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 Macro Viewpoint, a roundup of our key reports published over the last week by our team of economists and strategists.
Speaker: Coming up today, we look at what can be done to make the global economy more resilient in the aftermath of the pandemic.
Speaker: We consider what the latest data are telling us about the economic recovery.
Speaker: And we review the October ECB meeting and assess the outlook for Eurozone fiscal policy.
Speaker: This podcast was recorded on Thursday the 28th of October 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Pierre Sartre.
Speaker: And I'm Chris Brown-Hulmes.
Speaker: With countries emerging tentatively from the pandemic, what can be done to make the global economy more resilient?
Speaker: That's something that Stephen King, our senior economic advisor, has been considering this week, and he joins me now.
Speaker: So Stephen, what was the starting point for your piece?
Speaker: There's been lots of talk about a sort of comparison between the global financial crisis and the lessons regarding resilience associated with that crisis, and what's becoming a kind of
Speaker: huge supply side problem associated with the pandemic and whether you can incorporate lessons from that earlier period into the resilience of the current period.
Speaker: So how do you compare the financial crisis with the current situation?
Speaker: Well, there are actually some very, very big differences, but all the apparent similarities in terms of disruption of one kind or another, the two big differences are, first of all, that that was a crisis about trust more than anything else, the sense that
Speaker: There were assets around that were becoming increasingly toxic or possibly contained toxic items and therefore no one really wanted to own them.
Speaker: And it led to a sort of extraordinary collapse in the financial system.
Speaker: And this time around, the issue is more about information rather than trust.
Speaker: The fact that markets have been locked down, that prices haven't responded, that shortages have appeared.
Speaker: They're all signs that basically the price mechanism isn't working in the normal way.
Speaker: The second difference is that in one sense, you can say that the financial crisis was in a weird kind of way, relatively simple.
Speaker: It was about a daisy chain that ultimately connected subprime customers in the US with, for example, Norwegian pension funds.
Speaker: But today we have an incredibly complicated daisy matrix where you've got huge numbers of markets that are dependent on each other, all of which are out of kilter as a consequence of lockdowns of one kind or another.
Speaker: And the fact that they're all out of kilter simultaneously means it's very difficult to sort of search or find some kind of new equilibrium.
Speaker: And so this Daisy matrix is one that's incredibly unstable, which has led to these extraordinary price jumps that we've seen in recent times.
Speaker: So can we learn any lessons to what turned out to be the solutions to the financial crisis in the current situation?
Speaker: Well, oddly, the lessons that should be learned are probably not the ones that people expect to learn.
Speaker: So it was pretty clear after the global financial crisis that one of the lessons that regulators and policymakers drew was the idea that banks in particular had to have
Speaker: more protection in the form of higher capital and liquidity buffers, which is a kind of stockpiling, if you like, of financial safety.
Speaker: And stockpiling, some people think is quite attractive, if you think about it in terms of, I don't know, syringes and files and PPE that sort of medical equipment and so on, you might think that stockpiling is a good idea in current circumstances.
Speaker: But for the most part, these imbalances that we're currently seeing from a supply perspective can't really be usefully solved through stockpiling.
Speaker: You can't stockpile waiters, you can't stockpile drivers.
Speaker: So in actual fact, what you have to deal with is really this loss of information.
Speaker: The way you deal with the loss of information in the market economy is to try to keep the markets open.
Speaker: Now, of course,
Speaker: with COVID-19 has been difficult to do that.
Speaker: I mean, even now when countries have reopened domestically, the connections across countries are still weak, feeble and unpredictable.
Speaker: And as such, these sort of price disruptions that we're seeing may continue for really quite some time.
Speaker: And that has microeconomic consequences in the sense that you have potentially big price movements that aren't expected and which can lead to disruption in terms of people's planning for the future.
Speaker: But it also has macroeconomic consequences because the loss of information basically means that the supply side of the economy isn't performing in the usual way.
Speaker: So if demand returns to where it was and supply doesn't, well, you're going to end up with some demand pull inflation, which is precisely in fact what we've seen in recent months.
Speaker: So how do we rebuild resilience?
Speaker: Not by copying the lessons from the global financial crisis, frankly.
Speaker: The answer ultimately is to recognise the fundamental importance of markets, the information they provide, the price signals they provide, effectively the lessons from Adam Smith all those hundreds of years ago, and to realise that unless markets are able to open to function smoothly,
Speaker: then we're in for a bumpy ride.
Speaker: So whereas at the time of the global financial crisis, markets effectively were not trusted, today I think there's a strong argument for saying that markets really should be trusted.
Speaker: We should recognise that we've lost out as a consequence of many markets being shut down, at least temporarily, over the last few months.
Speaker: Stephen, thank you so much for explaining all that and for your time today.
Speaker: Thank you.
Speaker: Stephen was talking there about how to rebuild economic resilience.
