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The Macro Brief - Where in the world is inflation not a problem?
32 Plays2 years ago
The HSBC Global Research team reviews how the dollar's performance may affect the course of EM currencies in the second half of 2023, and highlights where in the world inflation may not be the primary focus of policy makers. Disclaimer: https://www.research.hsbc.com/R/51/KckWhv9 Stay connected and access free to view reports and videos from HSBC Global Research follow us on LinkedIn (https://www.linkedin.com/feed/hashtag/hsbcresearch) or click here: https://www.gbm.hsbc.com/insights/global-research.
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Transcript
Introduction to HSBC Podcast Series
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening.
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And now onto today's show.
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Following HSBC Global Research Podcast was recorded for publication on the 7th of July, 2023.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Emerging Markets and Currency Outlook
00:00:41
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Hello everybody and welcome to the Macrobrief, our weekly showcase of the insights and ideas from the team here at HSBC Global Research.
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I'm your host, Jack Reed.
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The focus this edition is squarely on the emerging markets.
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We'll be mapping out a possible direction for the US dollar in the coming months.
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and gauging how that may influence the path of EM currencies.
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But as you know, not all emerging markets are the same, and so we'll be looking at a few economies across the world that illustrate some of the rather stark differences in outlook for inflation, for central bank interest rates, and economic growth.
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And to do all this, we'll be joined by Paul Mackel, head of currency research at HSBC, chief Asia economist Fred Newman, and Simon Williams, chief economist for Central and Eastern Europe, the Middle East, and Africa.
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Paul Mackel's FX team has just published its monthly Emerging Markets FX Roadmap, coinciding with the end of the first half of 2023, and he joins me in London.
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Paul, welcome.
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Thank you very much.
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So what is your outlook now for the dollar?
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Well, we believe it's very timely to look back and gauge whether our track record, so to speak, how it's held up in terms of the performance of the dollar.
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for emerging market currencies or even just the broader dollar and where do we sit to kind of shape things for the second half.
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We still believe very much that the dollar will end up in a weaker state in the next couple of quarters as we head into 2024.
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So from a top-down perspective, that should give some further relief to emerging market currencies.
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Still, however, there's been certain parts of our top-down framework that are missing and is probably keeping the broader dollar a little firmer than what many would be expecting.
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And what that comes down to is global growth.
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There's still concerns out there that global growth will be a lot more punishing or more difficult within the next few months or quarters given the tightening by global central banks and also the way that China's economy has also been pretty sluggish.
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But if we're right that we reach more of a softer landing outlook, whether in the US, in the Eurozone, China's economy gets stronger, we think that should feed into a broadly softer dollar going forward.
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And as a result, helping a number of emerging market currencies.
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Looking ahead, a weaker dollar, giving some support to these emerging market currencies.
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But what are the internal factors that are also determining success or failure?
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Well, it's a very good question.
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And clearly the market has been thinking a lot more positively about the outlook for Latin American currencies.
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My colleague Joseph in Calcutta has been highlighting that for quite a long time.
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You have the high nominal yields, you have the high real yields, local policy risks appear to be abating, and even some of the external accounts for a number of the countries are also improving.
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And this is putting these regions' currencies
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in a stronger position compared to many other out there.
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It makes total sense to us, and we think that will continue.
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So dollar weakens, internal factors look good, this augurs well for better performance on some of the EM currencies.
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So while the market has been increasingly comfortable with, as I said, a number of LATAM currencies, if we're correct in our thinking that the dollar will weaken more broadly in the second half of this year,
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at a time when the global growth cycle is looking less bad, that could start to bring relief to other regions' currencies, in particular the low-yielding ones in Asia.
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Okay, so let's drill down a little bit to some of the currencies.
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The big one, the Chinese renminbi.
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What is the outlook for it?
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It's had kind of a rough patch.
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Absolutely, it has had a rough patch indeed.
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Again, for good reasons.
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The data pulse has been surprising to the downside.
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The market keeps waiting for signs of a policy stimulus to help turn the tide or turn the ship in a better direction for the economy.
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And it's this waiting game that has been undermining the RMB.
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That said, the FX policy resistance appears to be becoming more noticeable lately, where they're trying to stabilize the currency.
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But peering ahead, if we're right what we said on the broader dollar,
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and also taking into account the belief that China's economy will be doing better, ultimately we think that this currency, the renminbi, will start to shift onto a more stable footing and strengthen versus the US dollar towards the end of this year.
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We touched on Brazil and China.
00:05:26
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Where else might we see the second half bring better currency performance?
