Transcript
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Speaker: Hello everyone and thanks for joining us under the banyan tree where we put Asian economics and markets in context.
Speaker: My name is Fred Newman, Chief Asia Economist here at HSBC and I'm flying solo this week because my co-host Harold van der Linde is still on a very well-deserved break somewhere in Europe.
Speaker: I'm joined today though by Paul Bloxham, our Chief Economist for Australia and New Zealand, and who also is our Global Chief Economist for Commodities.
Speaker: We'll be talking about both of these areas today, beginning with the recent moves by the Australian and New Zealand central banks and what they tell us about the global monetary cycle.
Speaker: Then in part two, we're going to discuss the outlook for commodities across the board with our customary focus on the Asia-Pacific region.
Speaker: From Hong Kong and Sydney, this is Under the Banyan Tree.
Speaker: Paul, welcome to the podcast.
Speaker: Great to have you.
Speaker: Great to be here, Fred.
Speaker: Paul, so this week we had a lot of fireworks down under when it comes to central bank policy.
Speaker: The RBA surprised the market with a pivot, only 25 basis points.
Speaker: But the RBNZ in New Zealand still delivered a 50 basis point hike.
Speaker: What explains the divergence here between these two central banks?
Speaker: Well, one of the key reasons for that is that there are different inflation dynamics in both of these economies at the moment.
Speaker: Inflation has picked up earlier and has become more embedded in expectations in New Zealand.
Speaker: It's very clearly in the wage setting process.
Speaker: And the RBNZ is very worried about a wage price spiral.
Speaker: So they've remained quite hawkish.
Speaker: But in Australia, although inflation is above target,
Speaker: It's not yet gotten through to the wage setting prices.
Speaker: Wages are only rising gradually across the economy, at least.
Speaker: And a part of that's just the inertia in the enterprise bargaining system down here in Australia.
Speaker: But the lift in wages is a lot more sluggish.
Speaker: And so the RBA doesn't see that same wage price spiral dynamic yet.
Speaker: And as a result of that, they've deemed that they can afford to pivot.
Speaker: There's also a bit of a difference in their reaction functions.
Speaker: The RBNZ has been much more focused on inflation.
Speaker: The RBA has been much clearer that it's trying to find a way to deliver both lower inflation and the soft landing.
Speaker: So how do you think then about the economic outlook for both Australia and New Zealand going into 2023?
Speaker: Well, New Zealand's still got this bigger inflation challenge than Australia has.
Speaker: And so we think that given they're going to have to go harder with interest rates, and they've already done that to a degree, we think that that's going to deliver a harder landing.
Speaker: We've had that in mind for a while.
Speaker: We think New Zealand will likely have a recession around the turn of the year.
Speaker: The unemployment rate will rise.
Speaker: And then we'll be in a world where we'll be thinking about the possibility that the RBNZ might have to start cutting perhaps later next year.
Speaker: And that's what we've got penciled in.
Speaker: For Australia, we've got a milder story.
Speaker: We haven't got as big an inflation challenge in Australia.
Speaker: The RBA has pivoted already, and we think they've got a couple more hikes in them.
Speaker: But we think that the Australian economy will slow down but not have a recession, that it will be a soft landing.
Speaker: We've got that penciled in for Australia.
Speaker: The other thing that's helping Australia to a degree is
Speaker: is Australia is a large energy exporter.
Speaker: We're the second largest exporter of thermal coal and the second largest exporter of liquefied natural gas in the world.
Speaker: And of course, those products are in high demand at the moment.
Speaker: So that's one thing that I think works in Australia's favour in terms of supporting the growth story a bit more relative to New Zealand.
Speaker: Now, one of the reasons why we pay a lot of attention to the Australian and New Zealand central banks is because they tend to be trendsetter for really the rest of the world.
Speaker: And this week, actually, investors globally paid a lot of attention to particularly the RBA, not moving as aggressively as perhaps some in the market have thought.
Speaker: Do you think there are lessons here for the RBA?
Speaker: for other global central banks from the way the RBA and the RBNZ are setting rates or how they're sounding in terms of their messaging?
Speaker: Certainly, central banks often move in packs, as we know.
Speaker: So I think global investors have been watching these two central banks very carefully.
Speaker: And as you say, they tend to lead the way.
