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 consider the positives, negatives, and key takeaways from the COP26 climate summit.
Speaker: We take a look at what the latest data are telling us about the economic recovery, and we find out when trade disruption and supply chain bottlenecks could start to ease.
Speaker: This podcast was recorded on Thursday, the 18th of November, 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to the podcast.
Speaker: Hello, I'm P.S.
Speaker: Butler.
Speaker: And I'm Chris Brown-Hunes.
Speaker: After two weeks of intense negotiations, COP26 due to a close on Sunday with the agreement of the Glasgow Climate Pact.
Speaker: Can the outcome be considered a success?
Speaker: Let's get the thoughts of Wei Xin Chan, head of climate change research.
Speaker: He spoke to Graham Mackay earlier.
Speaker: Weixin, welcome to the podcast.
Speaker: Great to have you with us.
Speaker: It's great to be here as always, Graham.
Speaker: So COP26 is now over.
Speaker: We've had a little bit of time to digest what went on over that couple of weeks in Glasgow.
Speaker: What was your overall opinion on how the summit went?
Speaker: It was very roller coaster for me and I think a lot of other people.
Speaker: But on balance, given the small wins and disappointments, I think you could say it was a modest success.
Speaker: A lot still to be done, ambition not there for sure, but I think climate change is a little better off after COP26 than before.
Speaker: All right, well, let's start on a positive note.
Speaker: What did you think were the plus points to come out of the summit?
Speaker: The first plus point is that the Paris rulebook, those are the operational guidelines of the Paris Agreement, that was completed.
Speaker: Now remember, this was supposed to have been done about three years ago, so we're a bit late there, but key parts of it were completed, such as Article 6 and common timeframes, and I think that's a very, very important thing to note.
Speaker: Secondly, I'd like to say that science was welcome again.
Speaker: I love making this point because...
Speaker: In previous COPs, under previous US administrations, science was only taken note of, whereas now that it's welcome, it means that governments will have to respond when new best available science appears, and we can expect that in early 2022.
Speaker: Very good.
Speaker: And what didn't go perhaps so well?
Speaker: There's always a lot of things that don't go well and certainly not to the extent that a lot of parties are looking for.
Speaker: The first would have to be finance.
Speaker: Definitely developed countries miss their 2020 target and they're now promising for 2022 or 2023.
Speaker: We didn't get enough financial commitments on adaptation finance and certainly not enough for loss and damage.
Speaker: They are talking a lot more about the definitions of finance, which I think is a good thing, especially for climate finance, and also bringing concessional finance into play.
Speaker: This is about low interest rate loans, grants, guarantees.
Speaker: and other de-risking instruments, which I think is important because that is what countries that are most vulnerable to climate change really need.
Speaker: They can't be spending their time repaying interest loans.
Speaker: They really need to be working on how they can adapt their economies to be more resilient.
Speaker: Now, at the end of the day, all of this fundamentally comes down to global temperatures.
Speaker: How are things looking in that regard?
Speaker: We're often asked to judge these things by where temperatures are heading.
Speaker: And for this one, the temperature projections for the future have come down a little modestly from where it was before COP26 at 2.7 degrees to...
Speaker: if all the pledges and policies made at COP26 are implemented, we're now heading for 2.4 degrees.
Speaker: Now, that is way off the mark from 2 degrees and certainly the 1.5 degrees that we're looking for.
Speaker: So definitely a lot of work to be done.
Speaker: Now, to end on a positive note, countries have been asked to come back next year with even more ambitious climate pledges and plans.
Speaker: Now, that's very important because this was only supposed to happen every five years.
Speaker: But to come back next year and say,
Speaker: we need to keep bending this curve.
Speaker: We got from 2.7 to 2.4.
Speaker: Can we nudge it down even further next year?
Speaker: So I think countries bringing more ambitious climate pledges to the table by the end of 2022 is a great way to take forward.
Speaker: And are you confident that that trajectory can be sustained and that we're still on the right track and will remain so for the foreseeable future?
