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, our weekly review of the key reports from our team of economists and strategists across the globe.
Speaker: Coming up today, we take a look at how the economies of Asia and Europe are faring as they emerge from the pandemic shock.
Speaker: And we find out why there could be more Brexit tensions on the horizon.
Speaker: This podcast was recorded on Thursday, the 7th of October 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm Chris Brown-Hulmes.
Speaker: And I'm Piers Butler.
Speaker: We begin this week in Asia, where COVID-19, supply bottlenecks and financial jitters have combined to create a challenging few months for the region.
Speaker: Fred Newman, co-head of Asian Economics Research, is here to tell us if the outlook is improving.
Speaker: Fred, welcome to the podcast.
Speaker: Thank you very much.
Speaker: Let's start with the COVID question in Asia.
Speaker: Is there cause for optimism?
Speaker: There are certainly cause for optimism.
Speaker: We had a few rough months in Asia with virtually all economies in the region seeing a spike in cases.
Speaker: And in us in particular, we had very high daily case rates.
Speaker: But now the signs are really that
Speaker: These waves are abating and we've seen infection rates drop virtually across Asia.
Speaker: And the cause for optimism here is that most economies have ramped up their vaccination campaigns quite sharply in the last few months.
Speaker: And so we now expect that the majority of economies in Asia will see more than 75% of the populations being vaccinated, fully vaccinated by year end.
Speaker: And those are higher vaccination rates than we see in some Western economies.
Speaker: So now that's not necessarily to say that we won't see renewed waves coming through.
Speaker: But this acceleration in vaccination rates should certainly help to curtail any future spikes.
Speaker: China real estate has been in the headlines a lot lately.
Speaker: What's your outlook for the sector and the broader economic impact?
Speaker: So real estate is really key for the Chinese economy.
Speaker: Property construction is what drives growth.
Speaker: And the sector is also hugely important for the financial system.
Speaker: One thing that we should make clear right from the outset is that the direct financial implications are relatively limited for the system overall.
Speaker: That seems to be manageable.
Speaker: where the potential risks lie are in a deceleration in construction activity, which has already started in the last few months, but that could accelerate really going into the fourth quarter.
Speaker: And that represents a headwind for growth.
Speaker: We actually downgraded our GDP forecast for the fourth quarter to 4.6% from above 5% to take account of that.
Speaker: Now, having said that, because the sector is so important for the Chinese economy, we also do expect that stabilization will set in at the beginning of next year and that the government will remove some of the restrictions currently that are plaguing the sector to allow essentially developers to breathe again a little bit and to help stabilize construction activity.
Speaker: And supply chain disruption has been an issue for a while.
Speaker: Are there any signs of that easing in Asia?
Speaker: Well, they are quite clogged, these trade channels, particularly from Asia to Western ports.
Speaker: And we see only very faint signs that things are getting better.
Speaker: But more broadly on supply chains, Asia doesn't really face as much a production bottleneck as it does a logistics bottleneck.
Speaker: And that's a crucial distinction.
Speaker: If we look at, for example, delivery times in Asia, Asia,
Speaker: If we look at supplier bag logs, production bag logs, for example, they're nowhere near as stretched in Asia as they are in the Western markets.
Speaker: So the key bottleneck globally here is really shipping the goods that are produced in Asia to Western markets.
Speaker: And here we think it might really last until about the first quarter of next year, until we see meaningful easing of these logistics bottlenecks.
Speaker: But broadly speaking,
Speaker: It should get better from here on out, but it's more of a logistics issue than a production issue at this point.
Speaker: Energy prices are rising sharply.
Speaker: How much of an inflation risk do you see?
Speaker: Well, so far, inflation pressures have actually been remarkably contained across Asia, maybe with the exception of India and the Philippines.
Speaker: But broadly speaking, Asia never saw the big inflation surge that we saw in Eastern markets.
Speaker: Now, energy poses a risk here.
Speaker: It could drive headline inflation in a number of markets.
Speaker: That's certainly the case.
Speaker: But we would still argue inflation
Speaker: that because the consumer spending recovery into 2022 will be fairly subdued, that corporations really don't have much pricing power.
Speaker: And that would suggest that, yes, energy prices are going up, but core inflation should still remain fairly well behaved across much of the region, unlike perhaps other parts of the world.