Asia's Economic Resilience and Challenges
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It's very interesting because we're seeing some recent developments where a currency that's normally very sensitive to renminbi weakness
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and also some disappointing news flow from China's economy, it should be the Korean won.
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Historically, against the backdrop that we just discussed, that the Korean won, given that sensitivity, would be weaker, but that's not been the case.
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It's been the opposite.
00:05:56
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It's been pretty resilient.
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So what's going on?
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Well, some believe that we're seeing early indications that perhaps the technology cycle is beginning to bottom, globally that is, and could Korea be in pole position to benefit from that?
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Equity inflows have also been fairly strong, and it's been supporting the currency.
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So while it's still a low-yielding one, it's giving us an interesting indication about how, as I said, the tide could shift for the better for a number of these low-yielding currencies in Asia.
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So it's leaving us on the optimistic side still very much for the outlook for emerging market currencies.
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Okay, great.
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Paul, thank you very much for joining us.
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Thank you very much.
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While talk of inflation is still very much at the top of the agenda for many policymakers around the world, easing price pressures are providing some relief in Asia.
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Our economics team there has just published its latest quarterly outlook.
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Our producer in Hong Kong, Graham McKay, caught up with Fred Newman, chief Asia economist.
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Fred, welcome to The Macrobrief.
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Good to have you with us.
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Thanks for having me.
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Now, let's start with the title of your new quarterly, The Big Inflation Reversal.
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That sounds like a pretty encouraging name.
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Does it imply that we are further along than elsewhere in terms of actually seeing a return to normalization as far as inflation goes in Asia?
00:07:20
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Yeah, it's supposed to be somewhat of a corrective to a popular narrative, and that is that the world is gripped by an inflation surge.
00:07:26
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And that's certainly been true over the past year.
00:07:29
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But if you look closely, the inflation dynamics differ in different parts of the world.
00:07:34
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So you have in advanced economies a much more persistent inflation shock.
00:07:39
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When you look at emerging Asia, we actually have some economies like mainland China, for example, which is a deflationary crisis.
00:07:46
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or disinflationary process right now.
00:07:49
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And elsewhere across Asia, you see actually inflation coming down very quickly.
00:07:53
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In most economies, it's back to within target.
00:07:56
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And that is a big reversal from where we were a few months ago.
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And that's because inflation is driven here mostly by energy costs and a little bit food, not so much by core prices and wages.
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And that's where the difference comes from.
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And therefore, for Asia, at least, there's a big inflation reversal coming through.
00:08:15
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And I suppose the logical follow-up is, does that give room for potential rate cuts in the next six months or year ahead?
00:08:23
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That's right.
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So we see still some easing bias, for example, by the PBOC in China, if you will.
00:08:29
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They might cut the reserve requirement ratio, for example.
00:08:33
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But you're also seeing other central banks in Asia, mostly in emerging Asia, actually now kind of having an easing bias, if you will.
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So a place like Indonesia, for example, might be cutting rates before the end of the year.
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Korea might be cutting rates before the end of the year.
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And then early next year some other central banks will follow.
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But the big point here is that a lot of central banks in Asia might cut before the likes of the Federal Reserve will do by the middle of next year.
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And that means that really Asia is kind of leading a little bit the rate cut cycle compared to advanced markets.
00:09:10
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And that, I think, is important and it plays itself out in FX markets, for example, where you've seen
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Some of the Asian currencies may be weakened a little bit of late.
00:09:21
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And you see that really also in terms of market expectations, in terms of what's being priced in, in terms of rate cuts.
00:09:29
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Very good.
00:09:30
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Now, before we get too, I suppose, optimistic with the narrative here, we should probably acknowledge that, you know, the Chinese recovery never really did fulfill its potential, I suppose you could say.
00:09:42
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How much of a problem is that causing for the region, perhaps for the world?
00:09:49
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Well, you're right.
00:09:50
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So the Chinese recovery has been disappointing.
00:09:53
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It's not all as bad as some of the headlines suggest, but it's certainly a disappointing pace, and it means that the Chinese economy is growing below trend, and so it's not generating inflation.
00:10:04
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Now, for the rest of the world, this is actually disinflationary.
00:10:07
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And again, that's another corrective to this broad narrative that the world is gripped.
00:10:11
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in a relentless inflation spiral because it's the second largest economy in the world and you have increasing access capacity in China and that means that some of the manufacturers in China will look to export more goods because they can't really sell them domestically and that's kind of then leading to price competition in the goods markets and you'll see then therefore competitive pressure increase on other exporters that are competing with mainland China.
00:10:40
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Now there's a second element here and that is that the FX moves that actually you see in a sharp depreciation of the Chinese currency that gives additional help to Chinese exporters.