Speaker: So let's get the latest on how the world economy is recovering from the pandemic.
Speaker: James Pomeroy, global economist, has been looking through the latest data.
Speaker: So James, can you start by bringing us up to date with how COVID-19 case numbers are looking globally?
Speaker: So the case numbers are still relatively elevated in many parts of the world, particularly in the likes of the UK and the US, where restrictions have been relatively loose for some time.
Speaker: But what we are seeing, at least in the US, is those numbers starting to come off a little bit, whereas in the UK, they're staying relatively high.
Speaker: The good news is we're seeing much lower case numbers across much of Asia, particularly somewhere like Indonesia, which had a big spike in cases over the summer.
Speaker: Those have dropped off quite substantially.
Speaker: And across the rest of Europe, we're seeing case numbers that have come down quite a lot over the course of the summer and looking much lower as we head into the winter.
Speaker: But of course, the risks remain that those could pick up as people start to spend much more time inside.
Speaker: Looking more closely at the economics, how is activity faring?
Speaker: So a lot of the activity data have slowed over the course of the summer, particularly this comes in the shape of the consumer data.
Speaker: Some of this is due to supply issues.
Speaker: Essentially, people can't get enough of the things they want to consume and that's holding back a lot of spending, most notably with something like car sales in the US.
Speaker: Essentially, retail sales have been weaker because people haven't been able to buy cars because there's not enough
Speaker: of them out there.
Speaker: And what we are starting to see across some of the regions where case numbers have dropped off quite a lot is some of those activity numbers pick up a little bit, such as the mobility data in the likes of Asia and Latin America continuing to grind higher.
Speaker: Whereas in Europe and the US, where we have this sort of bounce back in terms of activity when economies reopened, both in the spring and in the summer, that sort of momentum appears to be fading a little bit.
Speaker: And consumers showing a little bit more caution around the pandemic where case numbers have picked up.
Speaker: That, too, is weighing on some of the activity data, too.
Speaker: What about the labour market?
Speaker: So the labour market remains really interesting.
Speaker: There's a lot of jobs out there.
Speaker: Essentially, most parts of the developed world appear to be having a huge rise in the number of jobs that are available, but not enough people to take those jobs.
Speaker: So it's an odd one in terms of thinking about how strong the global labour market is, because if people can get a job and they've got a little bit of wage bargaining power as a result, then things do look quite good.
Speaker: And you can see this in things like the quits rate in the US being extremely high.
Speaker: And what that's meaning, though, is that wage increases, particularly amongst low skilled workers and even more particularly in the leisure and hospitality sector, are really, really strong.
Speaker: And so you've got this slightly odd environment where there's still a lot of jobs that haven't been filled compared to where we were pre-pandemic.
Speaker: Unemployment rates are still relatively high, but workers feel comfortable.
Speaker: They're relatively confident they could find a job if they needed one and their wage bargaining power is pretty strong.
Speaker: So it's hard to translate that labour market data into what it means for consumer spending.
Speaker: But things are probably better than those headline figures might suggest.
Speaker: So what does that mean for inflation?
Speaker: Yes, well, those higher wage costs might be really good news for the workers, but they're not so good for employers who are clearly trying to grapple with a lot of other higher input costs at the moment.
Speaker: Some of that is higher energy prices, some of it is higher raw material prices, and of course,
Speaker: those wage costs too.
Speaker: That is feeding through quite noticeably into a lot of prices.
Speaker: We have seen in the US, for example, some of the monthly inflation data on the headline basis soften a little bit over the course of the last couple of months.
Speaker: What we're starting to see much more of is that inflationary pressure broadening out and this rather than being a sort of reopening and used car story, starting to be one where a lot more sectors are seeing higher prices and that means we may see some of these higher inflation rates hang around for a little bit longer.
Speaker: And then in the rest of the world, we've now got this energy story.
Speaker: Energy prices are soaring in many places.
Speaker: Food prices are elevated, too, in many parts of the world.
Speaker: And those two things are adding to inflation in many economies.
Speaker: So we're likely to see these higher inflation rates across the world persist for a little bit longer, at least until the middle of next year.
Speaker: This all puts policymakers in a tough spot.
Speaker: How do you expect them to respond?
Speaker: It's really interesting one for policymakers, because if you're a central bank at the moment, you've got these high inflation rates, you've got this relatively decent rebound in economic activity.
Speaker: And the logical thing to do in most cases would be to tighten and to raise interest rates.
Speaker: We've seen some central banks do that both in the emerging world.
Speaker: We've seen this in Brazil, in Mexico, Poland, Russia, and many more over the course of the last few months.
Speaker: And then in the developed world, we've seen the same thing happen in Norway and New Zealand.
Speaker: But a lot of other central banks in the developed world in particular are choosing to be much more cautious, most notably the Fed, where we're still not expecting a rate rise until at least the middle of 2023.
