Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is Bloomberg Daybreak Weekend, our global look at the
Speaker 2: top stories in the coming week from our Daybreak anchors
Speaker 2: all around the world. Straight Ahead on the program, we
Speaker 2: look ahead to how big tech may fare in twenty
Speaker 2: twenty six. I'm Nathan Hager in Washington.
Speaker 3: I'm Caroline Hebcker here in London. We look to a
Speaker 3: year in UK politics and what twenty twenty six may
Speaker 3: hold in store for Prime Minister Kissedalma.
Speaker 4: I'm Doug Prisoner, looking at what's in store for the
Speaker 4: Chinese economy in the new year.
Speaker 1: That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
Speaker 1: eleven three year, New York, Bloomberg ninety nine to one, Washington, DC,
Speaker 1: Bloomberg ninety two nine, Boston, DAB Digital Radio, London, Syria
Speaker 1: XM one twenty one, and around the world on Bloomberg Radio,
Speaker 1: dot Com and the Bloomberg Business App.
Speaker 2: Good day to you. I'm Nathan Hager. We begin today's
Speaker 2: program with a look at the economy. On Tuesday, we
Speaker 2: get a second read on third quarter GDP. This comes
Speaker 2: on the heels of some softer than expected readings on
Speaker 2: inflation and kind of a mixed report on the labor
Speaker 2: market as we start to get more of the releases
Speaker 2: that we should have gotten weeks ago but we're getting
Speaker 2: now due to the government shutdown. For more on this
Speaker 2: and what to expect from the economy in the new
Speaker 2: year as well, we are very pleased to be joined
Speaker 2: by Ed Harrison, senior strategist at Bloomberg News and author
Speaker 2: of Bloomberg's The Everything Risk newsletter. Great to have you
Speaker 2: with us on the program, Ed, and I'd just like
Speaker 2: to get your expectations for the GDP print this week,
Speaker 2: given some of the questions around some of the latest
Speaker 2: data we've seen in this past week.
Speaker 5: Yeah, Nathan, is a good question, because the CPI report
Speaker 5: was marred by the inability to collect data in the
Speaker 5: previous month, that's October. But luckily, this GDP report is
Speaker 5: a revision of data that goes from July to September.
Speaker 5: So these are numbers that aren't going to have any
Speaker 5: sort of anomalies because of lack of collection. We've already
Speaker 5: seen one number. The Atlanta Fed is talking to us
Speaker 5: about three point five percent number that's the GDP now
Speaker 5: that they put out. But where we actually stand as
Speaker 5: anyone's guess.
Speaker 2: Three and a half percent would be a pretty big
Speaker 2: jump from the preliminary number. What's got you thinking that
Speaker 2: we could see even more of an eye popping number
Speaker 2: this time around?
Speaker 5: Yeah, I think just based on the data that have
Speaker 5: come out for Q three, they've done the statistical analysis
Speaker 5: and they updated the Atlanta FED and run it through
Speaker 5: their models to produce a now cast, and that's telling
Speaker 5: them that it's going to be at three point five percent.
Speaker 5: The range of the top ten and the bottom ten
Speaker 5: four casts are you know, somewhere between two and a
Speaker 5: half and three and a half percent, So that's at
Speaker 5: the high end of the range of economists that are
Speaker 5: predicting that number.
Speaker 2: Of course, third quarter GDP is a backward looking indicator,
Speaker 2: and we're trying to think ahead about where the US
Speaker 2: economy could be going into twenty twenty six and the
Speaker 2: current quarter as well. Are we going to be thinking
Speaker 2: about this third quarter print as something of an anomaly
Speaker 2: given some of the data that we've gotten a more
Speaker 2: forward looking view of the economy.
Speaker 5: No, you know, I think that, you know, there's a
Speaker 5: lot of anngst about the labor market, but there's less
Speaker 5: angst about the growth level of the economy, and I
Speaker 5: think that this bifurcation is due to this so called
Speaker 5: case shaped economy where there's a lot of price pressure
Speaker 5: still in the pipeline. Lower income, lower wage workers are
Speaker 5: feeling that even more, and they're also taking the brunt
Speaker 5: of a slowdown in the labor market. But at the
Speaker 5: same time, there's this AI spend that's happening, there's a
Speaker 5: large government deficits, and the well to do are actually
Speaker 5: doing relatively well. So people are expecting numbers both for
Speaker 5: Q four and for twenty twenty six to be relatively good.
Speaker 5: And we know that especially because of the tax cuts
Speaker 5: that are due to hit already in the first quarter
Speaker 5: of next year.
Speaker 2: Well, you raise the question there about whether the top
Speaker 2: line numbers on GDP sort of mask what everyday Americans
Speaker 2: could be feeling when we think about, as you mentioned,
Speaker 2: all the spending going into artificial intelligence. I mean, what
Speaker 2: could that mean for a labor market that the Federal
Speaker 2: Reserve has put a lot of attention on, saying that
Speaker 2: they're worried about some of those cracks that we're seeing
Speaker 2: in the data.
