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The Macro Viewpoint - Russia-Ukraine escalation, trade update, China’s global integration
15 Plays3 years ago
In this edition we assess the economic implications of the conflict between Russia and Ukraine, look at how continuing trade disruptions are squeezing business margins and analyse China’s global trade and investment links. Disclaimer: To stay connected and to access free to view reports and videos from HSBC Global Research click here.
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Transcript
Introduction to HSBC Global Viewpoint
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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Thank you for listening.
Key Reports from HSBC Economists
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You're listening to the HSBC Global Research Macro Viewpoint, a roundup of our key reports published over the past week by our economists and strategists.
Economic Implications of Geopolitical Tensions
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Coming up this week, we look at the economic implications of the geopolitical tensions between Russia and Ukraine.
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We examine how continuing trade disruptions are squeezing business margins.
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And we consider whether China's trade and investment links with the rest of the world are weakening.
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This podcast was recorded on Thursday the 24th of February 2022.
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Our full disclosures and disclaimers can be found in the link attached to this podcast.
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Hello, I'm Mary Watkins.
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And I'm Piers Butler.
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There's only one place to start the programme.
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Tensions between Russia and Ukraine have escalated significantly this week.
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We're going to assess the economic implications of the conflict now with Janet Henry, Global Chief Economist.
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Janet, thank you for joining us.
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Hello, Piers.
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So, Janet, can you just summarise the initial impact of the conflict in financial markets?
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Well, it's been a typical risk off kind of move.
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So you have seen the dollar rally.
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You've seen equity markets come under pressure.
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Bond yields have edged a little bit lower.
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And one of the key impacts has been a further leg higher in energy prices.
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Obviously, oil and gas prices have already been rising in recent weeks.
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And now we've seen oil hit about $105 to the barrel and in some cases about a 30% plus rise in wholesale gas prices.
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And what are the likely economic effects if this continues over several weeks, maybe even months?
Impact of Energy Prices on Inflation
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Well, I think already we're starting to see the impact of energy prices.
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And we need to bear in mind, of course, that this is happening at a time when inflation in most parts of the world were already at multi-decade highs.
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So if oil continues to rise or even stays at these levels, then energy inflation is going to stay quite elevated.
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And then depending what happens with further sanctions, and we have had the EU and the US over
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warned that more significant sanctions will be coming through.
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If that extends to trade, we'll see a direct trade effect coming through.
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And when we look globally, it's Europe that is likely to be most affected.
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Russia exports about 10% of world oil supply.
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But Europe gets nearly 40% of its gas supplies from Russia.
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So higher costs or any disruption to gas supplies will affect Europe more significantly.
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But globally, everyone will see the impact on inflation from higher oil prices.
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And that really is something that weighs on consumers.
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already with inflation above wage growth that exacerbates the cost of living squeeze and typically you would expect this, therefore, to mean significantly lower consumer spending figures.
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But of course this is happening at a time when in Western economies in particular, they had accumulated a lot of savings so.
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It's uncertain how much growth is going to slow, but already we were on a slowing track and this is taking a bite out to consumer incomes.
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But also it means it's the inflation numbers are going to continue to deteriorate and take a long time to start coming down.
Challenges for Central Banks
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And in terms of the policy outlook, what changes do you think are likely to come through?
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Well, central banks globally have been facing already ever higher inflation at a time when growth was already set to slow down.
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And this latest leg higher in energy prices, if it persists and takes inflation even higher and poses even greater downside risks to growth, then that challenge actually becomes greater.
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But potentially the Fed and the ECB face different challenges.
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Europe's likely to suffer a little bit more on the growth side, depending on how the situation evolves from here.
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Whereas in the case of the US, because of the wage pressures that are starting to build when inflation is already running at seven and a half percent, this is unlikely to alter the likely course of Fed policy tightening through the course of 2022.
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Janet, thank you very much.
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Thank you, Piers.
Business Margins and Logistics Issues
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Those tensions that we just heard about are adding further uncertainty to the global trade outlook.
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For more on that and the continuing trade disruption, we're joined by Shanela Rajanagan, trade economist.
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So, Shanela, how are the ongoing trade disruptions affecting businesses?
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So ongoing logistics disruptions, component shortages and also higher input prices are acting as a squeeze on business margins.
