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The Macro Brief – Shock to the system
845 Plays4 days ago
Janet Henry, Global Chief Economist, looks at what the unprecedented energy shock means for the economic outlook.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/qQcrkHB
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Transcript
Podcast Introduction
00:00:02
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
Inflation Spike Predictions
00:00:23
Speaker
It is really a hump in inflation. You are going to see quite a big rise over the course of the next couple of months. you know Even in the US, headline inflation could be over 3%. It could rise from 2.5% to over 3% just in the course of the next month.
Macro Brief Introduction
00:00:47
Speaker
This is the macro brief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets around the world. I'm your host, Piers Butler, and so far, 2026 has been a challenging year for the global economy.
00:01:00
Speaker
It's only the end of March and we've already had tariff announcements, AR-related market volatility, and commodity price shocks from the ongoing conflict in the Middle East.
Economic Prospects Discussion with Janet Henry
00:01:10
Speaker
Today, I'm joined in the studio by Janet Henry, Global Chief Economist, to take stock of where we are now and discuss the economic prospects as we head into the second quarter.
00:01:20
Speaker
Janet, welcome to the podcast. Hello, Piers. It's good to be here. As you say in your global economics quarterly, nobody knows, in the sense that it's the length of the conflict that is the key determinant.
00:01:31
Speaker
So your approach has been to look at scenarios. Firstly, which scenario have you based your forecasts on? Well, good question. You're right. Nobody knows was actually a direct quote from Jerome Powell at the last press conference from the FOMC. He he admitted when he was quizzed about the forecast that nobody knows at this point. So as a We're very good at making assumptions and our oil team, Kim Fustier and team, make oil price assumptions. And it has been for a limited, severe disruption through the Straits of Hormuz.
00:02:06
Speaker
And on that basis, it would be that there'd be some reopening um of the Straits within a few weeks now. And that, yes, while we may have got a spike and they continue to get spikes towards one hundred and twenty dollars, that you do start then to see um oil prices be on a downward track and certainly by Q4 to be back in in the 70s. So, yeah, a short lived disruption.
00:02:28
Speaker
Now there is an uglier scenario, what's that? Well that uglier scenario is that oil prices stay higher for longer, that actually at least um through April, maybe into May, $140 a barrel and then they stay above towards the the end of September. And so it is it is higher for longer. but But the key difference between the two is that there is more likelihood of what we call second round effects into other areas of inflation. Because then you get into the area that it might feed through, not just into what we're already seeing, which is a whole array of different energy prices from diesel to obviously gas, given the disruptions in Qatar. but ah anything related, but it goes into plastics, it goes into food supplies, given what it means for tractors and deliveries of food, and a whole array um of other factors as well as as feeding through um into wages.
Country-by-Country Economic Impact Analysis
00:03:22
Speaker
So given that nobody knows, and as you say you make a number of assumptions, perhaps more interestingly is that you've done a detailed analysis by country of the economic impact, and it does vary a lot. Can you share a few highlights from that analysis? Yes, we have a wonderful um heat map, um heat map of vulnerability, I'm sad to say. The starting point is who are the net importers and exporters of energy in the report. And that is really the major factor, even though obviously we look at you know what's the exposure regarding the share of the inflation basket that's energy and then food. And we also look at the ability um to support it with policy, so fiscal positions. But the the key one, as I say, is the net importers and exporters. And the relative winners are, of course, the oil exporters outside the Middle East, where they haven't had to cut production and they may have some scope to increase production and exports. So Russia, Canada, the US, and top of the list, Norway, given that Norway is a massive net exporter worldwide. of oil, but actually domestically um uses quite a lot in renewables. It's really a world leader in terms of use of electric vehicles. but But what I would say, even in terms of those relative winners, the consumers will still feel the impact of of global prices.
00:04:40
Speaker
That's the point in the U.S., isn't it? Because everybody says, well, the U.S. is kind of self-sufficient in fat exports oil. But since oil is a globally priced commodity, the consumer in the U.S. is actually suffering from much higher gas prices at the pump.
00:04:51
Speaker
Absolutely it is. And of course, ah in the US, tax makes up a much smaller share of the petrol pump price or gasoline pump price. So for instance, the state of Georgia has already cut the the tax, which I think is about 37 cents on what is now $4 gasoline to try to offset it. But yeah, there is a quick pass through to consumers. But the key difference on that point, of course, in the US, yes, it It will impact on consumer demand, particularly lower end um consumers, lower income consumers. They already have a higher inflation rate. They spend more on energy. But it is really in the US just the auto fuel component. So on the flip side, you've got the relative winners because it is relative.
00:05:35
Speaker
This is not good for anyone. But the relative losers are those countries, much of Asia, not Malaysia, not Australia so much. who import a lot of energy, particularly the gas components. You know, US gas prices have not gone up, but European and Asian ones have a lot. They'll be impacted bit more. And Europe across the board. And in some of those countries, energy makes up, when you include household energy, a big share of the basket. You know, in parts of Asia, Thailand, India, it's about 10% or Eurozone, it's about 7%. Poland, it's about 17%. So, you know, you've got a very different mix in terms of the pass through of energy, even if you are a bigger share of it is actually the taxation component. So, yeah, relative losers, Europe and Asia, Latin America a bit in the middle and relative winners, those energy exporters. You mentioned taxes. What about
Government Measures to Mitigate Economic Impact
00:06:30
Speaker
governments? Are they in a position to soften the blow to households?
