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 on the 22nd of June, 2023 by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: And don't forget you can subscribe to the podcast on Apple and Spotify or wherever you get your podcasts by searching for The Macro Brief.
Speaker: Hello, I'm Piers Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: And a warm welcome to our weekly Macro Brief podcast.
Speaker: Here's what's coming up today.
Speaker: Inflation continues to give policymakers in the UK headache.
Speaker: We get reaction from the Bank of England's latest rate rise.
Speaker: Meanwhile, on this side of the Atlantic, inflation in many parts of Latin America is receding.
Speaker: We look at how attention is now turning to the prospects for policy rate cuts.
Speaker: And with China's economic recovery continuing to soften, we assess the implications for the growth outlook.
Speaker: Here in the UK, inflationary pressures are showing no signs of letting up.
Speaker: The latest figures released this week surprised on the upside, forcing the Bank of England to raise rates for an incredible 13th time in a row at today's meeting.
Speaker: Chris Hare, senior European economist, joins me in the studio.
Speaker: Chris, welcome.
Speaker: Pleasure to be here.
Speaker: So in the end, the Bank of England went for 50 basis points.
Speaker: What sort of was behind that?
Speaker: Well, they did.
Speaker: It was quite something.
Speaker: A lot of people in the market we were speaking to saying, well, we would quite like the Bank of England to go for 50.
Speaker: But given that we'd not got any real guidance towards that beforehand, we thought that the monetary policy committee was going to stick with a 25 basis point increase.
Speaker: But in the end, we got 50.
Speaker: It's really easy to rationalise these things after the event, of course.
Speaker: But we have had upside news over the last few weeks in terms of the wage numbers, wage growth above 7%.
Speaker: inflation, inflation in terms of the CPI rate up 8.7%.
Speaker: So it's a response to that sort of news.
Speaker: There is a perception out there that the UK inflationary problem is quite a bit worse than in other developed markets.
Speaker: Is that a fair comment?
Speaker: And if so, why?
Speaker: I think some of the inflation story does look worse in the UK, to be honest.
Speaker: If you look at the May inflation data, for example, core inflation, when you strip out energy and food prices, that fell back in the US and in the eurozone.
Speaker: But it's continuing to go upwards in the UK.
Speaker: It's up and above 7% now.
Speaker: In terms of what's driving that, there are loads of different factors.
Speaker: I think one thing I would point out, though, is that the UK potentially is suffering from more acute labour shortages.
Speaker: You could point to things like backlogs in the health sector, or you could talk about differing migration flows after the Brexit vote.
Speaker: So those sorts of things potentially are causing more persistent UK inflation problems.
Speaker: And there's also a perception that the Bank of England has struggled around controlling inflation.
Speaker: Do you think they're getting the upper hand again now with this 50 basis point rise?
Speaker: Well, the Bank of England, to be fair, has been subject to quite a lot of criticism over the last few months.
Speaker: And of course, that's going to be inevitable when inflation is still so high.
Speaker: We do see inflation coming down in our forecasts and as the Bank of England keeps raising rates, that should help re-establish some credibility in our view.
Speaker: Having said that, though, what we're finding here is that the impact of rate rises only has a very slow burn impact on inflation.
Speaker: So it might actually take quite a long time for inflation to come back down and for that credibility to really feel like it's fully restored.
Speaker: Before we finish, where do we stand with the ECB?
Speaker: Well, as I mentioned earlier on, Eurozone inflation is looking a little bit better behaved than in the UK.
Speaker: Nevertheless, we still see a couple of rate rises from the ECB, 25 basis point rate rises over the next two meetings, then a hold after that.
Speaker: But still, there's a challenge.
Speaker: Eurozone inflation is still pretty sticky.
Speaker: And until core inflation rates really start falling down,
Speaker: back, then there's still going to be a risk about the ECB potentially needing to do more and the prospect of rate cuts in Europe still seems some way off.
Speaker: Chris, thanks for joining us today.
Speaker: Pleasure.
Speaker: A couple of other European central banks also implemented hikes this week.
Speaker: In Switzerland, the SMB raised rates for a fifth consecutive time.