Speaker: The RBA was the first G10 central bank to lift its policy rate after the global financial crisis back in 2009.
Speaker: And the RBNZ was the first
Speaker: central bank this time around to start lifting its policy rate coming out of the pandemic.
Speaker: So they're watching them very carefully.
Speaker: I think that there are two different stories going on, as we've said, for Australia and New Zealand at the moment.
Speaker: In Australia, we don't have that strong pickup in wages growth.
Speaker: But in New Zealand, they've got a wage price spiral challenge.
Speaker: So the main thing I think global investors need to watch is whether whichever country you're looking at, be it the US or Europe or some of the Asian economies,
Speaker: whether those dynamics are more similar to Australia or New Zealand.
Speaker: If you've got a wage pickup, then perhaps the New Zealand story is more applicable.
Speaker: We talk about New Zealand being the Kiwi in the coal mine because it's the country that led the hiking cycle this time around, and we've got a cut penciled in for the tail end of next year, which would be one of the earliest.
Speaker: So it is worth watching these countries for that reason, I think.
Speaker: So really trendsetters here when it comes to the global monetary cycle.
Speaker: But I think global investors are also watching Australia and New Zealand for another reason.
Speaker: That's the housing market.
Speaker: So we've seen big increases in house prices in both economies, I think, over the years.
Speaker: Do rising interest rates pose a risk to the housing markets in Australia and New Zealand?
Speaker: Is that something we should watch?
Speaker: It's definitely worth watching.
Speaker: And we're watching it very carefully as well.
Speaker: It is a risk.
Speaker: But it's also part of the transmission mechanism.
Speaker: The central banks are lifting interest rates.
Speaker: They've lifted them quickly.
Speaker: And getting house prices to fall is one of the ways that they're slowing down the consumer.
Speaker: And it's part of the mechanism for getting inflation to come back down to where it needs to be.
Speaker: In Australia's case, we're a bit less worried.
Speaker: about house prices.
Speaker: House prices didn't go up as much through the pandemic.
Speaker: In New Zealand, we are much more worried about the house price story.
Speaker: House prices went up by about 45%, and even the RBNZ has been worried about them being unsustainable.
Speaker: And they've now fallen by more than a double-digit rate.
Speaker: So we are very carefully watching what's going on with house prices in New Zealand, and also in terms of its sort of financial stability.
Speaker: But for Australia, we're a bit less concerned.
Speaker: Well, it's interesting that you mentioned that really the impact of rising interest rates on the New Zealand economy in particular is worth watching because, of course, New Zealand was earlier in raising interest rates compared to other central banks.
Speaker: So I think there are lessons here for economies elsewhere as well that we should pay attention to.
Speaker: But we'll take a quick break here.
Speaker: And when we come back, we're going to take a closer look at global commodity markets.
Speaker: Welcome back, Paul.
Speaker: We wanted to talk a bit more about commodity markets now.
Speaker: It's an area that you cover as well, being the global chief economist for commodities at HSBC.
Speaker: And first of all, what's happening in global commodity markets?
Speaker: You saw a big pullback in prices in recent months.
Speaker: Is this the beginning of a sharper correction, do you expect?
Speaker: Or is this just that the froth is coming out of some of these prices?
Speaker: We think these commodity prices are still going to stay quite elevated.
Speaker: And the primary reason for that is we think the big driver of the lift in commodity prices has not so much been really strong demand, but it's been constrained supply.
Speaker: We've been describing it as a super squeeze rather than a super cycle.
Speaker: It's not a big demand driven story.
Speaker: It's about less investment in capacity to produce commodities.
Speaker: And it's about
Speaker: geopolitical disruption.
Speaker: So the Russia-Ukraine war disrupting supply of lots of commodities, less investment in recent years in large-scale oil, gas and coal capacity because countries and corporates are trying to meet climate goals.
Speaker: And of course, disruptive weather impact that's had an impact on agricultural supply.
Speaker: All of these things have constrained the supply of commodities and that's tended to push the prices higher.
Speaker: But of course, that means
Speaker: It's a squeeze on global growth.
Speaker: It's not boosting global growth.
Speaker: It's actually slowing global growth.
Speaker: It's another factor contributing to weakening global growth.
Speaker: So the decline in commodity prices we've seen recently, in part, we think, reflects that squeeze, as well as, of course, tighter monetary conditions and the global slowdown that's underway.
