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 on today's podcast, we assess the outlook for US policy as the Federal Reserve paves the way for a likely rate rise in March, even as global market volatility continues to surge.
Speaker: We consider whether arguments for imposing price controls to help tame inflation stack up.
Speaker: And we find out why the push for net zero could throw a potential lifeline to nuclear energy.
Speaker: This podcast was recorded on Thursday, the 27th of January, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Aline Van Dyne.
Speaker: We begin this week in the US, where at its meeting, the Federal Reserve signals its intention to hike interest rates in March.
Speaker: In addition, hawkish comments further weighed on already volatile equity markets and other risk assets.
Speaker: For more on that and the other key takeaways from the meeting, let's speak to Ryan Wang, US economist.
Speaker: Brian, there were some quite interesting comments as well from Fed Chair Jerome Powell.
Speaker: Talk us through the highlights.
Speaker: Chair Powell made a series of interesting comments in his press conference.
Speaker: He described how economic conditions are very different today than they have been in previous cycles, with inflation running high, with labor market conditions very tight.
Speaker: And he talked about other issues as well.
Speaker: When asked about recent declines in U.S. and global equity markets, he described how while the Fed is always paying attention to financial conditions, he didn't consider recent developments to be a near-term risk to financial stability.
Speaker: And so these comments and others where he talked about the idea that inflation continues to run higher than the Fed has been looking for and that
Speaker: The FOMC had updated its economic projections that he personally might have even boosted his core PCE inflation forecast by a few tenths.
Speaker: All of this left markets with a hawkish interpretation of where the FOMC might be headed with its policy later this year.
Speaker: So on the policy front, what does this mean for interest rates?
Speaker: What we think is really going to be important is the course of inflation later this year.
Speaker: The Fed is still of the view that inflation will gradually decline over the course of 2022.
Speaker: And we have a similar view that core PC inflation could be on the downward trajectory as early as this spring.
Speaker: And so this will be crucial to
Speaker: the outlook for what the Fed eventually delivers.
Speaker: If inflation stays higher than expected, well then the Fed could end up raising rates more quickly than we anticipate and in greater magnitude.
Speaker: But conversely, if inflation does begin to cool off, well then the Fed will feel less pressure to tighten monetary policy.
Speaker: Now there's of course also another prong to this, which is the balance sheet.
Speaker: What are we expecting there?
Speaker: Because quantitative tightening is on the horizon, isn't it?
Speaker: That's right.
Speaker: And here we've adjusted our expectations a little bit following the latest FOMC meeting.
Speaker: We now expect that quantitative tightening will commence sometime in the third quarter of this year, following a formal announcement in either June or July.
Speaker: And furthermore,
Speaker: we've taken the view that in the first year of balance sheet shrinkage, the total quantum of a reduction could be as much as $1 trillion.
Speaker: And so the Fed announced at its latest meeting that it would still rely primarily on changes to its reinvestment policy when it decides to start shrinking its balance sheet, as opposed to outright sales of securities.
Speaker: But nonetheless, this will be another form of
Speaker: monetary tightening that markets will have to grapple with sometime later this year.
Speaker: Ian, thanks for the latest update.
Speaker: Thanks, Elaine.
Speaker: On this hot topic of inflation, Stephen King, Senior Economic Advisor, has been looking at a new narrative that has emerged recently, which argues for targeted price controls rather than tightening monetary policy.
Speaker: Stephen joins me now.
Speaker: Stephen, welcome to the podcast.
Speaker: Well, thank you, Piers.
Speaker: Stephen, is it fair to say that inflation is no longer being seen as a transitory phenomenon?
Speaker: Well, of course, Jay Powell, the chair of the Fed, has already banned the use of the word transitory.
Speaker: But when you look around the world, it's pretty obvious that inflation in many countries is...
Speaker: significantly higher than expected and also spreading across a range of goods, services and labour markets.
Speaker: So I think it is much more entrenched, much higher than people might have feared or expected six months or a year ago.
Speaker: And that, I think, is a major economic policy problem.
Speaker: Talking about policy, what are the implications in terms of government policy?
Speaker: Well, the standard approach, of course, to dealing with inflation is to tighten monetary policy, to raise interest rates, which is the job of central banks.