Speaker 5: Yeah, I think if you look back in terms of
Speaker 5: the numbers that we've seen. We did not an unemployment
Speaker 5: number for October, but we have gotten from the Establishments
Speaker 5: the Establishment Survey in the last six months three numbers
Speaker 5: that were negative, saying that nonfarm payrolls actually declined in
Speaker 5: three of the last six months, and so the running
Speaker 5: total average over the last six months has been very low. Basically,
Speaker 5: what that means is for the average worker, the job
Speaker 5: opportunities are lesser, even though we have this boom in AI.
Speaker 5: You could call it a mismatch between job availability and
Speaker 5: the abilities of the working population. But the only positive
Speaker 5: that we've seen is that in the last report, more
Speaker 5: people came off the sidelines, re entered the labor market
Speaker 5: and we're looking for work, and that's usually a sign
Speaker 5: that they're optimistic that they'll be able to find a job.
Speaker 2: Are you expecting that we're going to see the kinds
Speaker 2: of levels in AI spending that we've seen not just
Speaker 2: this year, but in the years prior as well, And
Speaker 2: what could that mean for inflationary pressures?
Speaker 5: You know, Nathan, I think that AI that it's from
Speaker 5: an investment perspective, we're sort of at a tipping point now. Recently,
Speaker 5: in the past two or three weeks, we've seen a
Speaker 5: rotation out of the large cap tech companies that have
Speaker 5: been driving the market forward, which are very AI related,
Speaker 5: and the reason for that is concern about number one,
Speaker 5: the level of spend and whether that's sustainable, but also
Speaker 5: the fact that the spend that's being done now is
Speaker 5: increasingly done with diminished cash on the balance sheet and
Speaker 5: higher debt levels. And there's a concern particularly around companies
Speaker 5: like Oracle and their balance sheet, their ability to continue
Speaker 5: to invest into artificial and given the deterioration their balance sheets.
Speaker 2: I really appreciate this and thanks again for being with us.
Speaker 2: That is Edward Harrison, senior strategist at Bloomberg News, author
Speaker 2: of Bloomberg's The Everything Risk newsletter. I want to get
Speaker 2: more now on big tech because the Magnificent seven stocks
Speaker 2: once again fueled double digit gains on Wall Street, even
Speaker 2: with those questions about whether the valuations on some of
Speaker 2: these companies may have run too far too fast. Let's
Speaker 2: get more and what to expect from tech in twenty
Speaker 2: twenty six. We are joined by man Deep Saying, Global
Speaker 2: head of Tech research at Bloomberg Intelligence. Man Deep, I'll
Speaker 2: start off with the question that does seem to dominate
Speaker 2: the market all of twenty twenty five. Is it a bubble?
Speaker 6: Well, I mean the best way to fram it is,
Speaker 6: you know, look at the multiples of these companies, both
Speaker 6: in terms of earnings and free cash flow. And when
Speaker 6: it comes to earnings, I think what this year has
Speaker 6: shown is earnings have been very resilient and these companies
Speaker 6: have the levers when it comes to you know, cost rationalization,
Speaker 6: slower hiring, and they can sustain you know, low to
Speaker 6: mid team's growth easily. When it comes to free cash flow,
Speaker 6: the story maybe different in twenty twenty six, given all
Speaker 6: of these hyperscalers are looking to raise their capex by
Speaker 6: forty to fifty percent and we are already at very
Speaker 6: elevated levels. And what that means is even for a
Speaker 6: company like Meta, you know, you may see negative free
Speaker 6: cash flow, which is why they've been talking about, you know,
Speaker 6: rationalizing their spending on the metaverse for example, and I
Speaker 6: think you may see more of that in the first half,
Speaker 6: where companies may have to prioritize you know, certain types
Speaker 6: of AI spend and really offset it with either you know,
Speaker 6: slower hiring or in some case even headcount productions. If
Speaker 6: the ROI on AI is getting questioned more and more,
Speaker 6: and we know this is frontloaded in terms of spend,
Speaker 6: and that's where I think you may see a bifurcation
Speaker 6: when it comes to some of these mag seven names.
Speaker 2: When you talk about prioritizing AI spend, the types of
Speaker 2: AI spend, what are you looking at, what's going to
Speaker 2: be a winner, what's going to be a loser.
Speaker 6: So the clear ROI when it comes to AI spend
Speaker 6: is with the inferencing workloads. And that's what Microsoft has
Speaker 6: shown us this year is they were very selective in
Speaker 6: terms of you know, how they you know, partnered with
Speaker 6: open ai and what they left it for someone like
Speaker 6: Oracle to you know, take up. And I think Microsoft
Speaker 6: has shown that they have the best visibility in terms
Speaker 6: of what kind of workloads enterprises are willing to pay for,
Speaker 6: and they have really positioned the company that way. Oracle,
Speaker 6: on the other hand, has this huge i would say
Speaker 6: exposure to open ai when it comes to their backlog,
Speaker 6: and that's where the quality of Oracle's backlog is getting
Speaker 6: questioned because if open ai doesn't ramp up their revenue
Speaker 6: the way they have laid out to investors, you know,
Speaker 6: in terms of getting to two hundred billion dollars in
Speaker 6: revenue by twenty thirty. Then that will limit their ability
Speaker 6: to spend you know, the one point four trillion in
Speaker 6: commitments that they've made, and that will have a bearing
Speaker 6: on someone like Oracle.