Speaker: Its 25 basis point increase took rates to 1.75% with inflation staying above the bank's target.
Speaker: And Norway's Norgensbank lifted its key rate by 50 basis points to 3.75%, its highest level in 15 years.
Speaker: It also signaled more hikes would come over the summer.
Speaker: In contrast to that tough outlook in Europe, one place where inflation appears to be easing is in Latin America.
Speaker: The latest figures show lower inflation across much of the region, prompting a shift in focus to the timing of rate cuts.
Speaker: I'm joined from Buenos Aires by Jorge Morgenstern, Senior Economist for Latin America.
Speaker: So Jorge, what are the main drivers of this trend in Latin America?
Speaker: Well, inflation is coming down both in annual and monthly terms.
Speaker: First, it was a decline in energy prices.
Speaker: Later, in some countries, at least, we've had lower food inflation.
Speaker: And now across the region, we are seeing lower core inflation, more sticky.
Speaker: It's not coming down as fast, but it's coming down nonetheless.
Speaker: Is this also partly due to central bank policy responses in the last few years while inflation was high?
Speaker: Or how does this connect to the policy picture?
Speaker: Yes, of course.
Speaker: If you remember, Latin American central banks were amongst the first to high rates starting in 2021.
Speaker: So the tightening cycle is very mature now.
Speaker: In fact, all central banks have stopped hiking rates by now, we think.
Speaker: We now see the slowdown in economic activity in those countries that overheated.
Speaker: For example, in Chile, this was very clear in 2021 and 2022.
Speaker: In Colombia, the overheating was a bit later in last year, and only now the economy is cooling down.
Speaker: But also in other countries where the post-pandemic recovery, the reopening,
Speaker: came with a very strong consumption demand, that is starting to cool down.
Speaker: And that is driving these lower core inflation trends.
Speaker: And Jorge, is this the case, including for the big economies like Brazil?
Speaker: Yes, Brazil has a peculiarity in terms of inflation dynamics, which was how they approached the spike in energy prices in 2022.
Speaker: They did significant tax cuts, which affected the CPI.
Speaker: So we started to have a decline in energy inflation in Brazil much earlier than in other countries, a decline in overall inflation much earlier than in other countries.
Speaker: And in fact,
Speaker: At this in annual terms, energy inflation is now starting to pick up to be less negative.
Speaker: And we expect headline inflation to be maybe higher in the remainder of the year.
Speaker: But nevertheless, underlying trends are for inflation to go down.
Speaker: In the case of Mexico, the trend has been, as I described for other economies, very sticky core prices.
Speaker: which imply that the central bank had to hike rates maybe for longer than what they initially expected.
Speaker: But now starting to decline.
Speaker: And we think that with the central bank on hold and starting to consider whether to cut rates at some point in the second half of the year.
Speaker: Interesting, Jorge.
Speaker: Now, of course, there's one big outlier, which is Argentina.
Speaker: Just quickly tell us what's going on there.
Speaker: Well, initially in Argentina, we've had some of the similar trends of the rest of the country and the world with energy inflation spiking in 2022.
Speaker: But now, clearly, the dynamic has taken its own course.
Speaker: And that suggests that this is not an issue with food inflation or energy prices.
Speaker: This relates to the underlying macroeconomy.
Speaker: And in particular, in our view, that the central bank continues to be the main source of funding for the Treasury and thus is printing money to fund not just the primary deficit, but also part of the interest payments of the central government.
Speaker: With no money demand matching that increase in supply, the result is a very high level of inflation.
Speaker: Now around 8% per month, reaching 114% as of May on a 12-month basis.
Speaker: We expect inflation to continue rising to reach 135% by the end of 2023.
Speaker: All right.
Speaker: Well, look, thanks, Jorge.
Speaker: Very interesting picture and obviously some interesting examples in terms of the potential inflation paths ahead.
Speaker: Thank you.
Speaker: You're welcome, Aline.
Speaker: We end this week in China where the economic data has continued to surprise on the downside.
Speaker: Youth unemployment has climbed to a record high, private investment has contracted, and property investment dipped further.
