Transcript
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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: The following podcast was recorded for publication on the 23rd of February by HSBC Global Research.
Speaker: All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player.
Speaker: Hello and welcome to the Macro Viewpoint.
Speaker: I'm Piers Butler in London.
Speaker: And I'm Aline Van Dyne in New York.
Speaker: This week, we're picking up on one of the hottest topics in machine learning, generative AI, and our latest research on the potential it has to affect sectors across the global economy, from banking to pharmaceuticals.
Speaker: And a special guest joins us to explain more.
Speaker: I'm very excited to be here today, even though I don't actually exist.
Speaker: We'll also be diving into the latest economic data from Europe.
Speaker: Is recession avoidable across the region and why?
Speaker: Now from Europe, we head to Brazil to take stock of nearly two months under the administration of Luiz Inácio Lula da Silva, an investor concerned about the fiscal outlook.
Speaker: We're joined in the studio by Mark McDonald, the head of our data science and analytics team, to discuss the new report on generative AI and the rise of the machines.
Speaker: The report looks at the social implications, the impact on economic sectors, and the science behind it.
Speaker: Mark, thanks for joining us today.
Speaker: Thanks for having me on.
Speaker: So we're going to hear from your avatar in a minute.
Speaker: But before that, firstly, give us a quick explanation of the difference between AI that we hear a lot about and generative AI.
Speaker: What is the difference there?
Speaker: So most AI that's been prevalent for the last decade or so is predictive AI.
Speaker: Those are models much like the machine learning models that we include in our research, where you give it some historical data to learn from, if X, then Y, and then you give it new data and it makes a prediction.
Speaker: What's different about generative AI is these are machine learning models that can produce new content.
Speaker: And this is something that, until recently, was viewed as something that, you know, was the unique purview of humans.
Speaker: But it turns out that these machine learning models, they're pretty good at this too.
Speaker: It's something that, you know, has taken the world by storm recently.
Speaker: Indeed, and ChatGPT is now something that everybody is talking about.
Speaker: But is it hype or is there some reality to this?
Speaker: I would say there's reality to this.
Speaker: It's one of these things where sometimes if you speak to people who are on the technology side, they're surprised by the huge hype that there is around this area at the moment because from a technological perspective, things have progressed smoothly.
Speaker: It's been a steady improvement on what was already there.
Speaker: But what that misses is the fact that two years ago, if somebody wanted to use technologies like this, then they had to be someone like me, somebody that could spin up Jupyter Notebooks and program in Python and could go and use these models via code.
Speaker: Whereas now, anybody can just get a login to ChatGPT, and so anybody who can use a website can use these technologies.
Speaker: And it's the proliferation of this technology throughout the economy and getting it out of the hands of geeks like me and into the hands of content producers and entrepreneurs globally, that makes a huge difference.
Speaker: So I think it's not just hype, there is a lot of reality to this.
Speaker: So you talked about the economic implications.
Speaker: Can you give us a few more practical examples?
Speaker: I know in your report you looked at it from a sector perspective.
Speaker: Tell us a bit more about that.
Speaker: Well, yes, we asked our network of analysts from around the world who cover sectors in depth to pull out the implications for their sectors in more detail.
Speaker: So I think some sectors there's clear and obvious immediate implications.
Speaker: So any industry that's involved in producing content, such as the media sector, these models dramatically reduce the cost of producing content and they're already starting to have an influence there.
Speaker: And another sector of the economy where this is already starting to be relevant for investors is in big tech.
Speaker: So we saw a very dramatic example of this with Google when they did a public demo of their model Google Bard, which is a competitor to ChatGPT.
Speaker: The demo was not well received and there was a very sharp reaction in response to this to Google's share price.
Speaker: and clearly as well the semiconductor industry, there's direct relevance there too.
Speaker: However, there are some sectors of the economy where you might not immediately assume that this is relevant, but our analysts think that it is.
Speaker: So the piece has a very sizeable contribution from the healthcare and pharma team, and they go into great depth about the ways in which this technology can be useful to pharmaceutical companies and biotech.
Speaker: So I think there are many areas of the economy where these models are going to start being useful over and above the obvious examples.
Speaker: What about a bit closer to home on the banking side?
Speaker: How does it impact the banking industry?
Speaker: Well, that's an interesting one because obviously we've found this useful in producing this report and the quality of the content that ChatGPT and models like this can produce now is very high.
Speaker: But actually for the banking sector, our banking analysts feel that it will have a pretty muted influence in the banking sector.
Speaker: It's really down to the inherent nature of these generative models.
Speaker: What they're good at is being creative.
Speaker: The last thing you want in a heavily regulated industry is a creative model.
Speaker: You don't want your chat bot for a retail bank making things up when it's dealing with customer requests.
