A Review of HSBC's Global Economic Outlook Report 2009/10

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Macroeconomics

In HSBC bank’s monthly review, copies available on request, the bank reviews the prospects for the global economy. The salient points of which we review here. In the past we have found HSBC to be fairly conservative in their predictions sticking fairly closely to the official line, be that Treasury predictions or senior bodies like the IMF. However HSBC does have considerable research facilities at its disposal and if we differ in our conclusions with them it is more due to interpretation of the facts than the facts themselves.

It helps to take stock of the current position. While growth has continued in China, India and Australia it has contracted in developed markets. The rate of contraction was worse for those countries that make and export things or where property/construction bubbles have burst. Germany and Japan’s economies have shrunk by 6% this year, Russia and the Ukraine by about 8%, Ireland and Iceland by about 10% and some Baltic states by up to 15-20%. Exports have therefore slumped. Many exporting countries have seen declines of 20-30% in recent months and Japan’s are down by nearly a half. The global decline in cross border trade for the year is likely to be some 15%.

Consequently, industrial output has dropped by a third in Japan and over a fifth in the Euro area but probably only 12-13% in the US where financial services and other services industries makes up a larger portion of the economy. The reason exporters have been hit is the massive de-stocking in supply chains, a process the bank feels is now largely complete and in some industries actually over done. The stage is set for a gradual (in some case it will be at an anemic rate) recovery, driven initially by supply chain re-stocking and gradually by a slow economic recovery. While in some markets the rate of growth is being hastened by government stimulus packages, these will be of passing effect and in the medium term reduced bank lending and rising unemployment will continue to act as a drag on growth. Unemployment in the Euro zone is already at 9% and is set to top 10% in the next year.

The bank sees growth returning in the US in Q3 and in Europe in Q4 or Q1 next year led by the UK and Germany. They also see China and the other emerging markets returning to brisk rates of growth next year but we question whether that will be as strong as the bank seems to think. The effects of China’s stimulus package will begin to wear off by the end of this year but exports to developed markets are not going to come roaring back to replace the stimulus demand. Growth in the west is going to be slow for 2-3 years to come as households and governments look to reduce debts and struggle with market uncertainty. Without strong export markets, the emerging economies are going to struggle to fill capacity with domestic demand unless they introduce additional stimulus plans, which seems unlikely. The bank is predicting growth of 8.5% in China down from 13% in 2007, and 7.5% for India down from 9.3% in 2007. We would concur with China but question the numbers for India. Reforms have stalled there and we think that may be ambitious. The bank suggests the US is set to contract by 1.9% this year but grow by 1.9% next year, that’s probably about right; the housing market has about bottomed and although unemployment will rise, most US corporations went into this recession in a strong state of health.

In the long run of course the massive levels of debt taken on by the US and UK is a bill that can only be paid by higher taxation, and we all know what that means for long term growth.

–Stuart Burns

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