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The Macro Viewpoint - ECB hikes, FX drivers, trade challenges
27 Plays3 years ago
We assess the outlook for Europe’s monetary policy following the ECB’s latest rate hike, consider what’s next for the EUR and USD, and look at what to expect after the global trade boom. 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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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.
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Make sure you're subscribed to stay up to date with new episodes.
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Thanks for listening, and now onto today's show.
Assessing Europe's Monetary Policy Outlook
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You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our economists and strategists across the globe.
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Coming up this week, we assess the outlook for Europe's monetary policy following the European Central Bank's latest rate hike.
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In the currency markets, we consider the prospects for the euro and the dollar.
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And we look at why the world continues to face trade challenges, despite supply chain pressures easing.
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This podcast was recorded on Thursday, the 27th of October, 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 Piers Butler.
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And I'm Aline Van Dyne.
ECB Rate Hike and Market Interpretation
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We begin this week in Europe, where the ECB is continuing to tighten monetary policy, having just concluded its October meeting with another hefty rate rise.
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Let's get the details from Fabio Balboni, senior European economist.
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So Fabio, what did the ECB do?
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Well, first of all, the ECB did increase all rates by 75 basis point.
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That's the second consecutive 75 basis point rate rise.
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So another oversized rate rise by the ECB, taking the depo rates to one and a half percent and the main rate to 2%.
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So that was as expected in line with our expectation as well.
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Of course, we've seen some central banks starting to take down
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the foot off the accelerator in terms of rate rises recently, but for the ECB, given the delayed start in terms of the rate hiking cycle and with inflation almost a double digit, a 9.9% in September, really continuing with those large rate rises seemed widely expected.
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Fabio, the market seemed to respond by interpreting this as somewhat dovish.
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Is this indeed a dovish pivot in your view?
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Well, indeed, there were some dovish elements today, and we wouldn't say that it was as far as a dovish pivot.
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But for instance, in the initial statement, the ECB took off the intention to do
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do several more rate rises.
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They did say they want to increase rates further, but the sentence saying there will be several further rate rises has been dropped.
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Christine Lagarde did reiterate that the intention is to continue to increase rates until when inflation is not back at 2% in the medium term.
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So clearly, we are still quite a long way off from there.
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But they also said, however, which we think is interesting, that rather than simply looking at the current inflation outturn, the ECB will also be taking into consideration the implication for inflation of a possible recession.
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So that's a bit of a change in language.
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So far, the ECB didn't see in their central case a recession, unlike us, which we think a recession is coming in the eurozone.
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And they also said that they would take into consideration the impact
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of the policy action taken so far on inflation going forward.
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So certainly it does seem that relatively to the very hawkish consensus that we have seen so far in the ECB, within the ECB, as the recession gets closer,
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some of the doves within the governing council are starting to find their voice again.
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So to that aspect, yes, it can be seen as a bit of a dovish twist.
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And it does chime with our view that the ACB will keep raising rates in December and February, but then they will pause when the recession starts to bite.
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Any other policy measures of note?
Changes to TLTROs and QE Tightening
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Well, very briefly, there were other policy measures announced.
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The most notable was a change of the terms of the targeted longer term refinancing operation, the TLTROs.
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And these are cheap loans provided to the banks.
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So the ECB made those loans less generous, effectively taking off a lot of the juice for the banks from the 23rd of November.
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The terms will be changed.
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And the expectation is that as a result of that, more banks will repay early.
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some of those loans, and that will help shrinking the balance sheet.
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We do not think, however, it will solve some of the problems that we have seen in terms of collateral squeeze or shortage of short-end bonds, for instance.
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So we still think that possible further measure might be needed to alleviate some of those pressures.
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And finally, which is potentially a good news, the ACB did not discuss a possible quantitative tax
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tightening yet.
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So there's been some noise hinting to possible discussion already starting at this meeting.
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However, Christine Lagarde, the president of the ACB has been very clear.
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The intention is to start this discussion at the December meeting.