Speaker: And so I think the challenge there is really in getting to the point where the output of these models can be controlled, where you can have guardrails, where you can say, produce me some content, but the content has to refer to these facts in our knowledge base, for example.
Speaker: And then I think it might start to have more of an influence in banking.
Speaker: And that actually brings up a really important point, which are the ethical considerations surrounding this kind of technology.
Speaker: Can you tell us something about that?
Speaker: Well, interestingly, in the video that went with the report, that was one of the questions that we posed to ChatGPT itself.
Speaker: And then our avatar answered the question.
Speaker: So I think it does a better job than I would do.
Speaker: So I'm going to hand over to Artav, my avatar, for that.
Speaker: One major concern is the potential for bias in the data used to train generative models.
Speaker: If the data is not diverse or representative, the model may make decisions that perpetuate existing inequalities.
Speaker: Another concern is the potential for misuse of generative AI, such as creating deepfakes or spreading misinformation.
Speaker: Additionally, as generative AI automates more tasks, there is a risk that it may displace human workers.
Speaker: It is important that we consider these ethical issues and take steps to mitigate them as we continue to develop and use generative AI.
Speaker: Well, that was very clearly presented and convincing.
Speaker: Just to finish on, Mark, can we talk about the sort of broader economic opportunities if this reality really takes off?
Speaker: I think the core influence here is that it pushes the cost of producing content much lower.
Speaker: And once the marginal cost of producing new content goes down, then I think the people who are able to use this new technology appropriately will end up being the winners within a sector.
Speaker: And so, you know, there are always situations when new technology is created where
Speaker: People are worried.
Speaker: But it's not like creating the calculator meant that people stopped being good at maths.
Speaker: And it's not like the creation of these generative AI models will stop people being able to be creative.
Speaker: But probably the people who win and the firms and the sectors of the economy that win will be those that manage to harness this technology and use it.
Speaker: use it effectively to produce content that people still want to see, but to do so more effectively, more efficiently and more rapidly.
Speaker: Mark, Annie did your avatar.
Speaker: Thank you for joining us today.
Speaker: Thank you very much.
Speaker: Thanks, Piers.
Speaker: Now back to the real world, we turn to the latest economic data here in Europe.
Speaker: And for that, we're joined by Simon Wells, our chief European economist.
Speaker: Simon, welcome to the podcast.
Speaker: Thank you.
Speaker: So, Simon, we've had some economic data early in the week that, dare I say it, would imply that R stands for recovery rather than recession now?
Speaker: Certainly things are turning out a lot better than they might have done.
Speaker: We'd already started to see a bit of a turning point in many of the eurozone indicators, and that was certainly reinforced with the February PMIs.
Speaker: Now, these are widely watched leading indicators of activity.
Speaker: And through the second half of last year, every month they were below 50, which points to falling activity.
Speaker: But in January and February, they've been rising.
Speaker: They are now pointing to rising activity and are consistent with the economy in the eurozone expanding again in the first quarter.
Speaker: Now, if that is the case, it is possible that Europe will avoid recession.
Speaker: And given the size of the inflationary squeeze on real terms incomes, that would be pretty remarkable.
Speaker: I still don't understand what's happened here.
Speaker: You've got to give me a bit more explanation here.
Speaker: Well, you're not alone on that.
Speaker: And one thing we can say is that inflation is high and it is outpacing wage growth.
Speaker: So household incomes are being squeezed and we can say interest rates are rising and that is affecting firms.
Speaker: So what's going on?
Speaker: Well, one possibility is we've had more fiscal support than we thought, and that is keeping people spending.
Speaker: Another possibility is that people are running down some of the savings that they accumulated through the pandemic.
Speaker: But neither of these, I think, are conclusive and not particularly evident in the data.
Speaker: And the other thing is confidence just may be up.
Speaker: In many countries, there were a lot of warnings about how bad the energy crisis might get through the winter through a combination of wind
Speaker: Windy and warmish weather and things just turning out a bit better than expected were actually through the worst.
Speaker: And that may have provided a major boost to confidence.
Speaker: And finally, I'd say is we've seen some revisions to inflation data in Germany.
Speaker: And so it may be that even the income squeeze wasn't as bad as it looked in the data even just a few months ago.
Speaker: So policymakers have been hard at work tightening monetary policy or in plainer terms, increasing interest rates.
Speaker: Are they going to redouble their efforts?
Speaker: And is there a risk that with a lag in terms of monetary policy, they overdo it?
Speaker: Well, that's a very good question.
Speaker: There's a lot of debate about this at the moment.
Speaker: I think one thing that is clear is that all these indicators of stronger activity means that there won't be a deep recession pushing up on unemployment and therefore down
Speaker: on inflation.
Speaker: You've heard a lot of ECB policymakers coming out over the past few weeks.
Speaker: They do sound pretty hawkish.
Speaker: They are looking at this resilient economy.
