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The Macro Viewpoint - Our Q2 economic outlook, decarbonising heat
37 Plays2 years ago
Janet Henry looks at the challenges facing central banks as they try to balance the risks of persistent inflation and financial instability. Sean McLoughlin explains why efforts to decarbonise heat in buildings and industry need to be ramped up.
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Transcript
Introduction to HSBC Podcast Series
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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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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
Recording Date and Context
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The following podcast was recorded for publication on the 30th of March 2023 by HSBC Global Research.
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All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Central Banks: Inflation vs. Financial Instability
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Hello, I'm P.S.
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Butler in London.
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Coming up on today's program, we look at the challenges facing central banks as they try to balance the risks of persistent inflation and financial instability.
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And we find out why efforts to decarbonize heat in both buildings and industry need to be ramped up in the battle to reduce carbon emissions.
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We begin this week with the global economy, where we have just published our latest outlook.
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It comes after a turbulent few weeks for financial markets, with the banking sectors in the US and Europe coming under pressure.
Interview with Janet Henry on Economic Resilience
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Janet Henry is our global chief economist.
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She spoke earlier to Peter Stegall, our managing editor for Europe.
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Janet, welcome.
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Thank you, Peter.
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So when we last spoke three months ago, there was quite a lot of good news to talk about and economies going into 2023 with some momentum.
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So what happened?
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Well, actually, the hard global economic data in early 2023 has, if anything, been more resilient than feared, particularly in China with the reopening impact happening a little bit earlier and Europe really feeling the tailwinds from those sharply lower gas prices.
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that came through.
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So that has happened and the service sector in particular.
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It's just that, as you mentioned, it was overtaken by this extreme financial market volatility that we saw through the course of March, initially triggered by those problems in the US banking sector, but Europe certainly felt the impact
Analyzing Financial Turmoil and Interest Rates
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as well.
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And what does this financial turmoil mean for your outlook?
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Well, I think like central banks, everyone is slowly starting to try to assess the implications, but it is very early days.
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We do not think that this is 2008 period when there was a broad asset quality problem.
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with the US subprime mortgage market impacting.
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This is more of a liquidity problem.
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It is a consequence of the really aggressive rises in interest rates that we've seen over the course of the last year.
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That was certainly the problem with SVB, but there are implications.
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Credit conditions will be tighter.
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So it will be more difficult and more expensive for households and for companies to access credit.
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And for parts of the emerging economies that are very dependent on capital inflows, like some of those lower income economies, there will be implications as well.
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So credit conditions were already tightening.
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We already look for a marked slowdown.
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We still do, but we are not anticipating a full blown financial crisis that delivers a deep recession.
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So rate rises are starting to bite in the wider economy.
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But when it comes to inflation, what's the picture there?
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Is it falling in the way that policymakers would hope?
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There is evidence that tighter policy is feeding through in interest rate sensitive sectors like housing markets in particular.
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And there are even certain areas where we are seeing a rise in delinquencies.
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But other areas of the economies are holding up pretty well.
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Goods demand is slowing.
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So you're seeing that in global manufacturing data.
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But service sector is still quite strong.
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And inflation, while it is off its peaks, a lot of that has been driven by energy and there will be further reductions because of energy.
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But it hasn't been falling as swiftly as central banks hoped because that resilience in the service sector is keeping core inflation really quite high and on an accelerating trend, for instance, in Europe, even as it starts to roll over a little bit more in the case of the US.
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So it's just a reminder that
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that any slowdown in inflation is going to be more gradual than actually the slowdown in the economy.
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I mean, that makes for a very challenging mix for central banks, of course.
Central Banks' Inflation Strategy
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What do you think they're most worried about now?
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Is it the financial instability risks or taming inflation?
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Their primary goal is still more tied to inflation, though obviously the Fed obviously has the goal of inflation and employment.
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And for the Fed, inflation is too high and arguably unemployment is too low to be consistent with getting inflation back to target.
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So their primary goal hasn't changed.
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They know more work has been done to prevent inflation from becoming more persistent.
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But recent events, current events, are a reminder that financial strains will continue to grow.
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And obviously the support that's been provided by the Treasury and the Federal Reserve has helped to stabilise to some extent the situation.
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They will be watchful for any impact.
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They'll be looking to see whether credit conditions for tighten.
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But I think at the moment that their risk is still very much focused on the inflation front while being mindful of these growing strains.
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And taking this all together, what does this mean for your growth forecasts?
Revised Global Growth Forecasts
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Well, our growth forecast for 2023, remarkably enough, have actually gone upwards.
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In the case of the US, this is mainly because of growth already delivered at the end of 2022 and in early 2023.
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In Europe, it's because of the energy story and China, as I mentioned, it is the reopening story.
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We still have a slowdown in the US and Europe in the course of this year, but we are not looking for a recession.
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So we do not share the market view that we are going to get a very rapid reduction in interest rates.
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We actually expect further tightening.
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The Fed can push through further tightening.
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We have got two more 25 basis point rate rises, which we've also got from the ECB.
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And with inflation still staying quite sticky, we do not expect the ACB to cut rates even in 2024.
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With later cuts from the Fed than the market expects and no cuts from the ECB, we still have extended weakness even through course of 2024.
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And when we look for global growth to be 2.3, so virtually unchanged from 2023.
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And what about inflation?
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We've actually written a separate chapter in the piece on inflation, but our global forecasts are basically unchanged.
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We look for global inflation to slow from 8.4 to 6.7 in 2023 and 4.7 in 2024.