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So QT is very much on the agenda.
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It seems likely that it will start at some point next year.
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Of course, it will be a gradual start, but it could have major implication, particularly for some of the peripheral sovereign bond markets and most notably Italy, given its high debt and high deficit, which means a lot more of sovereign bond issuance will have to be absorbed by the market.
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Fabio, thank you so much.
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Thank you very much.
Challenges for the Euro
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Let's move on to developments in the currency markets now.
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We're joined by Dominic Bunning, head of European FX Research, to look at what that ECB meeting means for the euro.
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And ahead of the November Fed meeting, Dom has also been looking at the prospects for the dollar.
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He joins me now.
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So, Dom, a big hike from the ECB.
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Is that a positive for the euro?
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Thanks, Piers.
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Look, in our view, it's not really that positive for the euro, firstly, because that 75 basis point hike was fully expected by the market, fully priced in.
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And what really we think is going to matter is what happens going forward.
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How much is the ECB going to be able to maintain that hawkishness in the months ahead?
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And we're somewhat sceptical as to whether they will be able to keep that hawkish momentum, given that the economic story has deteriorated so much.
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So from our perspective, it's actually going to be harder and harder for the euro to maintain any gains.
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And actually, in the aftermath of the meeting, you have seen the euro sell off a little bit already.
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And that really lines up with our way of thinking that the euro is going to struggle to get much upside momentum from here.
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So what factors are going to influence the euro going forward?
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So firstly, on that cyclical perspective, you know, the degree to which the ECB can deliver those rate hikes, but also the degree it can deliver them without negative economic consequences.
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And that obviously is a very, very tricky thing for the ECB to achieve.
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So that cyclical story, I think, is still somewhat important.
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But.
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Behind that, there's also a structural story going on.
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And we've spoken about this for Sterling in the past.
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But what you've seen in Europe in the last year or so is a big deterioration in some of the structural factors, particularly the external balances.
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So the current account has shifted into deficit that puts more reliance on short term capital inflows.
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And ultimately, in our view, it does require a slightly lower valuation for euro in order to sort of start to see things rebalance.
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So there's a cyclical negative and a structural negative.
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Both of those things playing out against each other should drive euro a bit lower in our view.
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So let's look at the US
Market Speculations on Fed Pivot
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now.
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The Federal Reserve meets next week.
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How has the dollar been performing ahead of that?
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The dollar's been struggling, to be honest, really because people are focusing on the possibility of a Fed pivot, as it's become known.
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So this idea that the Fed is going to sort of stop hiking rates and that's going to cause the dollar to weaken.
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So that's been part of the theme for the last few weeks or so.
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But we've actually seen this play out a few times this year.
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We've had a number of occasions where
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There's been an expectation of a dovish shift by the Fed, and it just hasn't occurred because the reality is inflation pressures are still very strong in the US.
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The growth story is still more resilient in the US compared to the rest of the world.
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And so we're really not buying into that idea that the Fed is going to pivot that quickly.
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And if we're not really buying into the idea that the dollar needs to weaken dramatically.
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And so that's really how we've been thinking about it for some time.
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So I know you see the comments in the market.
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It's tempting to try and forecast a peak in the dollar.
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But are you saying it's a little bit early to be engaging in that kind of thinking?
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Yeah, absolutely.
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We think it's a bit early to call the peak.
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Really, what we've been looking at for some time is three broad drivers for the dollar.
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One is the global growth story.
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Two is the risk appetite story.
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And three is the relative yield and the relative growth story.
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Those three forces are becoming a bit less potent.
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You know, global growth is still slowing, but it's not slowing as much.
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Risk appetite is still relatively weak, but maybe not as much as before.
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And the relative story, again, is still in the dollar's favour, but maybe not by as much as it was previously.
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So,
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You know, that all suggests that the dollar won't make as big a gains as we've seen this year and that we are getting closer to the peak.
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But we don't think we're there yet.
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We think there's probably another round of dollar strength to come into the end of the year and maybe even insert to Q1 next year.