Speaker 2: We have seen though open ai making announcements of a
Speaker 2: lot of investments it's planning to get into the new year.
Speaker 2: I'm thinking, particularly just this past week about a deal
Speaker 2: that they made with Amazon. Is there further room for
Speaker 2: more deals like this for some of these large language models.
Speaker 6: So you're right that open ais it clearly has pivoted
Speaker 6: away from Microsoft and now it's actually working with like
Speaker 6: someone like Amazon. That would have been unimaginable twolve months back.
Speaker 6: But you have to remember the Microsoft contract with open
Speaker 6: ai and the binding they have extends to twenty thirty two.
Speaker 6: So it's not as if, you know, open ai can
Speaker 6: natively integrate with Amazon or Oracle, you know, in terms
Speaker 6: of what they do at the model level, they could
Speaker 6: use the compute from an Amazon, they could use the
Speaker 6: compute from Oracle. But Microsoft still remains in terms of,
Speaker 6: you know, how they build their API and the LLM functionality,
Speaker 6: and that I think will be a limiting factor for
Speaker 6: someone like open Ai that is looking to partner with
Speaker 6: as many companies. In fact, the Disney partnership was notable
Speaker 6: as well in terms of what they're looking to do
Speaker 6: on the content side. But they just can get off,
Speaker 6: you know, what they have to do in terms of
Speaker 6: Microsoft partnership, and that will have a bearing in terms
Speaker 6: of how they roll out the product and their large
Speaker 6: angry mob.
Speaker 2: Thanks for this, Man Deep, great having you on with us.
Speaker 2: That's Man Deep Saying, Global head of Tech research at
Speaker 2: Bloomberg Intelligence. Hey, coming up on Bloomberg day Break weekend,
Speaker 2: we'll look back at the year in UK politics and
Speaker 2: what twenty twenty six may hold in store for Prime
Speaker 2: Minister Keir Starmer. I'm Nathan Hager, and this is Bloomberg.
Speaker 2: This is Bloomberg day Break Weekend, our global look ahead
Speaker 2: at the top stories for investors in the coming week.
Speaker 2: I'm Nathan Hager in Washington. Up later in our program,
Speaker 2: we'll look at what's in store for the world's second
Speaker 2: largest economy in twenty twenty six. But first, from the
Speaker 2: US perspective, the UK looks like it did pretty well
Speaker 2: from this second Trump administration. Britain was first to get
Speaker 2: a trade deal with the US. A second state visit
Speaker 2: delivered FaceTime for brand Britain, with royals and politicians alongside
Speaker 2: President Trump and his entourage, while American business leaders at
Speaker 2: one point promised major AI investments. But from the UK perspective,
Speaker 2: the gains haven't been so easy to see. A midweek growth,
Speaker 2: US demands and a government that's lurched from U turn
Speaker 2: to crisis. Let's get more now. From Bloomberg Daybreak, euro
Speaker 2: banker Caroline Hepgar in London.
Speaker 3: Nathan, not too bad. I'm surviving typical responses in the
Speaker 3: UK if you ask a citizen how are you? And
Speaker 3: so it can be said of the Labor government barely
Speaker 3: a year and a half into office, Kirs Starmer's government
Speaker 3: has little to really hear about and a long list
Speaker 3: of troubles to ponder. And joining me now to discuss
Speaker 3: where we are at is Bloomberg's UK Political editor Alex
Speaker 3: Wickham and our Bloomberg opinion columnist Rosa Prince. Great to
Speaker 3: have you both with me, Alex, Can I start with you?
Speaker 3: What do we know about this government at the end
Speaker 3: of this year that we didn't know when they got
Speaker 3: elected in twenty twenty four.
Speaker 7: I think just how unstable they are and that the
Speaker 7: Labor government would be I think, I think, you know,
Speaker 7: Kirsten was elected in twenty twenty four and basically the
Speaker 7: pitch was We're not going to be like the Tories.
Speaker 7: We're not going to go through constant political crises and
Speaker 7: scandals and dramas and change the leader every five minutes
Speaker 7: and all of this stuff. I always remember this line
Speaker 7: that Kirs Starmer had in the election that politics should
Speaker 7: tread more lightly on everybody's lives, which was sort of
Speaker 7: a you know, wish for thinking, shall we say and instead,
Speaker 7: you know, almost straight away Labor went straight into basically
Speaker 7: copying what the Tories did in terms of you know,
Speaker 7: a lot of a lot of political nonsense and you
Speaker 7: know where we are quite astonishingly, you know, at the
Speaker 7: end of this year is you know, question marks over
Speaker 7: whether star War will still be there in a year's time,
Speaker 7: which you would never have thought even a year ago,
Speaker 7: eighteen months ago.
Speaker 3: Rosa, has it gone wrong? What has gone wrong? And why?
