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.
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Speaker: Thanks for listening, and now onto today's show.
Speaker: The following podcast was recorded for publication by HSBC Global Research.
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Speaker: Hello, I'm Piers Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: Coming up on today's programme, we look at how concerns over financial stability have affected the global economic outlook.
Speaker: We check in on China to find out how the economic recovery is progressing.
Speaker: And we look at why the price of gold has been soaring close to record highs.
Speaker: As we enter the second quarter of the year, volatility has gone up a notch, with the failures of banks drawing the attention of markets towards financial stability issues.
Speaker: This week, James Pomeroy, global economist, has been poring over the latest data to find out where pressure is being felt most.
Speaker: He joins us now.
Speaker: James, welcome to the podcast.
Speaker: Thank you for having me.
Speaker: So after the banking storm, what's the data looking like?
Speaker: Surprisingly good.
Speaker: If you actually looked at the global data for March, if you looked at the survey data, so the PMIs, you looked at some consumer confidence data, you wouldn't have known anything had happened.
Speaker: We saw actually an improvement in quite a lot of these numbers, PMI numbers picking up on a global basis, not just in China, not just in Europe, but actually...
Speaker: almost across the board.
Speaker: And by and large, things look much, much better than you'd expect.
Speaker: It's as if the average person on the street or the average business hasn't felt any impact of this crisis, which is maybe a testament to the actions that authorities and put in place very, very quickly.
Speaker: And talking about some of the differences within the data, one of the features post-COVID lockdowns was that people have moved away from buying stuff to doing things, going on holiday and services.
Speaker: Is that being reflected in the data?
Speaker: Yes.
Speaker: Very, very clearly.
Speaker: So if you look in the PMI numbers, for example, the global manufacturing PMI edged down in March.
Speaker: Part of that was China, but we saw this pretty much across the board.
Speaker: The manufacturing sector globally is struggling a little bit just because, as you say, people don't need to buy as much stuff.
Speaker: We bought loads of things during the pandemic and we're cutting back a little bit there as cost of living squeezes, hurting some people's maybe willingness or ability to buy certain items.
Speaker: But it's a service side of the economy that just remains rampant.
Speaker: And you can see this in the PMI numbers, you can see it in the consumer spending data, you can see it in the retail sales parts of the data where they include some services.
Speaker: You've generally got this big pickup in services demand, whereas it's good spending that's been much, much weaker.
Speaker: So if you look at retail sales volumes across the world, they've been really badly hit, particularly in Europe.
Speaker: And the standout is Sweden, where you've got retail sales volumes down more than 8% year on year.
Speaker: So a big squeeze.
Speaker: When household income is there, I'm feeding through into much lower spending.
Speaker: And what about inflation?
Speaker: Are we starting to see some better news, though?
Speaker: I think we are.
Speaker: Yes, some of the headline figures you get are heavily distorted by energy prices or some of the sort of base effects that are still in these numbers.
Speaker: And yes, in the US, you've still got this big role that rental inflation is playing, particularly on core inflation, is heavily distorting.
Speaker: that data.
Speaker: But if you step back and you look at the input cost data, you look at supply chains, which continue to look much, much better.
Speaker: You look at input price indices from the PMIs, supply delivery time indices in the PMIs.
Speaker: These all look much, much better.
Speaker: Commodity prices keep falling.
Speaker: Food inflation is a great example of this, where food prices on wholesale markets have fallen for 12 months in a row.
Speaker: Now, this isn't hitting food inflation in the UK or in Europe yet, but it surely will later this year.
Speaker: So we're getting a lot of sense, at least, that all of these leading indicators for inflation are looking much, much better.
Speaker: And this should hopefully mean inflation continues to come down through this year.
Speaker: So the central banks are the ones who look at that data.
Speaker: How have they been responding to it?
Speaker: So it's incredibly difficult for them because I mentioned at the beginning that the average person or average business isn't really seeing much impact of this banking crisis or banking shock yet.