00:10:50
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And so the Chinese economy is not just disinflationary in a sense of demanding fewer commodities and that's helping to curb commodity prices which is disinflationary.
00:11:01
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but also in the goods markets because China is such a big producer of goods.
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And that's also helping to curb goods prices and actually may lead to a decline in goods prices.
00:11:12
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And in terms of, I suppose, more economic resilience in the region, where would you point to?
00:11:18
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Well, overall, the region continues to be remarkably resilient.
00:11:22
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Macro fundamentals are pretty strong.
00:11:25
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So if you look at corporate balance sheets, if you look at banking sectors, if you look at external balances, FX reserves, these classic indicators, the region is extraordinarily resilient.
00:11:36
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But that doesn't mean we get necessarily super strong growth.
00:11:40
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We might see slightly below trend growth this year and next, and that's in fact our forecast.
00:11:45
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Now where the growth comes from is really on the domestic side primarily because exports are not doing too well at the moment.
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And so consumption, for example, has been quite strong.
00:11:55
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And here's some of the good news is that because we've seen lower energy prices, for example, consumers in India and Southeast Asia, for example, get that relief from cost pressures and that improves purchasing power.
00:12:10
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And that means actually consumer spending should actually remain quite resilient going forward.
00:12:14
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And that's where most of the growth will come from over the coming year.
00:12:18
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Very good.
00:12:18
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So I suppose in a global context, are we giving Asia the thumbs up economically for the next second half of the year?
00:12:25
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We almost always give it the thumbs up.
00:12:28
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And certainly, I think, given the global economic challenges, one of the points to make about Asia is that its resilience remains quite impressive.
00:12:38
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And yes, there are headlines around China not fulfilling expectations.
00:12:42
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But even there, we have to keep things in mind.
00:12:44
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We expect growth coming at 5.3% this year, maybe 4.9% next year.
00:12:50
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That's not a full-blown recession by any stretch of the imagination.
00:12:54
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And so this is still where most of the incremental growth will be generated for the world economy.
00:13:01
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Very good.
00:13:01
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Fred, great notes to end on.
00:13:03
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Thank you very much for joining us.
00:13:04
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Thank you very much.
00:13:07
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Fred Newman there, speaking with our producer, Graham Mackay, in Hong Kong.
CMEA Region Economic Prospects
00:13:12
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You may know that the Macro Brief, which is available wherever you find your podcast, also has a sister production in Hong Kong called Under the Banyan Tree.
00:13:19
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That Asia-focused weekly podcast is produced by Graham and jointly hosted by Fred Newman and the head of Asia equity strategy, Harold van der Linde.
00:13:29
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Now from Asia to the CMEA region, where our team covers the economies of about 20 countries from as far south as South Africa to Central and Eastern Europe.
00:13:38
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Chief CMEA economist Simon Williams is here now.
00:13:40
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Simon, thank you so much for joining us.
00:13:42
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My pleasure.
00:13:43
Speaker
Your quarterly outlook on the face of it seems a little glum on economic prospects in your region, Simon.
00:13:48
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What's behind that?
00:13:49
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Well, it is a big, big region, disparate region, 20 economies from Russia down to Africa and many places in between.
00:13:57
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I think it's a bit unfair to say the report is glum.
00:14:00
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There are some parts of the region we think are likely to outperform.
00:14:04
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But yeah, it's been a very disappointing quarter for parts of the region.
00:14:07
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It seems quite disparate in some cases.
00:14:11
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And what's driven that disappointment?
00:14:13
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Well, you look across the headwinds that they're facing.
00:14:15
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Global commodity prices have come down.
00:14:17
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They've come down enough to discomfort the commodity exporters.
00:14:20
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Not really come down enough to provide the importers with much relief.
00:14:25
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There's a problem with growth.
00:14:26
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Domestic demand in particular looks really soft across a lot of semen over the first months of addition going into Q2.
00:14:33
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Sentiment looks quite poor as well.
00:14:35
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You get that sense that policy tightening is really starting to get some traction.
00:14:40
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Monetary policy...
00:14:41
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As a consequence, we've lost some of its ring for maneuvering to push back.
00:14:44
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So the interest rate cuts that we've been hoping for further into this year, actually some cases we've got rates that need to go higher.
00:14:49
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So in contrast to some of Asia's economies that Fred was outlining, taming inflation is still very much a key factor here.
00:14:56
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It's a combination of things.
00:14:58
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Part of it's about inflation, an inflation dynamic which is cooling, but it's perhaps cooling a little slower than we thought, and core inflation has been quite sticky.
00:15:08
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It's been particularly difficult for those parts of the region where the currencies...