Speaker 8: Yeah, lots and lots have gone wrong. I mean the
Speaker 8: poll speak to themselves for themselves. Labour's ending the year
Speaker 8: in a terrible position. And Kiss Starmer is the most
Speaker 8: unpopular primers that ever, I think, including the dreadful Liz
Speaker 8: trust I think why I'll kind of give a macro
Speaker 8: and a micro answer for a financial podcast Macro. I
Speaker 8: think there's generally been a lack of vision and purpose
Speaker 8: with this labor government. Kiss Starmer often doesn't seem as
Speaker 8: if he knows what he wants to do with this
Speaker 8: enormous power he has big majority and also many many
Speaker 8: own goals. There were really accident prone government. They were
Speaker 8: dealt a tough hand coming in and they've kind of
Speaker 8: handled it really really badly. Specifically, the micro things I
Speaker 8: think they got wrong this year were a failure to
Speaker 8: deliver growth, which is what they put all of their
Speaker 8: kind of eggs in that basket on the economy. A
Speaker 8: failure really to get a grip on people's concerns about immigration,
Speaker 8: which has allowed the Reform UK and Nigel Farad party
Speaker 8: to really thrive this year. And also a failure by
Speaker 8: the government in Kirstarmer to control his own labor MPs,
Speaker 8: which meant he hasn't in particular been able to get
Speaker 8: those public spending cuts through government, which he really needed
Speaker 8: to do to make the sums add up.
Speaker 3: Okay, so record on popularity, some quite complex policy problems
Speaker 3: to solve, as you say, the big one was to
Speaker 3: try to deliver growth, but really a massive challenge. Where
Speaker 3: does that leave Kirs Starmer and also let's let her
Speaker 3: in Rachel Reeves as well, the Chancellor going into twenty
Speaker 3: twenty six.
Speaker 7: I mean, they faced this sort of slightly mind bending
Speaker 7: prospect that they could be a leadership challenge in May
Speaker 7: after the local elections, you know, which Labour's expected to
Speaker 7: do very badly. All of the questions all that anybody
Speaker 7: wants to talk about in Westminster are is you know,
Speaker 7: Andy Burnham gonna get a seat in the House of
Speaker 7: Commons so he can run. Is west streeting going to
Speaker 7: be the sort of the pretender to the throne. Is
Speaker 7: Angela Rainer going to be a candidate from more from
Speaker 7: the left. And all at the same time, Kirs Starmer
Speaker 7: has got to contend with this sort of immensely difficult
Speaker 7: international situation which takes up so much of his time
Speaker 7: on Ukraine US relations.
Speaker 4: Rachel Reeves has got.
Speaker 7: To sort out growth. As Rosa was saying that, you know,
Speaker 7: it is just the shock absence of any growth strategy
Speaker 7: is just therefore to see and they have to find
Speaker 7: a way to deal with these policy problems immigration as well,
Speaker 7: so important for voters, and you know, being able to
Speaker 7: get through the next few months is just looking very
Speaker 7: difficult now. You know, I would say it is hard
Speaker 7: to change the prime minister. You know, I always remember
Speaker 7: back in the sort of Theresa may Boris Johnson days,
Speaker 7: for a long time journalists would say, oh, this prime
Speaker 7: Minister's finished, and it took them a long time to go.
Speaker 7: So it's easier said than done. And people have been
Speaker 7: saying kiss Darma's finished for a few months now and
Speaker 7: he's still there, and you know, there is just a
Speaker 7: chance that he might just survive because it's really hard
Speaker 7: to get rid of the prime minister. I think that's
Speaker 7: perhaps slightly underpriced at the minute, but it doesn't mean
Speaker 7: all of these problems aren't there still.
Speaker 3: And it is quite difficult because each of the political
Speaker 3: parties has their own system for how they get rid
Speaker 3: of their leader, and that leader bit the prime minister
Speaker 3: of course when they're in government. ROSA, how seriously should
Speaker 3: we take a leadership challenge? And who are the potential successors?
Speaker 3: I will just remind listeners. Of course, that the deputy leader,
Speaker 3: Angela Rayner, resigned earlier this year, and she's seen as
Speaker 3: a significant potential candidate. Let's listen in to a little
Speaker 3: bit from Angela Rayner.
Speaker 8: The trade union movement taught me that it's not about yourself,
Speaker 8: it's about us. It's about who we're here for.
Speaker 3: And everything that I've done has been an endeavor for us,
Speaker 3: for our people who are elected doors and who we serve. Rosa.
Speaker 3: In terms of Rayner, is she the lead contender? Who
Speaker 3: else might be possibilities if there were to be a
Speaker 3: leadership challenge?
