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The Macro Brief - Competing global forces
786 Plays12 days ago
James Pomeroy and Shanella Rajanayagam look at what the latest data tell us about the global economy and review where key trade negotiations stand.
Click here for appropriate Disclosures, including analyst certifications, and Disclaimers that must be viewed with this podcast: https://www.research.hsbc.com/R/101/Lc6TLCR
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Transcript
Introduction to HSBC's Macro Brief Podcast
00:00:10
Speaker
Hello and welcome to the Macro Brief from HSBC Global Investment Research, the podcast that looks at the issues driving financial markets across the world. I'm Peter Stegall in London.
Impact of Middle East Tensions on Markets
00:00:20
Speaker
As we record, the situation in the Middle East remains unpredictable, with recent military action driving equities down and oil prices up. Just before this, however, financial markets had enjoyed some weeks of relief with oil prices falling back as the Strait of Hormuz began to reopen.
00:00:35
Speaker
So what do the latest data tell us about the global economy? In this week's podcast, we're also discussing some of the hot topics in world trade and where key trade negotiations stand.
Global Economists Discuss Trade and Data
00:00:45
Speaker
I'm joined in the studio by global economist James Pomeroy and trade economist Schnella Rajanagam. James and Schnella, welcome back to The Macrobrief.
00:00:53
Speaker
Thank you. Great to be here. So James, we'll start with you. You've been looking at the global economic data, which broadly covers the period leading up to and following the US and Iran signing a deal and before the latest military action.
00:01:06
Speaker
What was the picture like? So it's been a very mixed picture. So over the course of the last few months, we've been having so essentially two scenarios, a base case where oil prices fell back quite quickly and a more adverse scenario where oil prices stayed much more elevated.
00:01:20
Speaker
And over the course of the last few weeks, we have seen that probability of the base case increase a little bit. So your sort of average expected growth rate, etc. starts to look a little bit better. Now, of course, we're still in this world where those two scenarios are live. But a world where oil prices are even $80 a barrel versus $100 a barrel is going to be better news for the global economy in terms of keeping inflation lower, in terms of lifting up growth.
00:01:43
Speaker
But a couple of things that we have really clearly seen is that inflation is just not broadening out. We were very worried over the course of the last couple of months, you'd start to see higher energy inflation feeding through into other pockets of inflation. You're just not seeing it in almost every economy across the world, particularly major developed economies. where core inflation, particularly when we strip out things like transport prices and eating out and those sorts of things, um has stayed really, really under control. And actually, that's a world in which central banks have been able to say, maybe we don't need to raise rates. and That is a much more benign environment, even despite the latest actions, than we were maybe expecting a couple of months ago.
Growth Drivers: AI, US Resilience, and Europe's Challenges
00:02:20
Speaker
So two related questions. What's driving growth and who's faring well and which economies aren't quite up to speed? There's a big divergence at the moment. The other big theme in that global growth story is the AI build out. And you can see this really, really clearly in a lot of the Asian data. So in Korea and Taiwan in particular, but also a lot of other economies tied into that supply chain. There is potentially a little bit of softening in some of the output data in those economies.
00:02:46
Speaker
But this is off of really, really strong growth rates in the first quarter of the year. you're talking about extraordinarily strong growth rates in Taiwan in particular. You're also seeing this in the US very clearly, that build out of the the data center story, the investment in AI, and software, hardware, everything associated with that build out is really helping to underpin growth.
00:03:06
Speaker
But at the same time, it's not just a story of AI. You are seeing a bit of resilience in consumer spending. particularly in the US, where, as I say, there is this inflation shock, but it's not quite as bad as it could have been. And consumers are continuing to spend. And you can see this in the hard data. You can see this in retail sales figures. You can see it in just looking at your TV screens and how many people are at the football matches at the moment. You know, there is actually quite a lot of money being spent, particularly in the US economy.
Inflation Concerns and El Nino's Impact
00:03:30
Speaker
On the other side of the coin, Europe is still a laggard. I'm not really benefiting from either of those trends. You're not seeing a real boom in consumer spending. You're not seeing that huge AI lift, either in terms of the investment or in terms of the trade side. So Europe still is probably the region of the world where the optimism is much, much more muted.
00:03:50
Speaker
So you said inflation has been relatively well behaved or more well behaved than it might have been expected. What factors could make the difference there on inflation as we look ahead? There's a lot of things to worry about. There's this sort of AI story that could help to lift inflation in some areas, some of the bottlenecks, lifting costs for businesses. The one area we are still worried about is food.
00:04:09
Speaker
Food inflation has got a long pathway here to pick up, partly because of El Nino. That's going to cause some disruption to crops over the course of the next few months into 2027.
00:04:20
Speaker
um Some of the sort of spillovers of the conflict as well were lift food prices, higher fuel prices, shipping prices, plastic prices in terms of packaging. You've also got higher fertilizer prices, of course, which we had. Maybe they've come back down a little bit. But broadly, you are talking about food inflation moving upwards. What, as I said, has been encouraging is you're not seeing really any sign of this rippling out into other forms of goods, other forms of services. And as long as that side of things stays contained, I think central banks will be pretty happy.
Strait of Hormuz Traffic and Trade Agreements
00:04:47
Speaker
So you've mentioned shipping prices, and that might be a good moment to turn to Schneller. So Schneller, before the latest escalation, was traffic in the Strait of Hormuz getting back to normal? What what was the situation like?
00:04:58
Speaker
Yeah, that's right. So since ah the US and Iran struck their memorandum of understanding, vessel traffic did start to recover via the Strait of Hormuz. It wasn't quite back to the 100 to 140 vessels trafficking each day that we did see prior to the conflict, ah but it was more around 30 to 40 vessels transiting each day.
