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: This podcast was recorded for publication on the 14th of November, 2024 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Butler in London, and welcome to The Macrobrief.
Speaker: Now, while investors continue to digest the potential implications of a second Donald Trump presidency, today we're focusing on developments on this side of the Atlantic.
Speaker: And there's plenty to talk about.
Speaker: Resilient inflation, a weekly euro, the collapse of the coalition government in Germany, and of course, the devastating floods in Spain provide a difficult backdrop for the continent.
Speaker: So to discuss these challenges, as well as look at some potential long term opportunities, I'm joined by Simon Wells, chief European economist.
Speaker: Simon, thank you for joining the podcast.
Speaker: Thank you, Piers.
Speaker: Good to have you back.
Speaker: So perhaps let's kick off with a couple of key macro stats on Europe.
Speaker: Yeah, so the past week we've seen some data that's been fairly good.
Speaker: We've had the UK labour market releases.
Speaker: Overall pay growth was a little bit stronger than the market expected.
Speaker: But the key thing in terms of where interest rates are going and what that might mean, private sector pay was pretty much in line with what the Bank of England had been expecting.
Speaker: The unemployment rate also rose a little bit, up to 4.3%.
Speaker: But we have to bear in mind that the UK Statistics Office has completely distanced itself from those numbers.
Speaker: They really aren't worth very much at the moment.
Speaker: It's not going to be until well into next year that that is solved.
Speaker: Other releases we've seen and some more surveys out of Germany.
Speaker: You mentioned Germany in your introduction.
Speaker: The ZEW survey of investor confidence, really, in terms of current confidence, it hit the lowest it has been really since the depths of the pandemic in 2020.
Speaker: So unsurprisingly, perhaps not a lot of confidence there.
Speaker: Looking ahead, things a little bit better, but still in Germany, it's a country that's rattled.
Speaker: So it's a strange time.
Speaker: I saw the report that you published on the Europe of Opportunity, and I thought, that's a bit of a strange time to be writing something like that.
Speaker: After all, you have this very stark statistic when you compare European growth over the last few years versus the U.S.
Speaker: Yes, well, it is a little contrarian, Piers, let's be honest about it.
Speaker: But, I mean, the statistic you're referring to is since the mid-1990s, the US economy has doubled in size, Europe's economy has grown by about 50%.
Speaker: That's a major underperformance, and it warrants looking at it.
Speaker: So to your point, and we know with statistics there are different ways of looking at it, but is that a bit of a harsh comparison?
Speaker: It is.
Speaker: That's literally looking at the GDP data and the size of the economy.
Speaker: But if you measure it slightly differently in purchasing parity terms... What's that in layman's terms?
Speaker: Well, purchasing power parity is a way of doing an international comparison where rather than just convert things into US dollars, you try and assemble a similar basket of goods in each country.
Speaker: Look at what that basket would cost and adjust things that way.
Speaker: And in that way, you sidestep
Speaker: potentially big fluctuations in FX rates.
Speaker: Of course, you create a problem that you have to try and find a similar basket of goods, so nothing's ever easy.
Speaker: But if we do look at GDP in PPP terms, the gap is narrower.
Speaker: And in fact, I'll go even further and say if you look at GDP in PPP terms, say per capita or even per hour works in Europe, that gap almost completely disappears, which is somewhat remarkable.
Speaker: Not to say Europe doesn't have some deep seated economic problems.
Speaker: It certainly does.
Speaker: But you're right.
Speaker: It does in some ways depend on the way you look at it.
Speaker: Nevertheless, as you said, you highlight ageing population, weak investment and low productivity, which doesn't sound like a recipe for opportunity or does it?
Speaker: Well, there are certainly things that Europe can do.
Speaker: You've really hit the nail on the head.
Speaker: It's productivity that has been a big part of Europe's problem.
Speaker: And that is surely related to the very low levels of investment that we've seen over the past few decades, at least relative to the US.
Speaker: So a real key thing Europe has to do, of course, is boost productivity.
Speaker: And that probably requires boosting innovation and boosting investment
Speaker: as well.
Speaker: Let's come back to that in a second.
Speaker: But I just wanted to also ask you about Mario Draghi's report on European competitiveness.
Speaker: Was that significant?
Speaker: Was that in a sense a way of saying, we admit there is a problem and therefore we need to find solutions?
Speaker: Yes, I think potentially it was.
Speaker: Many of the things we've just been discussing, of course, are covered in great detail in the Draghi report.
Speaker: The question, of course, is how many of its recommendations can actually be implemented.
Speaker: It's easier to identify these problems than solve them.
Speaker: But certainly, I think it does show that in this new geopolitical and trade environment that Europe is at least facing up to some of these structural problems.
Speaker: So let's look at what could change.