Speaker: So we don't think commodity prices are going to fall dramatically or back to below average levels.
Speaker: But obviously, they're coming off a bit on the back of the global slowdown that's underway.
Speaker: So you describe a story of broadly limited supply in many commodity markets.
Speaker: How does Chinese demand play into this?
Speaker: Because we read over the years that China is a huge consumer of things like iron ore, for example, energy, of course.
Speaker: Is the slowdown in China really driving this?
Speaker: And then should that also mean that as China possibly recovers next year, would that then possibly lead to a pickup again in global commodity prices?
Speaker: So this story is quite complicated, but I think it depends on which commodity you're looking at.
Speaker: Because the slowdown we're seeing in China from a commodities perspective, a lot of the story at the moment is about the property recession that's going on.
Speaker: And of course, that tends to weigh more on the bulk commodities like steel, iron ore, coking coal.
Speaker: Those commodity prices have been weaker.
Speaker: Metals prices in general have been somewhat constrained.
Speaker: But then you've also got to keep in mind that there's an infrastructure ramp up that's going on in China.
Speaker: Part of the policy response has been related to infrastructure.
Speaker: A lot of that infrastructure is green infrastructure.
Speaker: And so there's a number of these metals.
Speaker: If we look at the metals that go into the green story, lithium,
Speaker: Cobalt, copper, aluminium, because electric vehicles tend to have more aluminium in them as well.
Speaker: And so there's a balancing item here that's actually providing some support.
Speaker: And as you say, as you run into next year, if China's growth lifts more and it's driven more by the infrastructure story, it should provide some offsetting support for that set of metals.
Speaker: That said, the property sector, well, the challenges there look as though they're going to be around for quite some time.
Speaker: So the bulk commodities may still be quite suppressed by that overall issue.
Speaker: Globally, of course, there's a lot of investment going on in the green space as well.
Speaker: So that provides a source of demand for those green metals.
Speaker: And I'll still come back to the main theme, which is there hasn't been a whole lot of investment in capacity in recent times to produce those products either.
Speaker: There's an extraordinary amount of investment going on in the moment in lithium, for example.
Speaker: It's not keeping up with demand and prices are very high, but there isn't that much investment in the pipeline for a lot of the other metals that are associated with the green story.
Speaker: So that sort of tells us that it's primarily a supply squeeze that's really been holding those commodity prices up.
Speaker: And that tends not to be great for global growth.
Speaker: So limited supply, certainly for certain metals that you mentioned.
Speaker: But another sector within commodities that has made a lot of headlines is, of course, disruption to the global agricultural trade.
Speaker: And we've seen across Asia, certainly a lot of people being vulnerable to rising food prices.
Speaker: Food inflation has increased.
Speaker: The headlines were very clear for everybody to see.
Speaker: Are you optimistic about a normalization in global food prices going to next year?
Speaker: Or do you think that there are some structural factors at work here, like constrained supply, possibly like in other sectors, that could actually leave us vulnerable to greater volatility going forward?
Speaker: Well, those food prices are certainly something that we have been very focused on.
Speaker: As agricultural prices rose sharply earlier in the year,
Speaker: They've come back down a little bit, but they seem to be stabilising at still quite elevated levels.
Speaker: Now, I think a part of this is going to stick around for a while.
Speaker: A part of it is related to the disruption that came from the Russia-Ukraine war, and that's had a direct impact on the availability of some grains.
Speaker: But it's also having a flow-on effect in the sense that Russia is also the world's largest exporter of fertiliser, and the price of fertiliser went up quite sharply.
Speaker: So a lot of farmers didn't use as much fertiliser through the last season.
Speaker: So it's going to leave a sort of residual continued effect in terms of yields, agricultural yields running into this coming season as well.
Speaker: Overlay that with the fact that, of course, the Russia-Ukraine war is still ongoing.
Speaker: So that creates an uncertainty.
Speaker: We're running into another season, a third season for the first time this century of La Nina, which means that weather conditions may be quite volatile and may be a constraint as well.
Speaker: And it's still the case that there's some residual effects from the COVID-19 pandemic.
Speaker: So there's a lot of moving parts in that story, but I think we should still be very focused on the fact that supply constraints in the agricultural space may continue to leave these agricultural prices at quite elevated levels.
