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: And now onto today's show.
Speaker: This podcast was recorded for publication on the 13th of February, 2025 by HSBC Global Research.
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Speaker: Hello, I'm P.S.
Speaker: Butler and welcome to the Macrobrief.
Speaker: Today we're focusing on the UK, where the economic outlook is looking increasingly like the weather here in London.
Speaker: Gloomy.
Speaker: Last week's rate cut by the Bank of England appeared to mark a dovish shift, but a deteriorating growth outlook, sticky inflation and weak consumer demand pose key challenges.
Speaker: And on top of this, Sterling remains under pressure.
Speaker: So to assess the current state of play, I'm joined in the studio by Liz Martin, senior UK economist, and Nick Andrews, senior G10 FX strategist.
Speaker: Liz and Nick, welcome.
Speaker: Hello.
Speaker: Hello, thank you.
Speaker: So Liz, we've just had the fourth quarter 2024 GDP numbers.
Speaker: What's the takeaway?
Speaker: Well, so the first thing to say is it was an upside surprise.
Speaker: The economy grew by 0.1% at Q on Q on Q.
Speaker: versus an expectation of a fall of 0.1% thanks to a stronger December than expected.
Speaker: But the bigger picture is really not great here.
Speaker: So first of all, the economy has slowed down sharply from the first half of the year.
Speaker: where growth was much stronger.
Speaker: And secondly, if we look at what was driving that small positive increase in Q4, it was all government.
Speaker: So government spending was up 0.8% quarter on quarter.
Speaker: Government investment was up strongly, but private consumption was flat.
Speaker: Business investment fell by 3.2% and export volumes fell for the third consecutive quarter.
Speaker: So
Speaker: Actually, the private sector is in recession here.
Speaker: It's just the government keeping the economy afloat.
Speaker: And what have you done to your numbers?
Speaker: So against that backdrop and considering the drop that we've seen in confidence among consumers and businesses, we have revised down our growth forecast for this year.
Speaker: Now, we're not forecasting recession.
Speaker: We do see positive growth in each quarter, but it's not going to be as strong as we previously thought it was going to be.
Speaker: So we're looking at 0.9% for the full year 2025, and that's down from 1.4% previously.
Speaker: Now, coincidentally, we've actually just released the results of a proprietary survey of 2,000 UK consumers.
Speaker: So a bit of sort of ground up evidence.
Speaker: How did the results of that survey compare to the sort of normal data that you look to track consumer behavior?
Speaker: Yeah, so this is a fantastic, wide-ranging survey.
Speaker: It is compiled and published by my colleagues Paul Rossington and Pankaj Agawala in our retail team.
Speaker: And what's really good about it is we've been running it now since 2017, so we've got a really nice, long history of
Speaker: of consumer attitudes in the UK.
Speaker: Now the first thing to say about it is when we ask people what worries them, people always, always, always say the cost of living.
Speaker: And that's been true since we first ran it in 2017, long before inflation was overshooting the target and the Bank of England was raising interest rates and we were all talking about
Speaker: the cost of living and so on.
Speaker: So it's always a concern for people.
Speaker: But what's a bit of a worry in this iteration is that actually slightly more people chose the cost of living as a concern in 2025 than chose it in 2024.
Speaker: And that's despite the fact that actually inflation is lower than this time last year.
Speaker: So that is a little bit of a worry in terms of people's attitudes and expectations around inflation.
Speaker: And interestingly, even among people who expect stronger real incomes, a majority say they would either mostly save it or use it to pay down debt.
Speaker: That's right.
Speaker: The statistics show that on aggregate, real wages are rising again.
Speaker: So most people's wages should be rising faster than prices.
Speaker: And yet what we see is that consumption hasn't risen perhaps as fast as we might expect in that environment.
Speaker: Interest rates are down.
Speaker: That should help as well.
Speaker: And the missing ingredient, I think, is confidence.
Speaker: And we see that in this survey.
Speaker: People preferring to spend any gains that they get, as you say, on paying down debt or saving.
Speaker: So are we getting closer to the definition of stagflation?
Speaker: I mean, how difficult is it to break out of a downward spiral of lower consumer confidence leading to weaker growth leading to lower consumer confidence?
Speaker: Well, I'm afraid we are quite close to the definition of stagflation in the sense that the economy stagnated in the second half of the year.
Speaker: Inflation was above target.