Speaker 8: Funny enough, I'm right in a column about this because
Speaker 8: my view is that I agree with Alex one hundred
Speaker 8: percent that Starmer is in real trouble. I'm going to
Speaker 8: the same parties and here the same things, which is
Speaker 8: that everyone's very fed up with him. But each of
Speaker 8: the candidates to replace him has serious issues and flaws
Speaker 8: that make it hard for them to achieve it. So, yes,
Speaker 8: people talk about Angela Rainer, but Angela Rana has resigned
Speaker 8: in disgrace only a couple of months ago. There is
Speaker 8: some polling out which shows that the public do not
Speaker 8: welcome her return to government. Now, she's very popular in
Speaker 8: the Labor Party, but I'm not so sure she is
Speaker 8: popular in the country at large. And if the idea
Speaker 8: is you want to get rid of an unpopular prime minister,
Speaker 8: why would you replace him with somebody who is also
Speaker 8: very unpopular, actually more unpopular than he is. The big
Speaker 8: problem with the most popular candidate, who is Andy Burnham,
Speaker 8: is that he's not a member of Parliament. Now he's
Speaker 8: been giving interviews saying well, I could get a seat,
Speaker 8: I could keep back. It's really difficult to do that
Speaker 8: if you've not got the backing of the Labor Party,
Speaker 8: and at the moment the Labor Party, the National Executive Committee,
Speaker 8: which is in charge of this stuff, runs elections and
Speaker 8: elections and probably wouldn't put him in there. So I
Speaker 8: think he can be counted out for the short term.
Speaker 8: And then you've got other candidates like Where Streeting the
Speaker 8: Health Secretary, is Shabana Mahmoud the Home Secretary. Both I
Speaker 8: think are a little bit more popular than say Angelina
Speaker 8: with the public, but they're from the right of the
Speaker 8: party and this Labor Party leans left, particularly the membership does,
Speaker 8: and I think they would find it hard to win
Speaker 8: an election so there's no clear successor to Kirs Starmer,
Speaker 8: which at the moment I think is pretty much what's
Speaker 8: keeping him in the.
Speaker 3: Job, all of which is quite negative for the government.
Speaker 3: Is there a flip side alex where Kirs Starmer manages
Speaker 3: to turn things around? Is it possible? What might be
Speaker 3: the criteria for that?
Speaker 7: Yes, it is possible. I mean, I think Kirs Starmer
Speaker 7: would say, I'm a year and a half in of
Speaker 7: a five year term. It's too soon to write me
Speaker 7: off completely. And to be fair to him that you know,
Speaker 7: that is not an unreasonable argument that you know, he's
Speaker 7: the first labor prime minister in fourteen years. Give him
Speaker 7: a bit more of a chance basically, you know, yes,
Speaker 7: there could be some interest rate cuts. You know, next year,
Speaker 7: people could start to feel that the economy has turned
Speaker 7: a corner a bit. They need to make serious headway
Speaker 7: on immigration and find a way to reduce the numbers
Speaker 7: of small boat crossings. You know, that is I do
Speaker 7: think fundamental to their electoral chances. They're polling the ability
Speaker 7: of them to sort of nip in the buds the
Speaker 7: rise of reform. You know, could they do slightly less
Speaker 7: badly than feared at the local ellections in May and
Speaker 7: launch that as a bit of a way of turning around.
Speaker 7: I think the other big unknown is is what does
Speaker 7: he do on Brexit, because there could be this just
Speaker 7: sort of slight hail Meherry, which is an unpopular leader,
Speaker 7: needs to find a big, game changing policy to get
Speaker 7: his party back on side. And if he just junked
Speaker 7: his red lines on negotiations with the EU on things
Speaker 7: like the custom a customs union and certain even if
Speaker 7: not that you know, some other way of forging a
Speaker 7: closer relationship that could just keep his party happier.
Speaker 9: Rosa.
Speaker 3: Was this the year of Nigel Pharage and the reform
Speaker 3: UK Party?
Speaker 8: Oh yeah, it really was. Everything seems to be coming
Speaker 8: up Rosie for Nigel Farage well ahead in the polls,
Speaker 8: lots of defections from the Conservative Party, which seems to
Speaker 8: be actually killing off what has been the most successful
Speaker 8: electoral party not just in Britain but in the Western world,
Speaker 8: getting lots of council seats wins. He's had some bumps
Speaker 8: in the road, He's fallen out with members of his
Speaker 8: own party. He had some stories which were very unwelcome
Speaker 8: for him recently about his school days when he was
Speaker 8: accused of being pretty unpleasant and even racist, so it's
Speaker 8: not all gone his way. But he even ends the
Speaker 8: year with a member of the House of Lords for
Speaker 8: the first time. So yes, at the moment in less
Speaker 8: Labor can pull themselves together, or perhaps the Tories emerge
Speaker 8: from where they've been sleeping. It looks like we are
Speaker 8: heading towards a reform government.
Speaker 3: After such an unpredictable twenty twenty five. Is it possible
Speaker 3: to list what the risks might be in twenty twenty six,
Speaker 3: what the key themes rosa might be for this UK
Speaker 3: government in this new year.
Speaker 8: Well, all eyes are on May, which is when we
Speaker 8: have local elections and elections in Wales and Scotland, and
Speaker 8: that's being seen as a big test of Keir Starmer's
Speaker 8: premiership and also of Kemy Badenoch, the leader of the
Speaker 8: Conservative Party, who's actually ends the year in a slightly
Speaker 8: stronger position. Since the summer, she's been seen as doing
Speaker 8: quite well in the House of Commons. She had a
Speaker 8: pretty good conference. The trouble for her is that her
Speaker 8: poll ratings are stubbornly the same. She's actually now polling
Speaker 8: on the same level as the Green Party. So I
Speaker 8: think the next sort of big landmark moment is may.