Speaker: And that would also mean that central banks across Asia, with a few exceptions like New Zealand and
Speaker: Korea will really take their sweet time to tighten policy.
Speaker: We don't really expect rate hikes before the second half of 2022.
Speaker: And even then, there'll be a very shallow tightening cycle.
Speaker: That's great, Fred.
Speaker: Thanks very much.
Speaker: Thank you very much.
Speaker: So that's The View from Asia.
Speaker: Let's get the story from Europe now.
Speaker: We're joined by Simon Wells, Chief European Economist.
Speaker: Simon, a rather intriguing title to this report, The Triumph of Economics.
Speaker: Why would you consider what's been happening in Europe recently to be the triumph of economics?
Speaker: Well, although economic momentum in Europe is slowing a bit, the strength we've seen through the middle of the year still means we think we can get 5.2% growth in the eurozone this year.
Speaker: And then next year, even as consumer spending growth slows and exports face headwinds, an investment recovery driven by funds flowing from the EU recovery fund, we think we could see growth of about 4%.
Speaker: And then in 2023, we see 1.9% growth, which may not sound like much, but it's still considerably above what we might estimate as the long term trend for the eurozone.
Speaker: Now, put all this together and implies the level of GDP will rise above a pre-pandemic trend through our forecast.
Speaker: So Europe emerges stronger.
Speaker: This is unprecedented for any downturn, let alone as deep a one as we saw in 2020.
Speaker: And so it's in that sense that the recovery has been something of a triumph.
Speaker: Isn't it, though, a little bit premature to be making a judgment like this?
Speaker: Because, you know, we're still not through the pandemic.
Speaker: A lot could still go wrong.
Speaker: It certainly is.
Speaker: And the title is a little bit tongue in cheek and has a question mark at the end of it anyway.
Speaker: Of course, all this support must be rolled off without derailing the recovery before we can pat ourselves on the back.
Speaker: And crucially for central banks at the moment, they need to deal with this rising inflation risk.
Speaker: Now, we look at that in quite some detail in the report, and we still think a lot of what we're seeing in inflation now will be temporary.
Speaker: It reflects energy price rises and base effects that should fall out of the annual comparison.
Speaker: It's the medium term outlook that matters for policy and central banks, and that really hinges on the labour market.
Speaker: Overall, we still think Eurozone wage growth should be contained.
Speaker: After all, the short time working schemes have to roll off.
Speaker: That should put a bit of unemployment in and slack into the labour market, keep a lid on wage growth.
Speaker: But there's no doubt upside risks to wages are rising.
Speaker: We go through that in the report.
Speaker: Numerous factors from minimum wages rising.
Speaker: to consumers resisting cuts to their real terms, income, wage indexation in pay negotiations, and the ability of firms to absorb costs on margin.
Speaker: Those upside risks are rising.
Speaker: Central banks need to navigate them carefully.
Speaker: So talking about where does that leave the ECB?
Speaker: Well, we think it will end its pandemic emergency purchase program on schedule in March.
Speaker: At that point, to prevent a cliff edge in asset purchases, we expect it to ramp up its regular asset purchase program and modify that slightly.
Speaker: It will keep, we think, its open-ended 20 billion a month of purchases, but add to that.
Speaker: a flexible purchase envelope for use next year of about 200 billion euros.
Speaker: That should prevent the cliff edge.
Speaker: And then only at the end of 2023 do we think the conditions on its forward guidance for rate rises would be met.
Speaker: At that point, we expect it to announce a short taper.
Speaker: But we're looking, based on what we expect from its medium-term inflation forecast, we're looking still at 2024 before it might consider a rate rise.
Speaker: So the ECB rate rise 2024, we've got a much earlier trajectory for the Bank of England to raise rates.
Speaker: Why is there such a difference?
Speaker: That's right.
Speaker: We expect the Bank of England will start tightening in February, follow that up with another rate rise in August, and then a 25 basis point rate rise in
Speaker: in February 2023.
Speaker: The UK labour market just seems tighter.
Speaker: It probably entered the pandemic tighter than the eurozone labour market did.
Speaker: And staff shortages seem more acute in the UK.
Speaker: Vacancies are higher.
Speaker: In part, this could be related to migration and Brexit.
Speaker: But it does seem when you look at a sectoral level that more pay increases, particularly in the sectors with the biggest vacancies, are likely in the UK.