Speaker: I think we'll be shaving off 0.1s of degrees as we go along.
Speaker: It's not nearly enough that we need to get to 1.5 degrees.
Speaker: The world is already warm by 1.1 degrees and we see all these extreme events already around the world and that's devastating for many, many places.
Speaker: But we need to try a lot harder and I think that's a step in the right direction at least.
Speaker: Good.
Speaker: Well, we'll take the positives or we can get them.
Speaker: Wei Xin-Chan, thank you very much.
Speaker: Thank you very much, Graham.
Speaker: Let's turn our attention to the economic recovery now.
Speaker: James Pomeroy, global economist, has been looking through the latest data and he joins me now.
Speaker: James, welcome to the podcast.
Speaker: Hi, pleasure to be here.
Speaker: James, let's start with a look at COVID-19.
Speaker: What's the latest on case numbers?
Speaker: So there's a really mixed story across the world.
Speaker: We've got the case numbers that are picking up relatively quickly in parts of Europe and some restrictions starting to come in place in some countries.
Speaker: But actually across the world, things are looking slightly better outside of Europe, particularly in Asia.
Speaker: And we've seen case numbers drop quite sharply, particularly given where we were in the summer, particularly in the likes of ASEAN.
Speaker: So things are looking slightly better on a global basis if we look outside of Europe.
Speaker: But in Europe, we're seeing this pick up in cases and some of these restrictions coming back into place.
Speaker: And it appears that consumer spending is showing no signs of slowing down.
Speaker: Not really, no.
Speaker: If we look at the data across the US and across Europe, which are good barometers of economies that have pretty much opened up, consumers' demand is still really, really robust, both for services and for goods.
Speaker: And it appears that demand is being held back by some of the shortages we're seeing from bottlenecks in the supply chain, as well as shortages in the labour market too.
Speaker: Now, you mentioned labour markets there.
Speaker: What are the data showing?
Speaker: So it's a really odd one where if you looked at the unemployment rates across the world, it would look like we've got very, very loose labour markets.
Speaker: But if you look at different data such as job openings, you start looking at the availability of workers, the wage growth figures, the quits rates, all of these other sort of sub forecasts and sub indicators that we'd look at, really, you do get a really tight labour market.
Speaker: You've got people quitting jobs at record rates.
Speaker: You've got wage growth in certain sectors picking up at record rates.
Speaker: So it's a really odd one in terms of trying to assess how strong labour markets are.
Speaker: But across that mix of data, it's quite easy to tell a story of very, very tight labour markets where companies are struggling to get hold of enough workers.
Speaker: And how is all of this affecting inflation?
Speaker: Well, it's meaning inflation's up and it's likely to stay high at least for the next six months or so.
Speaker: If you think about these bottlenecks in supply chains, they're pushing up goods prices, shortage of workers pushing up wages.
Speaker: That means companies are seeing higher input costs.
Speaker: All of this is a bit of a challenge in terms of those inflation prints because there's a lot of these factors that are clearly pushing up prices on top of the increases in energy prices that we've seen too.
Speaker: So firms are facing this
Speaker: really challenging environment of input costs rising really, really quickly.
Speaker: And some of that's being passed on.
Speaker: More of it could be passed on in 2022.
Speaker: How much of that is passed on is going to be a key determinant of the inflation sort of profile, I guess, across the world in the coming year.
Speaker: How are central banks reacting?
Speaker: Well, this is a tricky environment for them because if you've got high inflation today, you've got relatively strong demand.
Speaker: You've also got high house prices in most of the world.
Speaker: You think you could be tightening policy.
Speaker: But a lot of central banks are sat there sort of being quite conservative and saying, well, actually, some of this inflation is going to dissipate.
Speaker: A lot of it is sort of one off shocks and factors that aren't going to be repeated.
Speaker: in 12 months time and therefore we shouldn't do much.
Speaker: And so you've got one extreme, you've got central banks in Latin America and in Central and Eastern Europe who are raising rates quite aggressively.