Speaker: But they could do further down the line and we could start to see a little bit of tightness in credit conditions.
Speaker: This could mean slower lending growth.
Speaker: This could feed through into the economy more broadly.
Speaker: And central banks appear to be quite concerned about those risks.
Speaker: And that's why they might be a little bit more reluctant to tighten policy as much as they might initially want to, given this still high inflation rates and this relatively resilient consumer spending story.
Speaker: So actually, we do think that the Federal Reserve, the ECB, will continue to raise rates for their next couple of meetings.
Speaker: but then they're going to be at their peaks.
Speaker: And other central banks, such as the Bank of Canada or the Bank of England, look like they're at their peak as well.
Speaker: So central banks, at least for now, are weighing up these two different sides of the equation.
Speaker: They're looking at what's happening with inflation and some of that activity data, but keeping in mind those financial stability risks.
Speaker: And it does look like interest rates have maybe got just a little bit more to go, but not much.
Speaker: James, thanks for joining us.
Speaker: Thank you.
Speaker: One of the dominant themes this year is China's reopening and its impact on the rest of the global economy.
Speaker: So let's head to Asia to find out how the recovery is progressing.
Speaker: Erin Zinn is our Greater China Economist.
Speaker: She spoke to Graham Mackay earlier.
Speaker: Erin, thank you very much for joining us and bringing us up to date on the recovery in mainland China.
Speaker: Thank you very much for having me.
Speaker: So we'll get to the broad recovery in just a moment.
Speaker: But first of all, there was some trade data that came out today, Thursday, that you wanted to tell us about.
Speaker: Yeah, so the trade data was quite a surprise.
Speaker: Exports had shot up to almost 15% year on year.
Speaker: This is the first increase since about October last year.
Speaker: And it's been a bit of a surprise because we had expected that global demand would continue to be fairly weak.
Speaker: But our interpretation of this is that in the first two months of this year, because of the disruptions from COVID-19 with the peak outbreak, as well as the Chinese New Year holidays, that has led to some delays in the operations and the production of shipments, and that was likely pushed into March.
Speaker: So I think that that's probably why we see such a strong rebound in March.
Speaker: And I think looking ahead, this bounce back, you know, there's still some uncertainty on the global backdrop.
Speaker: So we think that this bounce back might be short lived.
Speaker: OK, so basically we shouldn't read too much into this export bounce in terms of how the rest of the global economy might be doing.
Speaker: Yeah, and I think that when we look at the breakdown of the data, it's actually pretty interesting because you do have some points of strength.
Speaker: ASEAN's very strong.
Speaker: But some areas like exports to the U.S., that's continued to be in contraction.
Speaker: And when we look at the product breakdown, things like exports of transportation-related goods like autos, airline parts, as well as services-related goods,
Speaker: suitcases, clothing, those have been very strong.
Speaker: But this electronics demand slump, that's been ongoing.
Speaker: And I think that that's pretty reflective of that rotation towards more service-oriented consumption in the post-recovery period.
Speaker: OK, and we've said since the beginning that this is going to be a consumption-led recovery for mainland China.
Speaker: That's certainly what we saw in the early days when the COVID restrictions were first lifted.
Speaker: Is that still the case?
Speaker: Is the consumer still driving that rebound?
Speaker: Yeah, so a lot of the high frequency data has been very optimistic, especially in terms of the services consumption recovery.
Speaker: So in mainland China, things like domestic tourism, box office movie sales, as well as traffic congestion data, those have recovered to pre-pandemic levels.
Speaker: So that's pretty strong.
Speaker: But I think that when we're looking at some of the leading indicators, like the purchasing managers index, that can shed some light on the fact that it's kind of a two track recovery.
Speaker: So consumption is likely to be very strong.
Speaker: There's some pent up demand here.
Speaker: There's excess savings that's supporting it.
Speaker: But things like manufacturing, it started to show a little slowdown in the momentum.
Speaker: So I think that that can be reflective of ongoing weakness in the global demand picture.