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And now businesses across all sectors are seeing their margins squeezed, although it is more pronounced in the technology sector and for food and beverage companies.
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And when it comes to the geographical impact,
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It is mainly businesses in developed markets that are tending to see their margins squeezed rather than those in emerging markets.
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Now, there is some sense that input price pressures might be starting to ease.
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However, the risk of higher energy prices still remain, and that could certainly feed through into higher input costs.
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So are there signs that these disruptions are starting to ease?
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So there are some signs and the Lunar New Year holiday recently did provide some respite for US West Coast ports to clear some of their cargo backlog.
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However, these ports still remain extremely congested.
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And in January, they did handle a record number of volumes.
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On the container freight rates side, freight rates are coming down a little bit, but they still do remain elevated around $15,000 to send a 40 foot container from Asia to the west coast of North America and to Europe.
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We've just heard from Janet about the geopolitical tensions.
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What impact are they having on
European Trade Flows and Energy Reliance
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trade?
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So at the moment, the geopolitical tensions risk disrupting European trade flows, especially given that Europe is quite heavily dependent on Russia for its gas supply.
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And indeed, some European countries like Finland and Latvia source over 90% of their gas supply from Russia.
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And then in addition to that, there are some tensions ongoing between Lithuania and mainland China.
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And as a result, Chinese imports from Lithuania fell around 90 percent year on year in December 2021.
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So a few things going on at the moment.
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The US did end up stepping up its gas exports to Europe.
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So there is some trade diversion as well as a result of these tensions.
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And finally, are there any policy developments that we should be aware of?
Global Trade Dynamics and Agreements
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Yes, so with Brexit, UK-EU trade talks over Northern Ireland continue, although they haven't quite reached a conclusion just yet, so they're missing their February deadline.
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Meanwhile, the UK continues to make good progress in its accession to the CPTPP.
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It has now entered the second phase, which is market access negotiations with the bloc.
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And when it comes to the Regional Comprehensive Economic Partnership, now that deal will take effect for Malaysia on the 18th of March.
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Shanela, thanks for the update.
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Thank you.
China's Market Influence and Structural Factors
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We end this week in Asia where our economics team have been testing the view that China's global trade and investment links have diminished.
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We're joined by Chu Hongbin and Erin Xin.
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Chu Hongbin, what has your research found?
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There are a lot of the discussions about decoupling.
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In other words, a reduction in China's economic links with the rest of the world.
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However,
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Our latest work suggests that, on the contrary, China's global market share in both trade and investment has increased significantly in the last three years, despite the challenges such as the pandemic, as well as the China-U.S. trade tensions.
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And why is this?
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Apart from some technical factors, we also found that there are some structural factors behind this kind of increase in China's competitiveness in the global trade as well as investment.
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We believe that this kind of trend, in other words, the deepening of China's integration with the rest of the world, will continue in the coming years, not least because Beijing's policy support in the years ahead.
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So Erin, can you put some numbers on this?
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We've been seeing over the last few years that China's global share of exports has risen considerably to being over 15% of the global total.
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And it's now the largest in the world.
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And in terms of FDI inflows, China is also risen considerably.
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And it's now the second largest in the world, right behind the US at 15% of global FDI.
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And what are the factors behind this?
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For China, in terms of trade, it's really benefited from a first in first out approach that's allowed its production to be quite high while other countries were still grappling with the COVID situation.
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But there's also underlying structural factors that have been supportive of China's continued growing trade share.
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We see a growing market share of medium and high tech manufacturing products, and this is stemming from China's large population of skilled labor.
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It has the largest population of STEM graduates at 4 million per year.
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There's also been rising innovation capacity over the last few decades, where China is now topping patents applications globally.
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We also have a very dynamic domestic market that allows manufacturers in high-tech fields to continuously iterate, which in turn allows them to have higher quality products to bring to the global market.
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Going forward, we see continued policy support, which will help continue to lift China's trade and investment
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We see this coming in the form of more tax incentives and credit support in the coming years.
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Hongbin and Erin, thank you very much.
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So that's all from us today.
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Thank you to our guests, Janet Henry, Shanela Rajanagam, Shu Hongbin and Erin Zin.
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Thanks very much for listening.
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We'll be back again next week.
Conclusion and Further Resources
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Thank you for listening today.
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This has been HSBC Global Viewpoint Banking and Markets.
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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.