Speaker: But what is odd at the moment is that because of the pandemic, because of ambitions to build back better, because some of the inflation is associated with supply chain disruptions of one kind or another,
Speaker: there's a sort of sense in some quarters that this is not your normal inflation therefore can be dealt with in other ways and one way it's been talked about quite a lot and in some cases enacted upon is the idea of price controls whereby you effectively have government edicts that prevent prices from rising beyond a certain level across a range of different industries in the hope that by imposing these kinds of rules you can prevent inflation from rising
Speaker: In the report you just published, you argue that price controls would be a mistake.
Speaker: Why is that?
Speaker: Well, the evidence in favour of them is not really that compelling.
Speaker: And the first point to note is that some people have said, well, inflation has picked up in the US in particular, and it's also been correlated with a big increase in profits.
Speaker: So it follows that it's greedy companies taking advantage of the pandemic to push through price increases that are basically unfair on consumers.
Speaker: And from a political point of view, you can see why this narrative might have some attractions.
Speaker: The problem, of course, is that
Speaker: The profit sharing us GDP has been rising for a good two decades or so, and most of that time has been associated with inflation has been too low rather than too high just to suddenly suggest that big increases in profits are associated with price increases seems to be at variance with history.
Speaker: Second thing that's worth noting is that when you break down us profits by sector.
Speaker: the sectors which have seen the biggest increases in profits over the last two years are often the sectors which have seen the smallest increases in prices so when you actually look at this in some more detail it's quite difficult to see the connection in a sort of underlying sense between profits and price increases and of course the reality is that some of this inflation that we're seeing is a global it's a worldwide phenomenon about energy prices for example if you were to
Speaker: try to impose price controls on energy supplies in one particular country, well, you can impose a price ceiling on them.
Speaker: But that simply means they can't pass on the wholesale price to their customers, which in turn means that they're likely to go bust.
Speaker: So you replace one problem, namely inflation, with another problem, namely business failures of one kind or another.
Speaker: So for all these reasons, price controls seem like a pretty bad idea.
Speaker: And as is often the case, there are lessons to be learned from history.
Speaker: Yeah, so some people seize upon the sort of end of World War II and its immediate aftermath and say, well, there were price controls then, so they worked then.
Speaker: What's the problem today?
Speaker: Well, the problem today really is President Nixon, because he imposed price controls back in 1971.
Speaker: There was a strong, firm belief at the time that inflation could be tackled through combination of price controls and wage controls.
Speaker: And there was a price commission, a wage commission set up to try to
Speaker: control all of this and all that happened of course was that markets were unable to work because prices couldn't move relatively which meant of course there was a misallocation of resources and activity was lower than you're otherwise likely to be and of course the fundamental problem which was excessively loose monetary policy was not dealt with and so you ended up with overly loose monetary policy
Speaker: price controls and help to pave the way to stagnation by a combination of too high inflation and too little activity.
Speaker: And I think the danger today is that if you simply say you need price controls because monetary policy isn't going to work or it's not appropriate, you're likely to end up the same kinds of risks.
Speaker: So inflation doesn't easily go away.
Speaker: And at the same time, you just disrupt your supply chains even further.
Speaker: So at the end of the day, I think the price controls, frankly, are a really bad idea.
Speaker: Stephen, that's very clear.
Speaker: Thank you for joining us.
Speaker: Thank you.
Speaker: And we finished this week in the energy sector and the debate about how the world can meet growing demand whilst cutting emissions.
Speaker: Two of our energy analysts, Tarek Solomon and Adam Dickens, have been looking at the divisive issue of nuclear energy and the role it may play in the transition to a net zero carbon economy.
Speaker: They join me now.
Speaker: Tarek, why is nuclear in focus now?
Speaker: Well, the recent focus, particularly in developed markets, has been driven by the climate debate and whether we need more nuclear to be part of a net zero emissions solution.
Speaker: It's not a yes, no answer, but there's some obvious attributes that nuclear has that lend itself to playing a role.
Speaker: It's large scale baseload electricity generation using a proven technology and it's low carbon.
Speaker: And nuclear is meaningful today.
Speaker: It generates about 10 percent of global electricity, more than wind and solar combined in 2020.