Speaker: And then the other side is that China still faces labor market pressure.
Speaker: So that's another point of stress.
Speaker: So I think that even though the recovery is well underway, particularly in services consumption, there are points of stress for the economy.
Speaker: And does that imply a greater need for support on the monetary or fiscal side?
Speaker: Yeah, that's exactly right.
Speaker: I think that we're going to continue to see a lot of fiscal support, things like tax cuts and fee reductions, as well as ongoing special local government bond issuance.
Speaker: On the monetary policy side, we're expecting they're going to remain accommodative.
Speaker: Inflationary pressures are still very muted.
Speaker: in mainland China, so that's going to allow the PBOC the space to continue easing.
Speaker: And we think this is really going to come through more quantity-based tools like RRR cuts.
Speaker: All right.
Speaker: And finally, we do have a significant economic indicator coming out of mainland China.
Speaker: That's Q1 GDP out next week.
Speaker: What are your expectations there?
Speaker: So we're expecting that sequentially we'll have an increase of about 1% Q on Q. This is notable because last quarter we saw basically flat growth on a sequential basis given the drag from COVID.
Speaker: But as I mentioned, some of the high frequency data, some of the January, February data, that's been very supportive that the recovery is ongoing.
Speaker: And this will translate to about a 2.2% year on year increase.
Speaker: Very good.
Speaker: Erin, thank you very much indeed for the update.
Speaker: Thank you for having me.
Speaker: Now, earlier we heard from James about growing concerns over the stability of the financial system.
Speaker: One beneficiary of this uncertainty has been gold, which surged above $2,000 an ounce as investors sought safe haven assets.
Speaker: So can this high price be sustained or is a gold rush over?
Speaker: James Steele, Chief Precious Metals Analyst, joins me to discuss.
Speaker: Jim, thanks for joining us.
Speaker: Let's start with some context.
Speaker: Just talk us through what's been driving the gold market, especially in the last year.
Speaker: Well, the market's been very interesting in the past 12 to 15 months and risk
Speaker: Whether the risk is increasing or decreasing has been what's been driving gold.
Speaker: The market soared above $2,000 per ounce, getting close to all-time highs in the immediate aftermath of the Ukraine invasion last year, and then subsequently sank as risk came out of the market and interest rates began to rise.
Speaker: Now, this year, we've seen risk of a different sort.
Speaker: Bank stresses has superseded geopolitical risk and taken the market significantly higher on safe haven buying, which has sustained it so far.
Speaker: So, Jim, what's the outlook?
Speaker: I mean, will this gold rush last?
Speaker: Well, if I can compare it to last year when we ran up and then sold off as risk declined,
Speaker: If in fact bank stresses are going to begin to relieve the market and the financial system is steadier, then that's going to undercut the safe haven bid for gold, which has taken the market up so sharply.
Speaker: Because one of the other things that happens when the market goes up like this is that price sensitive emerging market physical demand, i.e.
Speaker: jewelry, coins and bars, recedes, leaving the market overextended on short term investment, if you like.
Speaker: Just in terms of this demand side, there has been record buying from central banks.
Speaker: Just explain that, and will that last?
Speaker: Well, we saw a very significant buying last year.
Speaker: You're absolutely correct.
Speaker: over 1,100 tons, we believe, was bought, which is almost double the previous record.
Speaker: And that's based off of geopolitical risks again, but also portfolio diversification, as there's some movement out of the dollar and other currencies, which the central banks have found attractive to park some of that money into gold.
Speaker: Now, we may not be able to get anywhere near the level of buying this year because foreign exchange levels may be down a little bit and also simply the very high price above $2,000.
Speaker: But we're still going to see fairly strong buying in historical terms, we believe, but not as robust as last year.
Speaker: Jim, thanks so much for the update.
Speaker: Thank you.
Speaker: So that's it for another week.
Speaker: Thanks to our guests, James Pomeroy, Erin Zinn and James Thiel.
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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