Speaker: You've got Norway and New Zealand who have already raised rates in the developed world.
Speaker: Then the other end of the spectrum, you've got the likes of the ECB, Sweden's Riksbank, Australia's RBA, all very, very comfortable and we're not doing anything in terms of raising interest rates.
Speaker: That's a great summary, James.
Speaker: Thanks very much.
Speaker: Thanks very much.
Speaker: James mentioned the impact of supply chain bottlenecks there.
Speaker: And a key question for businesses all around the globe is when they might come to an end.
Speaker: To find out, we're joined by Shanela Rajanayagam, our trade economist, who this week joined up with our data science team to examine this important topic.
Speaker: So Shanela, can you just explain what you looked at in this report?
Speaker: Sure.
Speaker: So to get a sense of what businesses have been saying about trade disruption, we looked at data from recent company earnings calls as well as from business surveys.
Speaker: So in addition to actually reading the transcripts, our data science team used natural language processing to analyze what companies have been saying around certain topics, such as supply
Speaker: shortages and shipping disruptions, and also to get a sense of how companies are feeling, so their sentiment about some of these issues.
Speaker: So what have businesses been saying about these issues?
Speaker: So companies from around the world have been very concerned about supply shortages, and this issue featured most prominently for companies in the technology, industrials, and consumer goods sectors.
Speaker: Companies in Europe and the US were also particularly concerned about shipping disruptions and higher freight costs and supply shortages were weighing on company sentiment on supply chains.
Speaker: In the UK, many companies talked about the combination of COVID-19 and Brexit, and this has increased their concerns around trade disruption.
Speaker: And in fact, according to one survey, around 85% of UK businesses reported facing some form of supply chain disruption over the past three months.
Speaker: And what measures are companies taking to limit the disruption?
Speaker: Details from the earnings calls showed that companies have taken various strategies to essentially ensure that their goods keep moving.
Speaker: For example, you have companies like Crocs and Levi's.
Speaker: They've looked to shift production to alternative markets or to redirect trade to different routes.
Speaker: You also have the likes of Electrolux and ASOS.
Speaker: They've looked to use alternative modes of freight, such as air freight, while various manufacturers have also looked to build up buffer stocks.
Speaker: There was also a strong emphasis on strengthening relationships with suppliers.
Speaker: And some companies have also looked to source closer to home, although nearshoring is a bit more of a longer term trend.
Speaker: There were also some mentions about looking at vertical integration and helping these companies to secure their supply chain.
Speaker: And when exactly will these trade disruptions start to ease?
Speaker: Well, it is very difficult to answer that question precisely, and it will almost entirely depend on COVID-19 restrictions and also the strength of global goods demand.
Speaker: However, one scenario is that trade disruption could start to ease after the Lunar New Year in February 2022.
Speaker: Now, the period after Lunar New Year tends to be a quieter one for sea freight anyway, and the temporary closure of Chinese factories could provide some breathing room for ports to clear those container backlogs without even greater supply coming from China.
Speaker: However, there is a risk that two weeks' respite might not be enough to fully unclog the bottlenecks.
Speaker: And so in a second scenario, we could see trade disruptions only start to ease in the second half of next year.
Speaker: And that could be if container volumes remain high or if COVID-19 restrictions persist.
Speaker: What about the worst case scenario?
Speaker: So there is a risk that disruptions could not ease next year.
Speaker: And in this case, perhaps more stringent COVID restrictions have been imposed.
Speaker: There could also be the risk of ongoing closures of certain port terminals or factory operations, and also issues around land side logistics could persist.
Speaker: There's also the issue of upcoming negotiations at
Speaker: US West Coast ports between the port operator and the labor union, which could also lead to further disruption in the second half of next year.
Speaker: But however, I think the point to note is that regardless of which three of these scenarios play out, even once trade disruptions do start to ease, it is likely that it will take months for supply chains to fully disentangle.
Speaker: Shanela, thanks very much for your time.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to Weishin Chan, James Pomeroy and Shanela Rajanagam for joining us.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
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.