Speaker: That adds a bit more medium term pressure.
Speaker: That's why we think the bank will spring into action.
Speaker: And indeed, given the latest market moves, the market seems to see an increasing probability of a November rate rise.
Speaker: That seems a little early to us.
Speaker: There's still option value in waiting to see more labour market data.
Speaker: The Bank of England, I don't think, needs to panic on the medium-term assessment.
Speaker: But as you say, a very different picture in Threadneedle Street compared to Frankfurt.
Speaker: Simon, that's a great summary.
Speaker: Thank you very much indeed for your time today.
Speaker: Thank you.
Speaker: So we ended there on the UK, where it's now been over nine months since the post-Brexit transition period came to an end.
Speaker: the impact continues to filter through, but there could be more frictions to come.
Speaker: That's according to Liz Martins, our senior UK economist.
Speaker: She joins us now.
Speaker: So Liz, has Brexit been a factor in the UK's current disruption and labour supply issues?
Speaker: Yeah, I think it has.
Speaker: I don't think anyone would make the case that it was the only factor.
Speaker: We're certainly seeing supply issues across the global economy as a consequence of the pandemic and supply chain issues coming out of Asia.
Speaker: But I do think it's exacerbated the situation in the UK.
Speaker: We have particularly acute shortages of workers, although the data on that aren't great.
Speaker: It does seem that part of that is because a lot of people have left in the pandemic from Europe and not returned and might now find it harder and less appealing to return in the new post Brexit immigration environment.
Speaker: And in your report, you note that things could get worse.
Speaker: What are your concerns?
Speaker: Yeah, I mean, there is still plenty of friction still to be introduced.
Speaker: You know, there are deadlines on the 1st of January, the 1st of July 2022, and then the 1st of July 2023.
Speaker: All of those will bring new admin requirements on goods trade between
Speaker: the UK and the EU.
Speaker: So we've had some frictions introduced so far, but others have been kicked into the long grass and they're yet to come through.
Speaker: So we've already seen the impact on UK exports and imports.
Speaker: They haven't recovered to anything like the degree we've seen in Europe.
Speaker: And yet there are more regulations coming down the pipe.
Speaker: So I think, yeah, it could become even more difficult for companies involved in trade.
Speaker: You also highlight the Northern Ireland Protocol as a further complication.
Speaker: What's the latest there?
Speaker: Yeah, so essentially the UK and the EU don't agree on the contents of the Northern Ireland Protocol.
Speaker: The UK says this is unacceptable.
Speaker: We can't trade between Great Britain and Northern Ireland, between the single market of our own country.
Speaker: There are customs checks on goods, particularly phytosanitary, food, plants, etc.
Speaker: moving between the two areas.
Speaker: The EU said, yeah, that's part of the deal we signed in December 2020 is the only way to make sure that stability is preserved on the islands of Ireland and we don't have to have a hard border between Northern Ireland and the Republic and we're not renegotiating it.
Speaker: So tensions have really risen on that and the UK has threatened on a number of occasions to trigger Article 16, which would essentially annul all or part of the Northern Ireland Protocol and allow it to reduce those frictions in internal trade between Great Britain and Northern Ireland.
Speaker: And what would be the implications if the UK did trigger Article 16?
Speaker: So it certainly liven up the negotiations between the UK and the EU over the Northern Ireland Protocol.
Speaker: The UK is hoping that it would cajole the EU into making some concessions.
Speaker: But I think what's perhaps more likely than that is that the EU retaliates.
Speaker: And there are a number of ways it can do that through penalties and fines, taking the UK to the European Court of Justice, potentially ending up even in tariffs being imposed on UK-EU trade.
Speaker: And then as well, you know, there are still points of negotiation that are ongoing, like on financial services and data adequacy, and the EU could penalise the UK in those negotiations too.
Speaker: So essentially, in an already difficult environment where the UK is facing big supply chain issues and a very poor recovery in our trading sector, this could make things even more complicated.
Speaker: Liz, thanks very much for the update.
Speaker: Thank you.
Speaker: So that's it for today's programme.
Speaker: Thank you to our guests, Fred Newman, Simon Wells and Liz Martins.
Speaker: From all of us here, thanks for listening.
Speaker: Please join us next week for another edition of the Macro Viewpoint podcast.
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.