Speaker: Even before that, they wondered whether a mild recession would be sufficient to return inflation to target.
Speaker: And therefore, I think in the near term, we are going to see more interest rate rises.
Speaker: So we now expect a 50 basis point rate rise from the ECB in March, which was our existing view.
Speaker: We've now added 50 basis points in May as well, which would take the ECB's policy rate up to 3.75%.
Speaker: Recall it was minus 50 just last summer.
Speaker: So that's a big tightening and you're right.
Speaker: The question now is, is there enough already in the pipeline, given those lags with which monetary policy operates,
Speaker: such that they've done enough.
Speaker: We think maybe there is.
Speaker: The June meeting seems a long way off, so perhaps they pause.
Speaker: But for sure, policymakers will be debating these lags and also the risks of doing too much versus doing too little.
Speaker: The fullness of time will reveal.
Speaker: Well, let's see how it turns out.
Speaker: But thank you for joining us today.
Speaker: Thank you.
Speaker: Thank you.
Speaker: Now to Brazil.
Speaker: Ana Madeira, our chief Brazilian economist, has been looking at the policies of the nearly two month old Lula administration, and she's here to discuss her findings.
Speaker: Ana, there are concerns among investors about the fiscal outlook.
Speaker: Tell us where things stand at the moment.
Speaker: So indeed, the biggest concern is about the fiscal outlook, especially because we are going to see a shift between the previous government, which was right leaning into this new Lula administration, which is left leaning.
Speaker: And when we look at the initial speeches from all the newly appointed ministers, they have a heavy focus on social support and they point to the return of old policies that we saw during the previous administrations of Lula and Dilma.
Speaker: And we know that...
Speaker: especially during these previous policies that were used, this led to a very big fiscal burden.
Speaker: So the question for this year is, with all that pressure to do more fiscal spending, is the new fiscal rule that is going to be announced this year going to be fiscally responsible and whether it's going to allow for gross debt to GDP to stabilize in the medium to long term?
Speaker: So this is the big concern for this year.
Speaker: And Anna, in your report, you look at some of the policies that have been announced or signals.
Speaker: Can you talk us through some of the main areas of concern and focus?
Speaker: Yes, indeed.
Speaker: So we've got a few policies, a few measures that have been announced since January.
Speaker: And we also look in the report at some of the measures that are being signaled.
Speaker: So they haven't been announced, but they are being signaled.
Speaker: This is as important as the ones that have been announced.
Speaker: So among the measures that have been announced, they do have a sense of déjà vu.
Speaker: So, for example, we have the increase in the ministries that President Lula announced at the beginning of this year when he took office.
Speaker: We also have the announcement of the parallelization of all the privatization projects that were ongoing.
Speaker: And as part of the measures that have been hinted,
Speaker: from the new government, we find a bigger role for the public banks.
Speaker: We find a will to change the state-owned company laws and more recently as well, an attempt to rise the inflation target in order to try and reduce interest rates faster.
Speaker: So Anna, do you think all these fiscal changes will be made?
Speaker: What are you actually expecting for this year?
Speaker: That's a good question because timing, in our view, is going to be very important.
Speaker: We think that despite of all these measures that the new government has been signaling, they are going to focus on, they're going to have two main priorities for this year.
Speaker: One of them is going to be to present the new fiscal framework and the second one is going to be the tax reform.
Speaker: And in these two cases, the economic team is hinting at a new fiscal rule that would keep fiscal discipline and at the tax reform that would simplify the tax system, which is positive in our view.
Speaker: And this is relevant because these two measures, these two reforms are very heavy reforms that are going to require several months of discussions in Congress before being approved.
Speaker: And this is the point that is relevant in our view, because this means that it will need, the government will need to postpone eventual market and friendly measures as a consequence of all that effort and all that time being put into the fiscal and the tax reform.
Speaker: And what this means is that as a consequence, it should limit the big shifts in economic policy in the short term.
Speaker: we end up delaying, if you'd like, a little bit the risks for Brazil.
Speaker: So in our view, if we put it into a nutshell, we can say that for us, Brazil, the risks that we see for Brazil are being more medium term in nature rather than short term in nature.
Speaker: Anna, thank you so much for that update.
Speaker: Thank you, Aline.
Speaker: So that's all from us.
Speaker: If you don't mind, I'll take over and wrap this up.
Speaker: Thank you Piers and Aline.
Speaker: That's all the time the humans here at HSBC Global Research.
Speaker: How for this week's podcast.
Speaker: Special thanks to Mark McDonald, Simon Wells, and Anna Madeira.
Speaker: And of course, to chat GPT and Synthesia.io for giving me a voice.
Speaker: Piers will be off on holiday next week.
Speaker: Who knows, maybe I will be his replacement host from next week alongside Aline Van Dyne.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
