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 Viewpoints, a weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we look at what's next for oil markets with prices surging to their highest levels for over a decade.
Speaker: We assess the impact of the Russia-Ukraine conflict on European Central Bank policy.
Speaker: And we consider what rising uncertainty means for the global economy.
Speaker: This podcast was recorded on Thursday, the 10th of March, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline Van Dyne in New York.
Speaker: It's a turbulent time in the oil markets.
Speaker: Brent prices peaked close to $140 a barrel this week, and President Biden announced a ban on U.S. imports of Russian oil.
Speaker: With the conflict in Ukraine showing no signs of ending soon, the outlook is highly uncertain.
Speaker: We're joined by Gordon Gray, Global Head of Oil and Gas Research, to look at where we could go from here.
Speaker: Gordon, you've been in the industry for 25 years.
Speaker: How does this compare to events in the past?
Speaker: We've had some significant periods of major supply outage.
Speaker: And I'm thinking when Saudi facilities were attacked in 2019 or say the invasion of Kuwait back in 90.
Speaker: But in those sorts of circumstances, the outages of supply were very large, but they weren't hugely long lasting.
Speaker: And as those supplies returned, prices normalized.
Speaker: Here, we're not yet talking about any physical reduction in production.
Speaker: What you have is an ongoing level of political tension, which is resulting in buyers withdrawing from the market for a whole mix of financial and self-sanctioning reasons.
Speaker: And the point here is we have no visibility on when the backdrop, from a political point of view, could change.
Speaker: And how do you expect OPEC and the United States to respond?
Speaker: Well, I think the withdrawal of buyers from this market will probably be compensated by some additional buying elsewhere.
Speaker: So we're assuming a part of these losses will be made up from particularly non-OECD buyers.
Speaker: Beyond that, in the US, shale production is growing already because of prices.
Speaker: I think it will grow that much faster.
Speaker: And we're now looking for US domestic production to grow by more than a million barrels per day, not just this year, but next year as well.
Speaker: As for OPEC, there's not yet any sign they'll accelerate their increases of production, and we're not sure they will accelerate them.
Speaker: We think they will continue them till maybe mid-year, and that could add at least a million barrels a day of supply to the market.
Speaker: Problem is, what it will also do is reduce the remaining spare capacity to levels that are pretty low by historical context, to probably no more than two million barrels per day, which itself brings its own concerns about security of supply.
Speaker: What does this mean for the balance of the oil market?
Speaker: Well, we think even with that growth in US production, even with that higher volumes from OPEC countries, we think the market looks like it's in deficit again this year.
Speaker: a supply deficit for probably 18 months now, we've had inventories of oil and oil products falling to historically low levels.
Speaker: It could get even tighter.
Speaker: That's certainly what the numbers are saying, except for one thing which could bring some relief, which is a release of strategic inventories of oil.
Speaker: And there's already been a coordinated announcement across the US and the other IEA countries for 60 million barrel release into the market over a period of time.
Speaker: To us, those sorts of releases from inventory will have to continue potentially for the whole of this year if this market isn't to get even tighter.
Speaker: Gordon, thanks very much for the update.
Speaker: Thank you.
Speaker: The March meeting always looked to be a difficult one for the European Central Bank.
Speaker: Inflation has continued to surprise to the upside and, as we've just heard, the conflict has pushed energy prices even higher.
Speaker: Simon Wells, Chief European Economist, is here to tell us what the policy makers decided at Thursday's meeting.
Speaker: So Simon, how has the ECB responded to the increasingly complicated backdrop?
Speaker: Well, what it's done really is press ahead with a broad normalization of policy.
Speaker: What it announced today was a slight reversal of what was announced last December and in that now it is going to taper its asset purchases a bit faster.
Speaker: And although it will be flexible and data dependent,
Speaker: If the incoming data through the coming months are in line with how it expects and therefore inflation evolves as it expects it will, the Governing Council of the ECB thinks it will conclude asset purchases completely at some point in the third quarter.
Speaker: And Simon, what are the expectations now in terms of QE?
Speaker: Well, I think the March meeting was broadly in line with what we had expected.
Speaker: We had previously expected them to finish asset purchases in Q3, and there was nothing coming out of the March meeting that was particularly at odds with that.
Speaker: What I would say, though, of course, is that the ECB has always to be mindful of fragmentation risk across the eurozone.