Speaker: All of this has led our team to lower their growth forecast.
Speaker: Erin Zinn, economist for Greater China, can give us the details.
Speaker: She spoke to Graham Mackay in Hong Kong earlier.
Speaker: Erin Zinn, good to have you on the podcast.
Speaker: Welcome to the Macrobrief.
Speaker: Thanks for having me, Graham.
Speaker: So let's just start with what the new numbers are.
Speaker: What have you revised down Chinese Growth Forecast to?
Speaker: So this year, we're expecting growth is going to come in at about 5.3% for this year, down from our earlier estimate of 6.3%.
Speaker: I do want to emphasize that we are expecting growth is going to continue this year, and it's still going to be led by consumption, especially in services.
Speaker: But now we're seeing that there's some moderation in the activity, which is leading to us kind of making this adjustment to our GDP forecast.
Speaker: But all in all, 5.3%, still a relatively healthy number, especially if you compare it to where we were last year, where growth was only at 3%.
Speaker: Still relatively healthy, but one full percentage point isn't an insignificant reduction to your forecast.
Speaker: So what are these factors that you think are going to be weighing on the economy?
Speaker: There's three main considerations for this.
Speaker: One is that there's actually been some moderation in some of the data for April and May.
Speaker: So first quarter across the board activity was actually very strong, but that actually did fade a little bit in April and May.
Speaker: And we think this is really a reflection of kind of ongoing weakness in external demand and then domestic demand not fully picking up.
Speaker: Now, the second thing is going to be coming from the property sector.
Speaker: It looks like it's going to take a little bit longer than we initially expected.
Speaker: And they really do need more policy support in order to kind of stabilize it.
Speaker: So that's another consideration.
Speaker: And then lastly, policy support, you know, it's still going to be supportive for growth, but they're not going to come out with big bang stimulus this time around.
Speaker: Okay, and we have obviously seen that China has the capability to rule out major policy support in the past.
Speaker: We've talked over the past few weeks about why we think that's not going to happen this time.
Speaker: Can you just remind us why that is?
Speaker: Well, there's a few considerations, and I think one is that the structure of the economy is different.
Speaker: The recovery is going to be more consumption-based driven.
Speaker: Last time around, you know, there was more focus on increasing a lot of infrastructure investment and real estate investment.
Speaker: Arguably this time there's less space for that to happen just because China's infrastructure levels have gone up, you know, it's improved quite a lot over the last few decades.
Speaker: The other thing is that, you know, the property sector, while we are expecting, you know, stabilization should come through, I think that the government is definitely still mindful of kind of the challenges with speculation.
Speaker: They still keep this moniker of housing is for living in, not for speculation.
Speaker: So they're not trying to engineer V-shaped recovery.
Speaker: And in terms of the kind of medium and longer term goals, they're actually putting more emphasis on this.
Speaker: So this is structural growth, high quality development, a lot more focus on these new growth drivers in manufacturing, upgrading, green development, etc.
Speaker: And let's say if and when we do see the stimulus kick in, what sort of shape do you see it taking?
Speaker: Is this going to be sort of a one-off cash injection into the economy?
Speaker: Is it going to be more targeted to specific sectors?
Speaker: How do you see that rolling out?
Speaker: Well, it's going to be comprehensive in the sense that we're still going to have both monetary and fiscal policy.
Speaker: On the fiscal front, we do expect that it's probably going to be what was already announced earlier this year at the MPC.
Speaker: And that has, you know, that's kind of directed at both the areas that have been harder hit, services firms, SMEs, but also these new growth drivers.
Speaker: So you do get targeted support for technology sectors, green development,
Speaker: On the monetary front, we expect that they're going to keep that accommodative pace, so more through liquidity injections in order to allow credit growth to be sustained and encourage more investment.
Speaker: Erin, always great to get your insights.
Speaker: Thank you very much.
Speaker: Thank you for having me.
Speaker: So that's it from us.
Speaker: Thanks to our guests, Chris Hare, Jorge Morgenstern and Erin Zinn.
Speaker: And thanks to all of you for listening.
Speaker: We'll be back again next week with another edition of The Macro Brief.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