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But until those those three factors start to shift more dramatically, it is hard to call the end of the dollar rally at the moment.
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Very clear.
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Don, thanks for your time.
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Thanks very much.
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I'm Harold van der Linde.
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And I'm Fred Newman.
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And you can find us under the banyan tree.
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Join us weekly on our new podcast where we bring Asian markets and macroeconomics into context with special insight from our regional experts here at HSBC Global Research.
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Enjoy the rest of your podcast and we'll see you under the banyan tree.
Easing Global Supply Chain Pressures
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We wrap up this week's podcast with a look at global trade, where despite easing supply chain pressures and freight rates, there are still plenty of risks on the horizon.
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Shanela Rajanayagam, trade economist, is here to tell us more.
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So Shanela, let's start with the good news.
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It looks like global supply chain pressures are easing.
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That's right.
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So it does seem as though some of those pandemic related supply chain pressures are starting to improve.
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For example, one index of global supply chain pressures is now at a 22 month low.
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Container freight rates also continue to fall.
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They're currently around 70% below their pandemic peak.
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And based on our forecast, they could actually reach 2019 levels by the beginning of next year.
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So there's certainly some good news for exporters and importers, a combination of the easing pandemic related pressures, but also a little bit of the story of the downturn in consumer demand as well.
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Despite that, geopolitics is still causing a lot of disruption.
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What are you seeing there?
Impact of Ukraine War on Trade
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That's right.
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So we are still seeing a lot of disruption from the war in Ukraine impacting energy and food trade.
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On the food trade side, grains exports have started to flow from Ukrainian ports.
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Over six million tonnes have been exported since the beginning of August.
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However, there is a risk that the Russia Ukraine grains deal could not be renewed next month.
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particularly if Russia decides to walk away from the deal or imposes additional conditions.
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Similarly on the energy trade side, EU gas storage levels are pretty good at the moment, currently over 93% full, and there is some evidence of households and industry actually paring back their energy consumption.
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But given around 25% of the EU's net domestic energy use is used to produce exports, there is certainly a risk that either potential energy blackouts or demand reduction could lead key manufacturing plants to idle some of their production this winter, and that could have repercussions for global supply chains.
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And are there any other trade disruptions that businesses should be aware of?
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So I think there are some disruptions that could be associated with potentially escalating US-China trade tensions.
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So, for example, the US recently imposed sweeping new export controls on a range of chips exports to China.
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and that certainly risks exacerbating existing trade tensions, but could also have implications for US exporters given that they send around 20% of their chips exports directly to the mainland.
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And so certainly it's not just disruption in Europe at the moment, there are pockets of potential geopolitical tensions in other parts of the world as well.
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And finally, you've also looked at how supply chains have evolved over the past two decades.
Shifts in Asian Trade Dominance
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What have you found?
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That's right.
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So we've taken a bit of a look at how key supply chains have shifted over the past 20 years.
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And what you really see across the board is the rise of trade in Asia, but also the rise of Asian suppliers exporting to other markets further afield.
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To give you one example,
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Mainland China was involved in about three of the top 25 electronics export corridors in 2000, but that had increased by around five fold by 2021.
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And more recently, you have also seen China lose a bit of market share to the likes of Vietnam, Cambodia,
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in certain consumer goods as those US-China trade tensions did escalate.
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So certainly looking ahead, we do expect there to be some beneficiaries from ongoing supply chain rejigging.
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For example, you have the likes of Vietnam, Cambodia, Bangladesh, all expected to see export growth of over 7% in the coming five years on average.
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Shanela, thanks very much.
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Thank you.
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So that's all from us this week.
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Thank you to our guests, Fabio Balboni, Dominic Bunning, and Shanela Rajanagam.
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From all of us here on the team, thanks for listening.
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We'll be back again next week.
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Thank you for joining us at HSBC Global Viewpoint.
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We hope you enjoyed the discussion.
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Make sure you're subscribed to stay up to date with new episodes.