Speaker: but it's had a checkered history and global capacity has stalled in the last decade.
Speaker: It almost needs to, as a result, reinvent itself.
Speaker: And the IEA think that capacity needs to double between now and 2050.
Speaker: So it's not a silver bullet that getting to net zero will be difficult if we don't deploy more or we shut down what we have.
Speaker: And our view that doesn't give nuclear a clear path, but we think it needs to play to its strengths and address some of its key weaknesses.
Speaker: You mentioned the checkered history.
Speaker: What are some of the issues that nuclear has to overcome to become an energy choice?
Speaker: Well, I think the first thing to say is no energy choice is perfect.
Speaker: There often are as many pros as they are cons, but in the case of nuclear, some of these are quite specific.
Speaker: There's a perception problem.
Speaker: It's a polarizing energy choice, public opinions and that of governments can be quite strong in one direction or the other, usually around the issue of safety.
Speaker: And we saw that bear out in the debate around its inclusion in the EU's guidelines around sustainable investing or the taxonomy.
Speaker: costs are another issue.
Speaker: Overruns and project sort of budget blowouts have become increasingly common at nuclear.
Speaker: And then there's this issue around the toxic waste that is a result of using it as an energy source.
Speaker: There's no real consensus on how to deal with it and what the risks are in the long term around that.
Speaker: One of the things you looked at are the differences between emerging and developed markets.
Speaker: Adam, can you talk us through the experience in Europe?
Speaker: Of course, yes.
Speaker: The European
Speaker: nuclear industry is shrinking.
Speaker: We've got half of, if we take the EU plus Switzerland and the UK, half of the countries have no nuclear, have no intention of having any, and two thirds of the rest have nuclear but don't intend to replace the plants that they have when they cease production, leaving a small amount of fans which want to renew nuclear through rebuilding part of what is going to disappear over the next few years.
Speaker: We have a fleet which is 35 years about on average in Europe with nothing built in the last 15 years.
Speaker: And those opening over the next 10 years, only actually opening because they're so late.
Speaker: They should have actually opened in the last decade.
Speaker: Overall, nuclear is shutting about twice as fast as it's opening in Europe with some new builds certainly coming up later on into the 20s and the 30s, but not enough really in our view to stop this inextrable decline of the nuclear industry.
Speaker: Now, Tarek, there is a slightly different picture in emerging markets, isn't there?
Speaker: That's correct.
Speaker: So in this report, we get insights and input from regional analysts who provide the picture from Asia and Russia, as well as Europe and the US.
Speaker: And as Adam described, whilst most developed markets have the most pressing emissions goals, they are in fact struggling to decisively choose a path around nuclear.
Speaker: So the large majority of future expected growth in nuclear capacity is going to come from the emerging world.
Speaker: often with a view to meet growing energy demand rather than explicitly around climate change.
Speaker: China, for example, is set to have the largest nuclear fleet by 2050 at just under half of global capacity.
Speaker: Russia's national nuclear energy company is the most active today in terms of building reactors with a project backlog of around $140 billion.
Speaker: So the activity at the moment now is in the emerging world and the developed world is somewhat pondering its future.
Speaker: And looking ahead, Tarek, are there any innovations to highlight?
Speaker: The more current innovation is around small and modular reactors.
Speaker: And as the name suggests, this is the idea that making nuclear reactors smaller, simpler, more nimble, and ultimately, hopefully, cheaper by avoiding some of the pitfalls of larger units like expensive and often delayed construction.
Speaker: Now, these small modular reactors are part of, for example, the UK's 10-Point Climate Plan.
Speaker: and Rolls-Royce has planned to develop 10 of these by 2035, so more of a next 10-year story.
Speaker: There's capital that's been raising both on the public and the private side to fund that, and that seems to be moving along quite quickly.
Speaker: The slightly more horizon innovation is all around nuclear fusion, which is the holy grail, I guess, of limitless carbon-free energy.
Speaker: But one could always point to the fact that it's always been around the corner.
Speaker: And even though there's more money and more R&D going in it today, there's no real immediate sign of commercialization just at the moment.
Speaker: Tarek and Adam, thanks very much for talking to us.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Ryan Wang, Stephen King, Tarek Solomon and Adam Dickens.
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.