Speaker: Firstly, as you point out, something could change almost by itself.
Speaker: By that, I mean this point on cyclicality.
Speaker: So certainly some of the weak productivity we've seen post-pandemic could well be cyclical.
Speaker: You've seen a little bit of labour hoarding in Europe, people hanging on to workers after they found it so difficult to recruit immediately after the pandemic.
Speaker: So
Speaker: If and when global demand picks up, you might just see a cyclical recovery in productivity.
Speaker: Absolutely.
Speaker: And of course, interest rates are coming down.
Speaker: So we might see a cyclical pickup in investment.
Speaker: I don't think in the near term, but once we get deeper into next year.
Speaker: You talked about hoarding.
Speaker: Just expand a little bit on this concept of labour hoarding.
Speaker: What did you mean by that?
Speaker: Well, in Europe, let's say relative to the US, let's be honest, it is costlier to hire and fire.
Speaker: So there is a tendency for firms to hang on to workers when they can.
Speaker: You've got to add to that the longer term demographic trend where Europe's workforce
Speaker: is potentially shrinking so you want to hold on to workers for that.
Speaker: And there's a range in many European countries of government support schemes that actually, furlough schemes, actually help subsidise pay in tougher times.
Speaker: So overall you do tend to see a smoother employment profile in Europe and
Speaker: companies do hang on to workers when they can.
Speaker: Talking about hoarding, there's also this concept of capital hoarding.
Speaker: I suppose maybe the better way is capital stickiness in the sense of a lot of money is stuck in savings and not being invested productivity.
Speaker: So that is a key issue that we look at both in our report and is a huge part of the Draghi report as well, which is how do we better intermediate Europe's vast pools of savings to more productive investments rather than just necessarily sitting in cash?
Speaker: And there are various ways that could be done.
Speaker: Ideally, perhaps, would be the completion of capital market union.
Speaker: But that is certainly not something that's going to happen very quickly.
Speaker: But certainly, Europe's companies are much more reliant on bank financing than capital market financing relative to the US.
Speaker: So deepening Europe's capital markets...
Speaker: is one way.
Speaker: But even if we think full capital market union is still a long, long way off, there are things Europe can do, for example, through the European Investment Bank or even at the national government levels to try and get more venture capital and scale up capital, get Europe innovating more.
Speaker: And finally, Simon, I know it's a bit overhyped, but on AI and productivity, could that be a game changer for Europe?
Speaker: Of course it could.
Speaker: I'm glad you brought that up, Piers, because we've got all the answers.
Speaker: What I can say about AI in Europe is that, as with many developed economies, it kind of cuts both ways.
Speaker: On the one hand, the service-based economies have a lot of jobs, clerical work, technicians that...
Speaker: might be more easily replaced by AI.
Speaker: And that's obviously a concern for those economies.
Speaker: On the other hand, there's also a large percentage of the workforce in professional roles and managerial roles.
Speaker: And there, AI has scope to have huge complementarity, boost speed and productivity there.
Speaker: So carefully managed, yes, I think AI does hold opportunities for Europe.
Speaker: But of course, I'm being very vague and I'm an economist and this is what we get paid the big bucks for.
Speaker: But some Federal Reserve economists earlier this year did a survey of what AI might mean.
Speaker: And their conclusion was it could raise GDP growth anything from 0.1 a year up to 2% a year.
Speaker: And as I say, that's what economists are great at, those big wide ranges.
Speaker: Simon, thank you.
Speaker: And on that note, thank you for joining us today.
Speaker: Thank you.
Speaker: Three points on which to end this week's macro brief.
Speaker: Our UK economics team has made some tweaks to its forecasts, taking into account the first budget of the new Labour government.
Speaker: The team now sees slightly stronger growth of 1.7% for 2025, with inflation a touch higher at 2.3%.
Speaker: And while the Bank of England delivered a rate cut last week, we now see a more gradual easing path next year, with interest rates falling to 3% by early 2026.
Speaker: The rate of retail inflation for October is among a raft of UK economic data due next week.
Speaker: Also next week, our very own focus on the future of travel and tourism.
Speaker: HSBC's global economist James Pomeroy will be joining us on our LinkedIn channel for a live Insight event on Friday the 22nd of November.
Speaker: This is your opportunity to join us live and put questions to James on the post-COVID boom in travel and tourism and the challenges from the risk of so-called over-tourism to climate change.
Speaker: To sign up, find us on LinkedIn at hashtag HSBC research or email askresearch at HSBC.com.
Speaker: And finally this week, an important campaign for HSBC Global Research is underway in Asia.
Speaker: The Extel Asia Survey 2025.
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Speaker: The survey is already open and runs until the 6th of December.
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Speaker: That's all from us today.
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