Speaker 8: Aside from that, it's generally these themes. So the rise
Speaker 8: of reform, does that continue, what's going to happen with
Speaker 8: the Ukraine and the impact here, and just individual policy
Speaker 8: areas such as the NHS where we have ongoing strikes
Speaker 8: such as energy bills which the government's promised to get
Speaker 8: down and aren't and so on and so forth.
Speaker 3: That is Bloomberg opinion columnist Rosa Prince and Bloomberg's UK
Speaker 3: Political editor Alex Wickham. Always a beautiful summary and a
Speaker 3: big thought for us with your columns, of which we
Speaker 3: look forward to in twenty twenty six. Thank you. I'm
Speaker 3: Caroline Hepgar here in London and you can catch us
Speaker 3: every weekday morning for Bloomberg Daybreak here at beginning at
Speaker 3: six am in London. That's one am on Wall Street.
Speaker 2: Nathan, Thanks Caroline, and coming up on Bloomberg Daybreak weekend,
Speaker 2: we look at how domestic demand in China will be
Speaker 2: impacted next year. I'm Nathan Hager and this is Bloomberg.
Speaker 2: This is Bloomberg Daybreak Weekend, our global look ahead at
Speaker 2: the top stories for investors in the coming week. I'm
Speaker 2: Nathan Hager in Washington. Let's turn out to China and
Speaker 2: the challenge is facing the world's second largest economy in
Speaker 2: the new year. Here's Bloomberg's Doug Krisner, host of the
Speaker 2: Daybreak Asia podcast.
Speaker 4: Nathan, the Chinese economy is wrapping up twenty twenty five
Speaker 4: in a stronger place than where it started the year.
Speaker 4: It's whether a trade war with the US, and the
Speaker 4: government has focused on confronting several domestic challenges. So what's
Speaker 4: happening now and where do we go from here? For
Speaker 4: a closer look, I'm joined by John Leu. He is
Speaker 4: Bloomberg Chief China correspondent. John joins us from our studios
Speaker 4: in Beijing. Thank you for being here. Over the past year, John,
Speaker 4: you and I have talked about the many challenges that
Speaker 4: China is facing, and there has been a very important
Speaker 4: event recently. It's earlier in the month that the government
Speaker 4: convened the Central Economic Work Conference for twenty twenty six.
Speaker 4: How much do we know about what was discussed.
Speaker 9: Well, we know that what came out of the meeting
Speaker 9: was this readout that emphasized the need to increase consumer
Speaker 9: consumption here domestically in China. There was also a lot
Speaker 9: of emphasis on pushing forward with technology, trying to make
Speaker 9: China a more innovative economy and economy that creates new products,
Speaker 9: new technologies that people around the world will want to buy,
Speaker 9: and that also, by the way, would reduce China's reliance
Speaker 9: on the United States for a lot of those technologies,
Speaker 9: which we've all seen has become part of this trade
Speaker 9: war as a weaponized way that the US has tried
Speaker 9: to put pressure on China.
Speaker 4: So this is part of the weak domestic demand story
Speaker 4: that you and I have spoken about. And the elephant
Speaker 4: in the room is the property market. It's been I
Speaker 4: think we can say, persistently soft and weighing very much
Speaker 4: on consumer sentiment, and the headlines right now really aren't
Speaker 4: improving much. And I'm thinking in particular of China von Kah.
Speaker 4: This company was once the largest home builder in China
Speaker 4: and it's been way down, as many property developers have been,
Speaker 4: by enormous debt. And now we're being told that von
Speaker 4: Ka seems to be moving towards some type of debt restructuring.
Speaker 4: Default right now doesn't seem to be an option. Since
Speaker 4: Vonka is viewed from what I understand as almost a
Speaker 4: quasi backed company. Am I wrong in that?
Speaker 9: I think the chances of a default are probably greater
Speaker 9: than you think, Doug. We have passed the date of
Speaker 9: maturity for a bond that VANKA was supposed to pay
Speaker 9: on the fifteenth of this month. They have a five
Speaker 9: day grace period that takes us into Monday of next week,
Speaker 9: the nineteenth. It's not clear if VANKA is going to
Speaker 9: get an extension on that deadline, which they are asking
Speaker 9: those bondholders for. We should find out soon, but there
Speaker 9: is ants that they will not get that extension and
Speaker 9: they will be in default.
Speaker 4: John, Let's imagine that there is a default. What might
Speaker 4: the reaction look like.
Speaker 9: I think in terms of the markets, there will probably
Speaker 9: be more pessimism as a result, more concerned about where
Speaker 9: property is headed and how much lower we can go.
Speaker 9: I think based on what we got from the Central
Speaker 9: Economic Work meeting and based on the rhetoric that we've
Speaker 9: heard out of the government, it seems Beijing is a
Speaker 9: little bit less concerned. It seems Beijing's feeling is that
Speaker 9: if there were a default, it is something that the
Speaker 9: government could deal with, It could keep it under control,
Speaker 9: and it will not become some sort of systemic issue
Speaker 9: that cascades throughout the economy.
Speaker 4: So it's not a too big to fail situation. From
Speaker 4: what I'm hearing right.