00:06:33
Speaker
Are they in a position or are they trying to soften the blow? They're two different questions, I think, Piers. So yes, governments are already reacting. We've already seen a number of measures being announced across some Asian countries. Some of them relate to restraining demand for energy. So, you know, for instance, encouraging people to work at home few more days. Are we back that? Yes, we're back to that. Less energy consumption. and others are trying to cap prices or delay the pass through. So at the moment, a lot of the Asian countries are taking it on the budget deficit rather than allowing it to push up inflation. Because of course, if it pushes up inflation, that means that they're less likely to be able to, you know, they might actually have to raise interest rates. And even in European countries, Spain and Italy have already announced some measures related to VAT on fuels And such like. And what's interesting about some of the European countries, certainly they're talking about it, already taking steps at a much earlier stage than they did back in 2022. And of course, Europe had their taste of gas price increases after Russia invaded Ukraine, when there was a much bigger increase in gas prices than there has been so far. Yes, I remember. in Europe. And at that point, they did spend, you know, 3% or more of GDP on supporting the consumers. So I think what they're keen to do is to almost soften the blow at an earlier stage because last time, which was a very different picture, domestic demand was stronger, labour markets were stronger, but they did pass through into a broader mix of inflation. And they are trying to prevent that happening on this occasion.
Central Bank Strategies Amid Uncertainty
00:08:13
Speaker
The other influencer is obviously central banks. As you said earlier, Jerome Powell's kind of said nobody knows. Is it a bit of a watching brief on their part before they do anything on monetary policy? I think nearly all of the central banks um have taken the view that they are going to wait and see. Brazil did cut interest rates. Australia accelerated, you know, the the speed with which they were raising rates. But Australia was already raising rates and Brazil was already planning to cut rates. But if you look at the ECB um and the Fed, it was very much let's wait and see because Chair Powell said, we don't know.
00:08:49
Speaker
yet and the forecast was still you know not not taking any view on where we go from here. The ECB announced different scenarios to some extent the good, the bad and the ugly which is what Simon Wells did in his European Economics Quarterly. um It was the Bank of England that really you know surprised the market to some extent. because the vote was overwhelmingly on hold, whereas previously, you know, some members have been voting for rate cuts and nearly every member of the committee signalled that they were ready to act. In other words, the yeah UK has had more persistent inflation for a longer period of time. They're not the only ones that have been above target for and know five, six years. um The Fed has to. But the Fed has a dual mandate and obviously this is what the the bond market has reacted to as well as the shifting short rate expectations for the timing of future rate rises.
00:09:43
Speaker
Right, let's recap on your forecasts. More on inflation than on growth? Well, globally we've got near term quite a lot on on inflation. So yes, we have got some point forecasts. They're all in the report, both under the central scenario and under the uglier scenario.
Inflation and Growth Forecasts
00:09:59
Speaker
Under the central scenario, it is really a a hump in inflation. You are going to see quite a big rise over the course of the next couple of months. you know Even in the US, headline inflation could be over 3%. It could rise from 2.5% to over 3% just in the course of the next month. We know that probably in the UK, it will be July when we get the increase in gas prices because of the energy price cap. so But either way, it is a hump in inflation. then Then if oil prices come down under our central assumption, that you will see inflation starting to to fall back um later um in the year. So on that basis of higher inflation, lower growth, we have lowered our growth forecast for most of the major economies. We've certainly lowered our growth global growth forecast, but we still are ah not expecting the ECB or the Fed to change rates in 2026, although the the possibility that the ECB does um has certainly increased.
00:10:55
Speaker
ah Maybe just to finish on it's fair to say that if the conflict were to end tomorrow, there are still some long term consequences.
Security in Defense and Energy Sectors
00:11:04
Speaker
In your report, you mentioned security economics. What do you mean by that?
00:11:08
Speaker
Well, I think what we are seeing around the world is a need for greater security in many ways. you know Even since the start of last year, with all the discussions regarding NATO, there was already a move towards greater defense military um security. and you know Obviously, we've seen a greater commitment regarding defense spending. And increasingly, we've now had a need. Now, I think this is a reminder regarding um energy.
00:11:35
Speaker
security and and broader economic um security. So that that is one important driver. And of course, um you know the region we haven't really talked about so much is the Middle East. And while you know're we're hopeful um that we can get some gradual resolution, a return to pre-conflict levels of output that within a few months um is is being restored, there might be some more lasting implications for the non-oil economy. sectors um of the of the economy. And there may indeed be some political implications even within the US. s You know we've clearly seen how some of the opinion polls have moved recently in response to the feared pick up in inflation that may come through in the US. regarding the outcome of the midterm elections um in the US. so So there are lots of ways in which what's happened regarding the conflict has already changed um the outlook potentially for the rest of this year, even if it is resolved quite swiftly.
00:12:33
Speaker
I think that's all we have time for. May I wish you lots of luck in future forecasts, ah rather you than me. But thank you for joining us today. Thank you very much, Piers. A pleasure to be here as always.
00:12:48
Speaker
Janet Henry there on the outlook for the global economy. Now, there's a lot going on in global markets. So a reminder that you can keep up to date on all our latest reports, videos, and podcasts by downloading our app from Apple's App Store or Google Play.
00:13:03
Speaker
And don't forget to check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put Asian economics and markets in context.
Listener Engagement and Feedback
00:13:12
Speaker
And if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com.
00:13:20
Speaker
So that's all from us today. This week's Macrobrief was hosted by me, Piers Butler, and produced by Tom Barden. If you're enjoying the podcast, then please like, subscribe, and share with your friends and colleagues. Until next week, thanks very much for listening.
00:13:55
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.