Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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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 on this week's podcast, we hear from Janet Henry, Global Chief Economist, about the implications of the huge fiscal stimulus by the US and the outlook for growth and inflation.
Speaker: The COVID-19 situation has taken a turn for the worse in Europe.
Speaker: We get the latest from economist Shantana Sam.
Speaker: And with a new wave of infections hitting India, could the country's impressive economic recovery be jeopardized?
Speaker: We find out from Pranjal Bhandari, Chief India Economist.
Speaker: All that coming up on this week's podcast, recorded on Thursday, the 25th of March 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: The global economy looks at for a strong growth rebound in 2021 as economies around the world recover from the pandemic.
Speaker: But with the US embarking on a massive fiscal stimulus program, what are the implications for the rest of the world?
Speaker: We're joined by Janet Henry, Global Chief Economist.
Speaker: So Janet, two key themes in the report, recovery and experiment.
Speaker: Let's take those in turn.
Speaker: You're obviously seeing a strong recovery in the global economy this year.
Speaker: Yes, if you look at our forecast, we are looking for a synchronised recovery in the global economy.
Speaker: Virtually every country we forecast is going to see a significant bounce in average annual GDP growth rates.
Speaker: But a lot of that is just a reflection of the scale of recession that happened in 2020.
Speaker: And although it does look like a synchronised recovery, the fact is it's going to be a little bit bumpier than that.
Speaker: We're going to get some quarterly increases.
Speaker: erratic numbers.
Speaker: And we're also going to get big variations between countries.
Speaker: Some countries are going to benefit more as this shift of spending goes from goods to services.
Speaker: Some will benefit more from the US fiscal stimulus or from the Chinese capex recovery.
Speaker: And a lot of the moving parts relate to how the government strategies regarding the pandemic evolve.
Speaker: How quickly do they reopen their economies?
Speaker: And of course, how effective are they at rolling out the vaccination?
Speaker: Because that will be an important driver of that.
Speaker: So all of these different factors will explain some quite big variations in growth rates between regions and even within economies.
Speaker: Now, you call the report The Great Experiment.
Speaker: Why have you chosen that title?
Speaker: That Great Experiment title is a reference to the huge policy experiment currently being undertaken in the US, the huge fiscal stimulus being delivered by the Biden administration at a time when the economy is already recovering.
Speaker: And of course, this is happening at a time when the Fed has already committed a
Speaker: towards keeping policy very accommodative and tolerating moderately higher inflation until the economy generates maximum employment.
Speaker: And it's an experiment because it might prove to be the most effective policy combination to lift US and global growth,
Speaker: But it could even be a big mistake, a huge shock to demand that pushes up inflation in the US, but also has big implications for the rest of the world.
Speaker: There has been, as you know, in financial markets, a lot of focus on the inflation aspect of this.
Speaker: How concerned are you about that?
Speaker: Well, the concern about inflation is understandable to a large degree, given that oil prices have already risen sharply from their lows last year.
Speaker: We've also seen other commodity price increases.
Speaker: There's growing evidence of shortages and bottlenecks in certain sectors, most notably the likes of shipping costs or indeed shortages of semiconductors.
Speaker: And there is no doubt that inflation is going to be higher over the course of the next few months.
Speaker: as all of those factors feed through.
Speaker: On our forecast, we do see inflation slowing down in the US later in the year, and in the eurozone in 2022.
Speaker: And we also see some somewhat mixed inflationary pressures in the emerging economies.
Speaker: So I suppose
Speaker: Yes, in the two largest economies, it's sub 2% inflation in 2022.
Speaker: And we think that therefore central banks will not be in a hurry to start reining in the policy stimulus or indeed to start thinking about raising interest rates.
Speaker: So you don't think the major central banks will be raising rates in 2022, but do you think they'll be continuing the asset purchases that they've been carrying out as part of quantitative easing?
Speaker: Well, Chris, we don't expect the majors to be raising rates in 2022.
Speaker: But of course, some emerging economies already are those with higher inflation expectations, like Turkey and Brazil and Russia have already started to raise interest rates.
Speaker: But the asset purchases, we think they will continue by the ECB and the Fed in 2022.
Speaker: But the big question for this year is will the Fed be able to scale back the asset purchases to taper?
Speaker: On our forecast, it will in late 2021 as the economy starts to rebound more strongly in the course of this year.
Speaker: But one of the questions is, will the markets be as patient as the Fed in waiting for signs of sustained inflation?
Speaker: So the Fed has talked about looking through this transitory rise in inflation and that it will wait for signs that it is sustained.
Speaker: the financial markets might just start to question its commitment to do so.
Speaker: We've already seen the rise in bond yields coming through.
Speaker: And if that were to cause some damage in risky assets, including in parts of the emerging markets, it's possible that the Fed is even thwarted in its goal to start scaling back the asset purchases over the course of the next year or two.
Speaker: Janet, thanks very much for explaining all that.
Speaker: Thank you, Chris.
Speaker: Here in Europe, the COVID-19 situation continues to deteriorate and many countries across the continent are imposing new restrictions.
Speaker: Let's get the latest from economist Shantana Sam, who joins us from Paris.
Speaker: Shantana, welcome to the podcast.
Speaker: Thank you.
Speaker: So infection rates have been going up across the big four economies.
Speaker: What's the latest?
Speaker: Yes, infection rates are rising quite quickly, especially in France and Italy, but also in Germany where prices are a bit lower.