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And that's still too high.
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And that's really where central banks need to focus.
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The risk is, of course, that these current financial sector strains mean that they may have to turn their attention to preventing a bigger crisis on the financial sector front when they still have unfinished business on inflation.
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Janet, thank you very much.
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Thank you very much, Peter.
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I'm Harold van der Linde.
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And I'm Fred Newman.
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And you can find us under the banyan tree.
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Join us weekly where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
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Search for HSBC Global Viewpoint on Apple Podcasts or Spotify or join us via the HSBC Global Banking and Markets page on LinkedIn.
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Enjoy the rest of your podcasts and we'll see you under the banyan tree.
Decarbonizing Heat in Buildings and Industry
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Now we turn to one of the nine key themes that we focus on here at Global Research, energy transition.
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Decarbonizing electricity generation and the transport sector are well underway thanks to renewable energy and electric vehicles.
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But what we at HSBC describe as a third and most challenging frontier in decarbonization may prove more difficult to conquer.
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That is heat.
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We're talking about heat used to keep buildings warm and heat used in industrial processes.
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Sean McLaughlin, head of EMEA Industrials Research, can tell us more.
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Sean, welcome to the podcast.
00:08:24
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Thank you, Piers.
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I'm thrilled to be here.
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So with respect to this third frontier, why has it lagged so far behind the first and second frontier?
00:08:32
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Well, I think it's essentially up to now been a lack of investment.
00:08:35
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And I'll give you some 2022 stats just to underline that point.
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22 saw for the first time clean energy investments top $1 trillion globally.
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And most of that went into renewables and it went into electrified transport.
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So only about 65 billion actually went into low carbon heat.
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So there must be a reason behind why investment isn't flowing more readily into this third frontier.
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Can you give us a sense of why that is?
00:09:03
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Well, I think it's a slightly complex question to answer, so I'm going to try and step back and split it down into chunks.
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So if you look, first of all, what is surprising is the scale of the problem.
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So 50% of what we consume in energy is consumed as heat.
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It's an absolute massive number.
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So there's no energy transition ultimately without a heat transition as well.
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Why it's lacked, I think, is part down to its complexity.
00:09:31
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So again, where is heat consumed?
00:09:33
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It's really in buildings and it's in industry.
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So it's these two sectors that have to face the decarbonisation.
00:09:42
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So in buildings, it's about individual building requirements.
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Heat is localised.
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Therefore, it's a very bottom up transformation.
00:09:53
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Whereas in industry, the problem is very different because you have a number of high heat intensity industries that actually consume the majority of heat globally.
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And these are historically being regarded as hard to abate sectors.
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So these are steel making, these are chemicals, these are cement and concrete.
00:10:11
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So here there's a bit more innovative thinking and implementation required in order to really meet the challenge.
00:10:18
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So given the progress that's been made in the first and second frontier, there is a sense that there is perhaps a bit more focus on the third frontier.
00:10:26
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And what can be done going forward to accelerate development?
Future of Low Carbon Heat Solutions
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Well, I think first of all, we need policy.
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So we've noticed that certainly policy around low carbon heat is moving up the agenda.
00:10:39
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We think it's previously been ignored or rather, you know, we've had investments towards renewables and investments towards electrified transport.
00:10:46
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So I think that is now starting to change.
00:10:49
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So if you look, for example, you know, the US, the Inflation Reduction Act contains a lot of support and tax credits for heat pumps.
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If we look at the European regulation currently under discussion, the Net Zero Industry Act, it also lists heat pumps as one of eight strategic technologies that it wants to be supporting investments in.
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So we note that this is certainly moving up the agenda.
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But certainly what is, I think, still unclear as to how heavy industry is going to really decarbonize.
00:11:28
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So if we looked at it globally, where do you see the most progress happening?
00:11:32
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Is the Inflation Reduction Act a game changer for the US?
00:11:35
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In many ways, yes.
00:11:36
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And we've certainly seen, I think, across clean energy sectors, I think we have seen certainly capital gravitating towards the US since last August.
00:11:46
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And in fact, Europe had come under pressure, I think, to give some response to that.
00:11:53
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So we think if we look, for example, at the heat pump market, which we've done a lot of a lot of work on here, you know, we do see over the next, certainly out to 2030, the highest growth being in Europe and in the US.
00:12:06
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So, Sean, if we were to meet again in a year's time, where would you see that investment in the third frontier grow?
00:12:14
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Well, that's a complex question to answer.
00:12:16
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I think what I can say is certainly we're seeing an acceleration in a number of markets, in particular within heat pumps.
00:12:25
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Heat pumps are one of the key heat technology solutions for decarbonizing the building sector.
00:12:32
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Overall, we're expecting heat pumps.
00:12:33
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global emissions in buildings to actually fall over the next four to five years, whereas we're expecting global emissions in industry to continue to rise.
00:12:41
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So that's the near term focus, but certainly longer term industry will also, I think, accelerate.
00:12:47
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So I think in a year's time, you'll probably find me more positive.
00:12:51
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Well, that's an encouraging note to finish on.
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Sean, thank you very much for joining us.
00:12:54
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Thank you.
00:12:57
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So that wraps things up for another week.
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Special thanks to our guests Janet Henry and Sean McLaughlin.
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From all of us here, thanks for listening.
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Please join us next week for another edition of the podcast.
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Thank you for joining us at HSBC Global Viewpoint.
00:13:32
Speaker
We hope you enjoyed the discussion.
00:13:34
Speaker
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