Speaker: So the way you describe that is really limited supply in different types of commodities that will presumably put a floor under commodity prices in this cycle.
Speaker: But you're a student of really long-term commodity trends.
Speaker: So let me ask you...
Speaker: Usually commodity cycles are beholden to the supply side.
Speaker: It is when prices are high, people invest more than prices decline over time.
Speaker: Do you see that supply response coming through?
Speaker: Is that typical cycle at work here?
Speaker: Or are we in an environment where perhaps increased geopolitical risk, rising interest rates are kind of restraining the needed supply response?
Speaker: And then you might say, because of that, we might look at many more years of elevated commodity prices.
Speaker: I think that's part of the story, definitely.
Speaker: Elevated interest rates, geopolitical concerns and so on.
Speaker: But I think the other thing we've got to keep in mind is the energy transition itself is driving this story.
Speaker: And it's almost as though it's what it's supposed to do, right?
Speaker: The underinvestment or less investment in capacity to produce fossil fuels means that, of course, the prices of those fossil fuels are likely to be structurally higher for a period.
Speaker: That will motivate a whole bunch of investment outside of the commodity space in terms of investment in wind capacity, solar capacity.
Speaker: Hydrogen will play an increasing role, but right now it's a very small component of the overall commodities picture.
Speaker: So the energy transition itself is one of those supply constraints.
Speaker: It is forcing investment into other parts away from what we call the larger part of the commodities basket, the fossil fuels.
Speaker: And so there's a whole collection of things suggesting that
Speaker: You know, there is going to be more limited supply that is going to keep the prices higher, but there's not going to be this wide, broad-based resources sector investment upswing like we've seen in previous super cycles, like we saw in the early 2000s.
Speaker: It's different this time around.
Speaker: So, Paul, speaking of energy, we still have relatively high energy prices, certainly natural gas, coal price very high, even as crude oil costs have now come down.
Speaker: How does this really the expensive price of fossil fuels, how does it impact, do you think, the Asia-Pacific region?
Speaker: So there are going to be some countries that benefit and others where it's a big drag.
Speaker: I think
Speaker: the big winners, of course, are going to be the energy exporters.
Speaker: So Australia is a big exporter of gas and coal.
Speaker: Indonesia is also another country that's benefiting, I think, from this story in terms of the higher energy costs.
Speaker: In terms of the rest of the region, a lot of them are importers of energy.
Speaker: So that's a weight on growth.
Speaker: But I guess one of the more positive aspects is that a lot of the gas that's imported into Asia is on contract.
Speaker: It's on long-term contracts.
Speaker: It's not on spot prices.
Speaker: So
Speaker: Those long-term contract prices are held down a bit more, and that's at least one of the more positive stories for the region.
Speaker: Well, thanks, Paul.
Speaker: I think reading your research and listening to you, I think it's always interesting how you tease out the importance of structural factors for global commodity markets.
Speaker: So going beyond the headlines and the cyclical factors that are driving prices, perhaps we should keep in mind certainly that these underlying factors are extremely important in driving energy and broader commodity markets indeed.
Speaker: But Paul, here under the Banyan Tree, we have a tradition of asking our guests or indeed our co-hosts certain recommendations, things they've read recently.
Speaker: Is there anything that before we let you go, you might want to recommend our listeners to maybe take a look at?
Speaker: Yeah, there's this great book that I'm reading at the moment.
Speaker: It's called Disorder, Hard Times in the 21st Century.
Speaker: And it's by an academic called Helen Thompson.
Speaker: And it talks about the interaction between
Speaker: the mix of geopolitics and energy and how you've got to think about what's going on in the economic space, not just through the geopolitical lens, but how the energy supply story really plays a bigger role in affecting the economic story too.
Speaker: And at the moment with what's going on in Europe, of course, it's very pertinent.
Speaker: Well, Paul, thanks for those insights.
Speaker: And we're going to have to wrap things up here.
Speaker: Thank you again for joining us today on The Banyan Tree.
Speaker: Thank you very much.
Speaker: And that's it for another week, folks.
Speaker: Always a pleasure to have you with us here under the banyan tree.
Speaker: We'll be back again next week putting Asian markets and economics in context.
Speaker: Till then, take care and all the best.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
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