Speaker: And indeed, some bond spreads did widen out today in Italy, for example.
Speaker: And I think that probably puts maybe a bit more pressure on fiscal authorities to find a policy response to the rather crippling energy price squeeze that the eurozone economy is facing.
Speaker: Lastly, Simon, it's a relatively hawkish action.
Speaker: How does that compare to what's being priced into the market?
Speaker: Relative to what's priced into the market, immediately after the announcement, there was about 40 basis points of rate rises priced in by the end of the year.
Speaker: Market expectations may still be a bit overdone in terms of what is possible by way of rate rises this year.
Speaker: After all,
Speaker: The ECB is intending to continue net asset purchases until some point in Q3, and it will not, it says, raise rates before that.
Speaker: So I think at the earliest we might see a rate rise will be in Q3, but a rate rise before that still seems very much off the table.
Speaker: Iman, thanks for the update.
Speaker: Thank you.
Speaker: Of course, the conflict isn't the only headwind the global economy is facing.
Speaker: COVID-19 cases are still very high across much of the world.
Speaker: Inflation is rising and supply chains remain stretched.
Speaker: James Pomeroy, global economist, has been looking through the latest data.
Speaker: So James, let's start with the conflict.
Speaker: What's been the direct economic impact on the global economy?
Speaker: So, so far, the impact has been relatively small in terms of direct trade effects, and that's largely because both Russia and Ukraine in aggregate only make up a very small share of most other economies trade.
Speaker: But where we are seeing a huge impact is in some of the spillovers into commodity prices.
Speaker: So, soaring oil prices, gas prices, particularly in Europe.
Speaker: as well as food prices, so wheat, and some other commodities, so the likes of palladium and nickel that the world relies on from Russia and Ukraine seeing prices soar, and therefore the impact is likely to be on inflation, but also maybe in terms of shortages of some of those products feeding through into global supply chains.
Speaker: So the direct economic impact may be relatively small on a macro basis, but in terms of those spillovers, they're already very noticeable,
Speaker: and we'll have to see how they evolve in the coming weeks.
Speaker: Inflation remains high across many economies.
Speaker: What are you expecting and how are consumers reacting?
Speaker: So there's a lot of things going on in the inflation story.
Speaker: So that headline inflation rate is likely to stay pretty high or move higher because of these higher energy prices and higher food prices in particular.
Speaker: And what we're also seeing is that cost inflation that businesses are facing starting to be passed on a little bit more across the world.
Speaker: So there's elevated PPI inflation numbers feeding through into CPI inflation.
Speaker: But having basically thought that consumers would cut back their spending in response to higher prices, there's very little evidence of that happening so far, both from the macro data in terms of retail sales and consumer spending, but also from what we're hearing from a lot of businesses across the world, that essentially those higher prices are just being eaten up by consumers because demand is very strong.
Speaker: So at the beginning of the year, we've seen households pull down their savings rate rather than cut down on spending.
Speaker: And the big question is whether that is maintained in the course of the coming months, particularly as energy bills rise further and food prices rise higher.
Speaker: So that's the key thing to keep in mind.
Speaker: Will consumers continue to run down savings to maintain consumption or not?
Speaker: James, how do you think central banks will manage this?
Speaker: a really tricky environment for them because you've got high inflation or even higher inflation or more sustained high inflation that typically you would think that would mean to faster pace of tightening or more tightening to come from central banks in the course of the coming months but if we take that alongside the massive amounts of uncertainty that the economy is facing and the squeeze to households that
Speaker: could weigh on the growth in the second half of the year or in the coming months as well, then central banks need to try and weigh those two things up against each other.
Speaker: So I think it's going to be on a central bank by central bank basis as we get a number of big central bank meetings in the course of the next few weeks.
Speaker: It'll be interesting to see how they individually treat this trade-off.
Speaker: And that will vary by central banks.
Speaker: So we may see some acting with a little bit more caution, which is what markets seem to be pricing in.
Speaker: We may see some saying, well, inflation is really high.
Speaker: We haven't seen any impact on consumer demand at the moment.
Speaker: So we're going to push on with our tightening plans.
Speaker: And that will be very much a central bank by central bank call.
Speaker: James, thanks very much.
Speaker: Thanks very much.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Gordon Gray, Simon Wells, and James Pomeroy.
Speaker: Thanks very much for listening, and 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.