Speaker: And as we look ahead, we're looking at low growth.
Speaker: and possibly a rise in inflation as well.
Speaker: So it kind of is the worst of both worlds, unfortunately, for now at least.
Speaker: And on our rates forecast, we have, as a house, been more dovish than the market.
Speaker: What's the gap been?
Speaker: And do you think that's likely to narrow?
Speaker: Yeah, so as a reminder, our forecast is that we will continue along a cautious path for now, one 25 basis point cut per quarter through to August.
Speaker: And at that point, we think this kind of weak economic growth and jobs picture will start to take centre stage and the pace of cutting will actually accelerate.
Speaker: such that you get 125 basis point cut per meeting, taking us to 3.25 at the end of this year and 3% at the start of next year.
Speaker: The market is much more worried at the moment about inflation, I think partly due to developments
Speaker: in the US and market moves over there.
Speaker: And so the market, you know, moves around a bit, to be honest, at some point, you know, it thought that the peak was going to be four and a bit, then four, then three and three quarters, we're back up again, you know, the gap is, is moving all the time.
Speaker: But we do think as time goes by, as I say, we'll be worrying a little bit less about inflation and a little bit more about growth in the economy.
Speaker: Nick, thinking about sterling, none of this is really very supportive.
Speaker: And we saw, as we said in the introduction, that the Bank of England last week seemed to exhibit a more dovish bias.
Speaker: That's right.
Speaker: Last week we had a fairly dovish Bank of England meeting.
Speaker: Catherine Mann, who was previously a hawk, switched to being quite a dove.
Speaker: She voted for 50 basis points cut.
Speaker: Whereas the majority were voting for 25.
Speaker: Whereas the majority voted for 25.
Speaker: But if you listen to what she was saying this week in her speech, she's more worried about the deterioration of the labour market.
Speaker: And there's been some early signs and survey data so far this year that the labour market is deteriorating.
Speaker: And if that continues, that will probably mean the market prices in more rate cuts than currently priced, and that will push sterling lower.
Speaker: And what about tariffs?
Speaker: It's obviously the theme du jour.
Speaker: But would it be fair to say that the UK is less exposed than the rest of Europe to potential tariffs from the US?
Speaker: Yes, I think that's right to say the UK has a fairly balanced trade balance with the US, whereas the EU runs a large goods trade surplus versus the US.
Speaker: So this, for one thing, makes the EU more of a target from White House tariffs.
Speaker: But at the same time, the UK will be exposed to any tariffs on the EU to the extent that the UK does a lot of trade with the EU.
Speaker: So it will be less exposed than the EU, but there's still a risk to sterling from it.
Speaker: In terms of the added global uncertainty and volatility that the tariff environment creates, sterling is really a risk-off currency.
Speaker: It suffers when there's a risk-off environment.
Speaker: As we saw in the first two weeks this year, sterling fell more sharply than most other currencies.
Speaker: And more importantly, Liz, what about the weather?
Speaker: Is that going to improve?
Speaker: I hope so, Piers.
Speaker: I really do.
Speaker: It's been awful, hasn't it?
Speaker: It has.
Speaker: We don't know on that score either.
Speaker: But thank you for your comments today and thank you for joining us.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Hello from Under the Banyan Tree.
Speaker: Fred Newman here, Chief Asia Economist at HSBC in Hong Kong.
Speaker: On this week's podcast, Can the Chinese Consumer Plug the Economic Gap Left by Trump's Tariffs?
Speaker: And what can the government do to make that happen?
Speaker: I'm joined by special guest Jing Liu, our Chief China Economist here in Hong Kong.
Speaker: Listen, like, and subscribe, and we'll see you Under the Banyan Tree.
Speaker: Before we go, here are a few key reports published by Global Research this week.
Speaker: Steve Major and his team have released the February edition of their fixed income asset allocation, which outlines the key issues influencing the bond markets.
Speaker: Industrials analyst Sean McLaughlin has assessed what developments in AI could mean for spending on data center equipment.
Speaker: And global economist James Pomeroy has been looking at what the latest data can tell us about the state of the world economy.
Speaker: For more information on any of these reports, please email us at askresearch at hsbc.com.
Speaker: And a final call for any of our clients taking part in the Extel Survey 2025.
Speaker: If you've valued our service and insight, please consider voting.
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Speaker: So that's all from us.
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