Speaker 9: That looks like what the government has determined at this point.
Speaker 9: That could change based on what the reaction is in markets,
Speaker 9: what the reaction might be for home buyers out there.
Speaker 9: That could change, but right now, I think that's what
Speaker 9: we're looking at.
Speaker 4: So we're nearly at the end of the year, and
Speaker 4: I'm wondering whether it's likely that China is going to
Speaker 4: reach that five percent growth target for twenty twenty five.
Speaker 4: Perhaps there's the risk that it misses this marked by
Speaker 4: a small degree.
Speaker 9: So I think this is a very interesting question, and
Speaker 9: I will try an answer in two parts. The first
Speaker 9: part is they will definitely hit the about five percent target,
Speaker 9: there's little doubt about that. The second part of that answer,
Speaker 9: which I think is more interesting, is the number that
Speaker 9: they report for GDP growth is the real GDP growth number.
Speaker 9: It's not nominal if you look at nominal, which is
Speaker 9: just you know, however, many trillions of dollars the economy
Speaker 9: was in twenty twenty five minus what it was in
Speaker 9: twenty four and what the difference is the nominal rate
Speaker 9: of growth is actually much lower and may not even
Speaker 9: get to four percent this year. When they calculate for
Speaker 9: the impact of inflation and deflation, and because China is
Speaker 9: going through this bout of deflation at the time, you
Speaker 9: actually get an increase of about a one percent growth
Speaker 9: two five percent, And so actually the way people are
Speaker 9: experiencing the economy is they are not experiencing the same
Speaker 9: rate of growth as that real GDP number might suggest.
Speaker 4: You and I have spoken in the past about the
Speaker 4: issue of overcapacity, particularly in industries like electric vehicles, and
Speaker 4: I'm wondering whether that issue was addressed at the Central
Speaker 4: Economic Work Conference.
Speaker 9: It wasn't. It didn't seem to be addressed that specifically,
Speaker 9: but it is very much on the minds of officials,
Speaker 9: and there's some language in the communicator around that idea.
Speaker 9: We've seen, for example, just this past week, China actually
Speaker 9: impose some new rules that will impose legal enforcement of
Speaker 9: how car makers price their cars, and so if car
Speaker 9: makers are selling cars priced below the cost of production,
Speaker 9: they actually face legal implications for that now. And so
Speaker 9: that just shows how very meaningful this idea of excess
Speaker 9: capacity is. For the government and how much weight they're
Speaker 9: putting on trying to get through it.
Speaker 4: There was an interesting piece in The New York Times
Speaker 4: in the last week reporting on how Chinese car makers
Speaker 4: are winning over drivers in the UK, where tariffs are
Speaker 4: low and buyers seem to be a little bit more
Speaker 4: open to new brands. This goes to the use of
Speaker 4: exports as a way of addressing the problem of over capacity.
Speaker 4: But I would imagine it's got limitations. So if there
Speaker 4: has to be greater reliance on domestic Chinese demand, what
Speaker 4: would it take to get there? And I'm curious maybe
Speaker 4: you can weigh in on what the local car market
Speaker 4: in China has been like.
Speaker 9: So the local car market has suffered. It's slowed down
Speaker 9: a lot in the latter part of twenty twenty five,
Speaker 9: and that's because the government was offering quite generous subsidies
Speaker 9: to get people out and buying goods and products. Not
Speaker 9: services yet, but cars definitely had subsidies, and then towards
Speaker 9: the end of the year those subsidies starts to taper out.
Speaker 9: We don't have great clarity on whether there will be
Speaker 9: more subsidies or how that's going to happen, But as
Speaker 9: those subsidies started to taper out. You saw the market
Speaker 9: start to turn and people buying fewer cars.
Speaker 4: So let's look at the trade situation between China and
Speaker 4: the United States. Recently, Scott Bess and US Treasury Secretary,
Speaker 4: said that thus far, China has done everything that was
Speaker 4: negotiated with regard to that trade truce. I'm wondering, from
Speaker 4: your point of view, John, are things pretty much on
Speaker 4: an even keel now or is there some sort of
Speaker 4: risk that we could see another blow up in these relations.
Speaker 9: So so far, so good. Everything that we've heard and
Speaker 9: seen so far suggests that both sides are sticking to
Speaker 9: the agreement. We've seen soybean purchases by China. We've seen
Speaker 9: some more rare earth licenses issued on the American side.
Speaker 9: We've seen the tariffs lowered, We've seen that additional add
Speaker 9: on to putting sanctions on the subsidiaries of already sanctioned company.
Speaker 9: We've seen that paused, and so it looks like both
Speaker 9: sides are sticking to the agreement. I think what's interesting
Speaker 9: for twenty twenty six is you have a situation where
Speaker 9: the two presidents, Presidents She and Trump could meet each
Speaker 9: other four times and so President Trump is supposed to
Speaker 9: come to China in April. President She is supposed to
Speaker 9: travel to the US, and then at the end of
Speaker 9: the year, China hosts APEC in November, and then the
Speaker 9: US hosts G twenty in Miami, with four meetings on
Speaker 9: the schedule. I think there are two outcomes. One it
Speaker 9: could be a pillar for stability. But at the same time,
Speaker 9: we've seen as the two presidents get ready for a meeting,
Speaker 9: we've seen a tendency on both sides to try to
Speaker 9: look for advantages at the bargaining table, and sometimes that
Speaker 9: actually leads to more tension in the short run.