Speaker: The situation is actually quite better in Spain, but we also see rising infection rates in smaller countries like Sweden, Belgium and the Netherlands.
Speaker: So this has caused the governments to respond.
Speaker: What's been the action taken by them?
Speaker: Some of it's been a little bit contradictory.
Speaker: In France, we have new local lockdowns that were implemented in 16 departments covering all the Paris regions.
Speaker: In Germany, the government has just announced an extension of the current restrictions until at least the 18th of April.
Speaker: And he also flip-flopped on Easter because he announced initially a hard lockdown and he finally decided to not apply it.
Speaker: So it's quite a negative point for the confidence in the government that is already very low.
Speaker: And what's the latest on vaccinations?
Speaker: The suspension of the AstraZeneca vaccine due to the blood clot scare has been lifted in most of European countries.
Speaker: But a recent YouGov poll suggests that confidence in that vaccine has been significantly daunted.
Speaker: And so it's a big problem for the rollout of the campaign in the coming months, because if people are reluctant to use the AstraZeneca vaccine, it will delay further the progress in the vaccination campaign.
Speaker: The vaccination campaign is already lagging significantly compared to the UK or the US.
Speaker: Just to give an example, in the UK, almost half of people have received a jab.
Speaker: In comparison, in France and Germany, only 15% of people have received a vaccine.
Speaker: So you listen to all of this and you would expect the economic data to be weak, but that's not the case.
Speaker: Why is that?
Speaker: Yes, actually the March PMIs have been surprisingly good, both in the manufacturing sector but also in the service sector where we saw signs of improvement.
Speaker: But we have to be quite cautious because the surveys don't take fully into account the recent announcement on restrictions and lockdowns.
Speaker: And in addition, there are also some rising cost pressure that could be negative for the margins of businesses and the consumption outlook.
Speaker: Shantana, thank you very much for joining us.
Speaker: Thank you.
Speaker: So it's bad news in Europe and it's bad news in India too, where new COVID-19 cases have surged in March.
Speaker: Pranjal Bhandari is our chief India economist and she joins us now.
Speaker: Pranjal, cases in India had been holding steady at the start of the year, but there's been a dramatic increase over the past few weeks.
Speaker: What's the latest?
Speaker: Yes, indeed.
Speaker: So India is in the midst of a second wave with about 53,000 new cases every day.
Speaker: The country's total active cases are actually inching closer to the September peak.
Speaker: And the rise is not just led by Maharashtra, which has been the main contributor, but also other states like Punjab, Karnataka.
Speaker: The positivity rate is rising.
Speaker: The R value is again become greater than one.
Speaker: And health experts worry that this is a rapidly transmissible strain.
Speaker: Thankfully, what we see in India is that, you know, the mortality rate remains low.
Speaker: It's definitely lower than the global average.
Speaker: So it's about 1.4 global average is around 2.2.
Speaker: How's the vaccination program progressing?
Speaker: Well, you know, with the entry of private hospitals, the pace of vaccination has picked up in March.
Speaker: That said, India is currently administering about two and a half million jabs per day, compared to its capacity of more than double of that.
Speaker: And the government's decision this week on March 23rd to widen out eligibility criteria and actually allow even those who are over the age of 45 and not just those who are over the age of 60 to get vaccinated will help close that gap.
Speaker: In fact, we've done a scenario analysis which suggests that if India can manage 5 million jabs per day, it could cover over 50% of the population by year end.
Speaker: Alongside this, you know, some of our surveys had already shown that even before vaccination started, about 20% of the people already had antibodies.
Speaker: So putting that together, perhaps by the end of 2021, India could reach herd immunity.
Speaker: India's economy has been rebounding strongly.
Speaker: How will the recovery be affected by these latest developments?
Speaker: Well, some localized restrictions have mushroomed over the last few weeks.
Speaker: And some of the mobility has got impacted.
Speaker: For instance, Google and Apple mobility indices have slowed a bit.
Speaker: But some other indicators that we track, for example, electricity consumption has not slowed as much.
Speaker: In fact, we have a HSBC recovery tracker, which includes a lot of data, both mobility and non-mobility data.
Speaker: And while that has plateaued in recent weeks, it has plateaued at fairly high levels, close to pre-pandemic levels.
Speaker: So we do think there's going to be some temporary slowdown, but we don't think it'll last for too long.
Speaker: In fact, as vaccination progresses, there could be pent-up services demand, which could again give a booster to growth in the second half of the year.
Speaker: And what's the outlook for inflation?
Speaker: Well, you know, we believe that activity may already be over the threshold where core inflation starts rising.
Speaker: In fact, our diffusion index is indicating that core inflation pressures are spreading, led by strong demand for goods.
Speaker: but also pass through of higher commodity prices by corporates onto consumers.
Speaker: So inflation is definitely a worry.
Speaker: The RBI is likely to take note of this in its upcoming April 7th policy meeting.
Speaker: We do expect the RBI to normalize monetary policy, perhaps on the short end by sucking out some of the excess liquidity from last year.
Speaker: But we don't think it's going to tinker with rates very much.
Speaker: We don't see any repo rate hikes in the foreseeable future.
Speaker: We think repo rates will be kept at 4%.
Speaker: Pranjal, thanks very much for your time.
Speaker: Great to be here.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Janet Henry, Shantana Sam and Pranjal Bhandari.
Speaker: We'll be back again next week.
Speaker: Thanks for listening.
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.