00:15:12
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have been under practice.
00:15:14
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We do have a few where we've had some really big, sharp downward movements in the FX.
00:15:18
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So the relief that others have enjoyed from lower commodity prices really hasn't shown itself in those economies.
00:15:25
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There's been a problem with risk appetite as well.
00:15:27
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And then we've got some parts of SEMIA that are in need of funding.
00:15:31
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Global risk appetite has moved against some and that has exposed some pretty clear bounce of payments vulnerabilities.
00:15:37
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Are there some countries in the Semia region that you might consider to be outperformers by comparison?
00:15:43
Speaker
Our performers, well, look through the numbers where clearly it's still pretty upbeat on prospects for the big oil producers in the Middle East.
00:15:50
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We've actually taken some of the growth numbers down quite sharply.
00:15:53
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The overall growth numbers down quite sharply for the oil producers in the Middle East.
00:15:56
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But that's really misleading.
00:15:57
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Because oil prices.
00:15:58
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It's not oil prices, it's oil production.
00:15:59
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So oil production has come off because OPEC has introduced some additional cuts.
00:16:02
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That means the oil sector will contract.
00:16:04
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That brings down the headline rate of economic growth.
00:16:07
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But what matters is the non-oil.
00:16:10
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economy and there we think momentum still looks strong sentiment looks good employment growth looks good we can see not just a pickup in consumption we see some big gains in investment coming through as well so don't get caught up by that headline and growth figures about the normal sector and there yeah we think normal sector is growing quite nicely let's switch regions now to central and eastern europe what do you find in there
00:16:34
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Yeah, the story's moving on.
00:16:35
Speaker
The policy challenges are still quite pronounced.
00:16:38
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They're rooted around containing inflation.
00:16:41
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And we do think the peak inflation has passed across CE.
00:16:44
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We're expecting a pretty steep disinflation path over the second half of this year.
00:16:49
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Some of it we're already beginning to see come through.
00:16:52
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But, you know, even in CE, we've had to
00:16:54
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Mark down some of our expectations for immediate policies and push back some of the first cuts that we've been expecting, apart from the global backdrop.
00:17:03
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It's also about the difficulty of managing core inflation, especially in CE, where fiscal policy sometimes seems to be working.
00:17:10
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to monetary policy, but also where these labor markets are still very tight.
00:17:14
Speaker
Employment is high, wage growth in some parts of CE is still very strong, and that's the kind of environment where it's tough to get inflation back towards target.
00:17:23
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Any success stories out there?
00:17:24
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Which policymakers are beating inflation?
00:17:26
Speaker
In terms of who's delivering, Czech Republic feels like it's the most advanced.
00:17:32
Speaker
That's where we can already see some big drops in core inflation.
00:17:36
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It's where we think inflation gets back to our target earliest than we're expecting in a first cut from CMB before the end of the year.
00:17:44
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I just wanted to say that alongside those inflationary pressures, what you're also seeing is a lot of pressure on domestic demand.
00:17:53
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The loss of momentum in domestic demand, the contraction,
00:17:55
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in hassle consumption in particular, is really striking.
00:17:59
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And that's the price that the city is having to pay to get inflation back towards the target level.
00:18:04
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So we've talked about places where policy has begun to kick in.
00:18:08
Speaker
What about some of the countries where policy isn't yet working?
00:18:12
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Again, we tried to discuss it at some length in the report, tried to run through where we think policy is in that adjustment cycle.
00:18:20
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And there are clearly some places who are on the curve, even ahead of the curve.
00:18:24
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Others, though, the challenges still lie ahead.
00:18:27
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We look at Romania, its big counter-count deficit, and that makes us nervous.
00:18:31
Speaker
There are changes that Egypt has committed to as part of its IMF reform programme that still need to be rolled out.
00:18:38
Speaker
There are changes, clearly, in Turkish policymaking as well,
00:18:41
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post the election.
00:18:43
Speaker
Okay.
00:18:43
Speaker
Thank you very much, Simon.
00:18:45
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My pleasure.
Conclusion and Subscription Reminder
00:18:46
Speaker
So that is the Macro Brief this week.
00:18:48
Speaker
Special thanks again to Paul Mackel, Fred Newman, and Simon Williams.
00:18:52
Speaker
Remember, subscribe to the Macro Brief on Apple and Spotify on your platform of choice to get our weekly updates.
00:18:59
Speaker
Thanks very much for listening.
00:19:00
Speaker
We'll be back soon.
00:19:25
Speaker
Thank you for joining us at HSBC Global Viewpoint.
00:19:28
Speaker
We hope you enjoyed the discussion.
00:19:30
Speaker
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