained stubbornly elevated.
Speaker: But at the same time, the policymakers are also considering a variety of risks.
Speaker: There are risks stemming from developments in the banking sector.
Speaker: There are risks related to what that might do to credit conditions and the impact that that might have on the economy.
Speaker: And there are near-term risks related to the current debt limit impasse.
Speaker: So it's this balance between these risks against the persistence of elevated inflation that's going to be the key driver of the FOMC's decisions, not only at the June policy meeting, but over the year ahead.
Speaker: Looking into the coming weeks, what data points are going to be particularly important?
Speaker: Well, in the next few weeks, we'll be looking at the April figures on jobs, on inflation, on retail sales.
Speaker: We will get the results of the senior loan officer survey on lending practices, which will give us some idea in a quantitative sense about the proportion of banks that may be tightening their credit standards.
Speaker: And so these will all be important.
Speaker: And the Fed is still facing a challenging situation when it comes to the tightness of the labor market and the impact that that's having on both wage pressures and inflation.
Speaker: We'll be waiting to see whether that changes in the data over the weeks ahead.
Speaker: And lastly, Ryan, any insights on the issue around the U.S. debt ceiling, whether or not the U.S. may be able to continue borrowing?
Speaker: Well, I think the next key date on this topic, which could be very important for markets, will be on May the 9th, when we will have a meeting between President Biden and House Speaker Kevin McCarthy.
Speaker: We'll be waiting to see whether bipartisan negotiations pick up any steam after that meeting.
Speaker: And in the meantime, we'll be also monitoring
Speaker: the daily cash flows reported by the Treasury to see whether the 1st of June date that has been flagged is going to be a key risk for markets.
Speaker: Ryan, thank you so much.
Speaker: Thank you, Aline.
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Speaker: Now in Europe, the ECB has also just held its latest meeting.
Speaker: What happened, Piers?
Speaker: Well, Aileen, the banks slowed the pace of their rate hikes with a 25 basis point rate rise, taking the deposit rate to 3.25%.
Speaker: Our European economics team expects a further 25 basis point hike in June before a pause.
Speaker: And sticking with the European theme, we finished this week in the currency markets where our team has been positive on the euro and sterling since the end of last year.
Speaker: As we head towards the summer, Dominic Bunning, head of European FX Research, has been assessing their prospects and he joins me in the studio now.
Speaker: Dominic, welcome to the podcast.
Speaker: Thanks, Piers, and thanks for saving the best till last.
Speaker: Absolutely.
Speaker: Firstly, remind us of your thesis behind this bullish stance on the euro and sterling.
Speaker: Yeah, so we'd some more bullish on both the euro and sterling back in November.
Speaker: A big part of that was that we thought the dollar had peaked and sort of the flip side of the dollar peaking and the likely rebound in global risk appetite and those sorts of things, that was going to be quite bullish for euro and sterling.
Speaker: But I think we're seeing some signs of some idiosyncratic factors now becoming more positive as well.
Speaker: Indeed.
Speaker: So we're shifting from some sort of global perspective towards some more localised phenomena.
Speaker: Can you sort of run us through those?
Speaker: Yeah, absolutely.
Speaker: So the first thing we've noticed is if you look at the relationship of the currencies versus global risk appetite and versus rate differentials, we're seeing that shift towards rate differentials mattering more.
Speaker: And that's a sign that that local story is becoming more important.
Speaker: And when we look at some of those local factors, we see really strong rebounds in consumer confidence, and that's tended to be a good lead indicator of currency performance for both the euro and sterling.
Speaker: We're seeing PMI, so businesses showing much more optimism as well.
Speaker: And we're also seeing some big signs of disinflation.
Speaker: And what we're really talking about here is a big reversal
Speaker: of the negative pressures that came about in 2022.
Speaker: So growth is starting to pick up locally.
Speaker: Inflation is softening a little bit, and that provides quite an optimistic picture for both the euro and for sterling during the summer months.
Speaker: Any clouds on the horizon to spoil that rosy summer view?
Speaker: Yeah, there are some risks, absolutely.
Speaker: You know, if you look at particularly the credit cycle, there's definitely some signs here that credit demand is slowing, credit growth is slowing.
Speaker: And that's something that the ECB has spoken about briefly and is ultimately a cause or an effect, sorry, of all of the policy tightening we've seen.
Speaker: But it's not in our view going to be enough for now to drag down that near term momentum.
Speaker: So looking beyond the summer, I do have some concerns that credit story could be a bit more challenging, make that growth outlook a bit more difficult.
Speaker: And that's why, you know, by the end of the summer, it might be harder for the Euro and Sterling to keep extending those gains.
Speaker: But for now, I still think it's a pretty sunny outlook.
Speaker: Very good.
Speaker: Thanks, Dominic, for joining us today.
Speaker: Thanks very much.
Speaker: So that's it for another week.
Speaker: Thanks to our guests, Jing Liu, Ryan Wang and Dominic Bunning.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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