Speaker 4: It's clear that we've seen many advancements in Chinese technology
Speaker 4: over the course of twenty twenty five. On the hardware side,
Speaker 4: I'm thinking of domestically produced semiconductors. On the software side,
Speaker 4: think of those large language models like deep seak. Is
Speaker 4: there still a fair amount of optimism that these industries,
Speaker 4: whether it's chips or AI, will continue contributing in a
Speaker 4: meaningful way to overall growth in the new year.
Speaker 9: If you look at financial markets here in China and
Speaker 9: Hong Kong, there is a lot of optimism. I would
Speaker 9: say bordering on excessive. So we had this chip maker
Speaker 9: in Shahai called meta x. It was founded by some
Speaker 9: engineers who used to work at AMD. There's this thought
Speaker 9: here in China that it could become sort of a
Speaker 9: Chinese competitor to Nvidia and am D and other American
Speaker 9: chip makers. And when that stock listed on the Shahaigh exchange,
Speaker 9: it went up more than six hundred percent on the
Speaker 9: first day of trading. So there is a lot of
Speaker 9: interest and excitement about the future of technology in China.
Speaker 9: But I would make the distinction between financial markets and
Speaker 9: real economics in that that excitement might be there in markets,
Speaker 9: but we have not yet seen it filter into real
Speaker 9: economic activity.
Speaker 4: So to what extent is the government invested in maintaining
Speaker 4: that enthusiasm.
Speaker 9: I think the excitement is beneficial for China's technology drive
Speaker 9: in that it makes financing for innovative new companies much
Speaker 9: easier to get. It makes that financing lower cost for
Speaker 9: these companies to get. I think the other thing that
Speaker 9: this excitement about tech does for China is people who
Speaker 9: are in the market, people who own stocks, people who
Speaker 9: have pensions or have funds. They see the value of
Speaker 9: those assets go up and there is a beneficial sort
Speaker 9: of wealth effect, and hopefully, I think the government is
Speaker 9: hoping that results in people actually being willing to spend
Speaker 9: more money.
Speaker 4: So we've touched on some areas of the Chinese economy.
Speaker 4: But before I let you go, John, i'd like to
Speaker 4: get your sense of what we may see in terms
Speaker 4: of stimulus in the new year. Is something that is
Speaker 4: going to be handled in a very conservative way, would
Speaker 4: you imagine?
Speaker 9: All indications that we have gotten so far is yes,
Speaker 9: it will be relatively conservative in terms of how much
Speaker 9: additional stimulus we get from Beijing. Indications are that the
Speaker 9: central government looks like it's going to keep its budget
Speaker 9: deficit unchanged from twenty twenty five, so about four percent
Speaker 9: of GDP. If that is the case, then that would
Speaker 9: suggest the government is taking a much more measured approach,
Speaker 9: that it's not trying to flood the system with money
Speaker 9: to try and change the trajectory of the economy, but
Speaker 9: it's going to take a more targeted approach. And there
Speaker 9: are some areas that may not get as much assistance
Speaker 9: as maybe had previously been hoped.
Speaker 4: And I'm wondering John about the extent to which currency
Speaker 4: is a part of that story if you're trying to
Speaker 4: manage an economy that is so heavily reliant on exports
Speaker 4: while at the same time not wanting to trigger the
Speaker 4: outflow of capital.
Speaker 9: On the currency front, China's actually in a relatively better
Speaker 9: position going into twenty twenty six. Then coming into this year,
Speaker 9: the currency's been gaining versus the US dollar, it's been
Speaker 9: gaining versus many of its trading partners. That I think
Speaker 9: is a reflection of the perception of how the Chinese
Speaker 9: economy is doing. It is also aided by that trade
Speaker 9: surplus that you were talking about, Doug, and so heading
Speaker 9: into twenty twenty six, what we've been seeing is action
Speaker 9: is being taken by the Chinese government to try and
Speaker 9: hold back the currency so it's not strengthening too quickly.
Speaker 9: And so I think that is good for China or
Speaker 9: it makes the jobs of the regulators easier because it
Speaker 9: makes the concern about outflows less.
Speaker 4: Okay, John, we'll leave it there. It's always a pleasure.
Speaker 4: Thank you so very much. John lou There, Bloomberg Chief
Speaker 4: China correspondent. I'm Doug Krisner, and you can catch us
Speaker 4: weekdays for the Daybreak Asia podcast. It's available wherever you
Speaker 4: get your podcast.
Speaker 2: Nathan, thanks Doug, and that does it for this edition
Speaker 2: of Bloomberg day Break Weekend. Join us again Monday morning
Speaker 2: at five am Wall Street Time for the latest on
Speaker 2: markets overseas and the news you need to start your day.
Speaker 2: I'm Nathan Hager. Stay with us. Top stories and global
Speaker 2: business headlines are coming up right now.