00:05:18
Speaker
So there was that kind of return to some form of normalisation. Obviously, it's still a very live situation. There continues to be attacks on commercial vessels even after the Memorandum of Understanding was signed. And clearly, ah the path to normalisation will continue to be quite bumpy. And the question really is, we even return to what it was like pre-conflict, given that we have now seen that the strait can be closed at a moment's notice.
00:05:46
Speaker
Thanks for that, Shanela. That's a good time for a quick break. We'll be back with more insights shortly.
00:05:54
Speaker
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00:06:08
Speaker
Now, back to today's episode.
00:06:14
Speaker
So Schneller, even leaving aside the straighter four moves, there's plenty of moving parts when it comes to trade policy and international agreements. Markets had been looking ahead to the 1st of July when the US had said it intended to renegotiate the USMCA, the agreement with its partners in Mexico and Canada.
China-EU Trade Dialogue and Global Cooperation
00:06:32
Speaker
What happened? So the US actually said that it will not be renewing the USMCA at this stage, which was a little bit of a surprise because we did think that nothing actually would be announced at that trilateral meeting. But what it means in practice is that the deal will continue to remain in in effect for the next 10 years out until 2036. And the partners will engage in annual reviews. until they either agree that they do want to renew the deal, in which case it will extend for a further 16 years, or they decide that the deal will sunset after 10 years. So nothing too much changes in practice, and clearly ah negotiations will be ongoing. It's actually been quite constructive because the US s has been engaging in formal negotiations with Mexico in earnest. It has a third round of negotiations with Mexico scheduled for the week commencing 20th of July.
00:07:25
Speaker
On the other hand, its ah talks with Canada have been a bit more informal. But again, this is not too dissimilar from how the USMCA was negotiated in the first place. So it was basically a bilateral deal with Mexico and then Canada was brought into the fold. ah In terms of ah what the parties are talking about, ah clearly tighter rules of origin, particularly with regard to autos and other industrial goods, is high up on the agenda. along with ah things like Canadian dairy practices and also things around labour reforms in Mexico and economic security writ large.
00:08:03
Speaker
So staying with negotiations, China and the EU also held talks recently. What was on the agenda there? That's right. So ah there have been a bit of concerns from the EU side about its bilateral trade imbalances with China. and The stat that's getting a lot of attention is that the EU's goods trade deficit with China is about 1 billion euros per day. And of course, you know, this is not necessarily a new issue, but it's certainly come to the fore, especially with everything else that's going on ah globally. So there was a ministerial level meeting recently between the EU and China. They basically agreed to deepen cooperation in number of areas, including rebalancing trade and investment and also on WTO reform.
00:08:48
Speaker
Interestingly, parties also agreed to ah construct some sort of trade monitoring mechanism ah whereby they'll essentially share trade data so they can monitor any surges in imports or exports and then escalate it as necessary.
00:09:01
Speaker
ah So I think this meeting was quite constructive. They have agreed to meet again at the ministerial level in October. ah So that's, you know, three months. I don't think it's quite enough to fundamentally alter trade imbalances. But clearly, this was a step in the right direction. it signals some sort of de-escalation in the fact that they are still willing to talk to each other.
00:09:23
Speaker
Well, talking of steps in the right direction, you've recently said that closer relations between the EU and the CPTPP, that's the economies of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, could become a third pillar of trade.
00:09:38
Speaker
What do you mean by that? Well, as we've talked about, you know, global trade is still under a lot of pressure. There's a lot of strain in supply chains. And so the idea of this third pillar is that you have like minded countries that are largely trade liberal coming together to kind of strengthen supply chains, diversify trade. and boost supply chain and resilience. The EU and the CPTPP, they are quite trade liberal in general. They've been advancing, ah you know, trade liberalisation between the members. And actually in November, they've kind of decided to formalise this ah corporation that they have. So they're working to deepen cooperation, particularly around WTO or reform and digital trade. They've also started to draft some provisions to not raise tariffs on each other. ah ah so I think you know this could ah almost act as a bit of a counterweight to what's going on with the US and China in this particularly trade volatile world. We don't think you know a comprehensive trade deal between the two is there in the near term. That will still take some time to negotiate. But certainly it's beneficial, especially if other countries also decide to come on board.
00:10:52
Speaker
so there are clearly challenges, but bright spots too. Certainly, especially in this time where there is a lot of trade volatility. It's really encouraging to see a number of economies continue to advance trade liberalisation.
Podcast Wrap-up and Contact Information
00:11:05
Speaker
All right, thank you. So one final question for you both. What will you be watching out for over the coming months? What's the key data point or event that you've got penciled in your diaries? um James, perhaps we could go to you.
00:11:16
Speaker
The most important data is quite simply how much traffic goes through the Strait of Hormuz, because that basically drives which of those two scenarios we're talking about. And the more traffic that goes through, the more comfortable we are of our base case and probably the brighter the economic outlook is.
00:11:29
Speaker
mean, completely agree with James, but also the 24th of July is when the US's 10% tariff is due to expire. So we'll see what new tariff regime kicks in by then. Fantastic. James, Shanela, thank you so much for sharing your ideas today.
00:11:43
Speaker
Thank you. Thanks, Peter.
00:11:50
Speaker
That was James Pomeroy and Schnella Rajanayagam on the latest developments in the global economy and trade. If you'd like to know more about Asia, then listen to our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put the region's economics and markets into context.
00:12:05
Speaker
And if you'd like to get in touch, please contact us at askresearch at hsbc.com. So that's a wrap for this week. Today's episode was hosted by me, Peter Stegall, and produced by Tom Barton. Don't forget to like and subscribe to The Macro Brief wherever you get your podcasts.
00:12:22
Speaker
Until next week, thanks for listening.