Speaker: And also the ECB, the Bank of England, all for now at least unwilling to tighten policy.
Speaker: But there is a growing market expectation that we could see higher rates in some of those economies.
Speaker: But central banks are therefore facing an interesting bind here.
Speaker: Do they push back?
Speaker: on those market expectations or are they starting to be a little bit more concerned that these inflationary pressures could be a little bit more persistent and the growth recovery has maybe got a bit more momentum to it and if that is the case then maybe more central banks will start to think about raising rates.
Speaker: James thanks very much for your time.
Speaker: Thank you.
Speaker: We finish this week with a look at the Eurozone, where the ECB has just finished its October meeting.
Speaker: To discuss the outcome and to assess the outlook for the region's fiscal policy, we're joined by Fabio Balboni, Senior European Economist.
Speaker: Fabio, what was the key takeaway for you from today's meeting?
Speaker: Well, Chris, we were expecting a pushback from the ECB,
Speaker: against the increasingly hawkish market expectation for future rate hikes.
Speaker: And indeed, we did get one.
Speaker: The market has been pricing in two rate hikes by early 2023.
Speaker: And Christine Lagarde made it very clear that that is inconsistent
Speaker: with the ECB forward guidance, which was changed in July, also taking into account of the new inflation target of 2%.
Speaker: And she also made it clear that while we're seeing very high inflation at the moment, the ECB believes that in the medium term inflation
Speaker: will still fall short of the new target and therefore requires further monetary policy stimulus and not a tightening of rates.
Speaker: Yeah, inflation has to be the key issue for the ECB at the moment.
Speaker: What do they have to say about that?
Speaker: Indeed, absolutely.
Speaker: And Christina Gard said very clearly that the main focus on the discussion today
Speaker: was inflation.
Speaker: Markets are getting increasingly concerned about inflation.
Speaker: We see inflation peaking above 4% in November, and that is much higher than the ECB inflation target.
Speaker: But Christine Lagarde made it very clear that the ECB believes that the current surge in inflation is temporary,
Speaker: that the factors driving inflation higher will fade next year, although she admitted that it might take a little bit longer for them to fade than the ECB had previously anticipated, and therefore that in the medium term that they will need to further stimulus from the ECB to be able to hit their inflation target.
Speaker: and not the other way around.
Speaker: But she did admit, however, that there are risks to the upside, and particularly the fact that inflation could remain higher for an even longer period of time.
Speaker: And if that's the case, we could start to see second round effect in terms of higher wages.
Speaker: But she did say that those risks at the moment are fairly marginal.
Speaker: We didn't hear much today about the QE programme.
Speaker: Are we expecting to hear anything more at the December meeting?
Speaker: Well, exactly.
Speaker: This is going to be the key.
Speaker: Today, there was no new forecast and there was no new policy announcement.
Speaker: In December, we will have a new forecast that in all likelihood will see the ECB not meeting its inflation target by the medium term, and that will give
Speaker: it's ammunition to provide further monetary policy stimulus.
Speaker: And on the back of that, we think that they will also provide further stimulus from QE.
Speaker: Christine Lagarde did make it very clear today that as things stand at the moment, she believes that the Pandemic Emergency Purchase Program will be shut down in March.
Speaker: But we believe that that will be replaced by more support
Speaker: under the normal QE programme, the APP.
Speaker: And indeed, Christine Lagarde made it very clear that the ECB was not in the mood for tapering purchases, but she was in the mood for recalibrating purchases looking into the future.
Speaker: And finally, Fabio, how is monetary policy dovetailing with fiscal policy and mindful of the fact that we've just had the Eurozone governments tabling their budget proposals for next year?
Speaker: Absolutely, Chris.
Speaker: One of the reasons why we believe that the ECB will need to step up QE next year is because fiscal deficit remains very high in the eurozone.
Speaker: And the ECB chief economist, for example, has said that net issuance is a key guiding factor when it comes to the ECB to set the pace of asset purchases in the future.
Speaker: And what we've seen going through the budget is that even though this year stronger than expected growth performance meant that the fiscal deficit were revised down, when we look at next year, the governments were very much in the mood for spending all the windfall gain.
Speaker: rather than saving.
Speaker: And that means that the deficit next year hasn't been revised almost at all for most countries, and particularly when we look at countries such as Italy, Spain and France, the fiscal deficit will remain substantially higher than
Speaker: they were before the crisis.
Speaker: And therefore, they will likely require some support from the ECB to ensure that increased net issuance does not lead to pressures in terms of funding.
Speaker: Fabio, thanks so much for explaining all that to us today.
Speaker: Thank you very much.
Speaker: So that's it for this week's podcast.
Speaker: Thank you to Stephen King, James Pomeroy and Fabio Balboni for joining us.
Speaker: From all of us here, 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.
