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The Macro Brief – Tracking economic disruption
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James Pomeroy looks at whether the latest data can give us any clues about how the Iran conflict is impacting the global economy, while Pranjul Bhandari assesses the implications for India.
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Transcript
Introduction to HSBC Global Viewpoint
00:00:02
Speaker
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.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening. And now onto today's show.
Rising Input Costs and Inflation
00:00:23
Speaker
Where you can see it much more clearly in the data is on the inflation side, in the surveys. So you can see a lot of business surveys saying, look, our input costs are going through the roof because of this energy crisis. And the big question for us in the next few months is how does that ripple through, both into headline inflation rates, but also in terms of how businesses and consumers behave?
US-Iran Ceasefire and Global Economy
00:00:49
Speaker
This is the macro brief from HSBC Global Investment Research, where we look at the issues driving financial markets. I'm Pierre Spatler. Now this week has seen a significant development in the Middle East, with the US and Iran agreeing to a two-week ceasefire. And whilst that initially sparked relief amongst investors, the conflict has clearly caused significant disruption to the global economy.
00:01:08
Speaker
So on today's podcast, we're looking at whether the latest data can give us any clues about how the effects of the war are filtering through. We're also going to assess how the energy shock is being felt by one of the world's largest economies, India.
00:01:22
Speaker
To do this, I'm joined in the studio by James Pomeroy, global economist. And dialing in from Delhi is Pranjal Bhandari, chief India economist.
Regional Impacts of Energy Crisis
00:01:30
Speaker
James and Pranjal, great to have you back on the podcast. Great to be here.
00:01:34
Speaker
Great to be here, thanks. So James, starting with you, clearly the ceasefire is good news. But even with this ceasefire, are we about to hit some physical supply constraints? By which I mean the last of the crude oil shipments that were en route before the conflict started are now being delivered.
00:01:49
Speaker
And in fact, some Asian economies have started to take some action. Yes, exactly. And I think it's very important at the moment to distinguish about the very different regional stories. So if you look in the US, for example, you've got surging gasoline prices at the pump. Yes, that's going to have a huge impact on consumer sentiment and inflation and all of those things. But natural gas prices are largely unaffected and so you're not likely to see that sort of broad-based inflationary pressure or shortages like you might elsewhere.
00:02:16
Speaker
In Europe, it's a slightly different story. We've got much higher gas prices, not quite anywhere near where we were in 2022, but still up a long way and higher oil prices. So it's an inflation shock. But there's not really many signs of outright shortages potentially in jet fuel in some countries, but not really across the board. Whereas in Asia, the shock appears to be much more intense. So here you're getting both a price shock on oil and natural gas. But given the greater reliance on the Middle East for both of those products, you are starting to see a lot more shortages and governments having to think seriously about how they can limit energy usage, how they can restrict some of what people are doing, trying to encourage people to use less energy, but also starting to think about alternative forms of fuel, such as coal or maybe accelerating some other forms of energy
India's Energy Import Challenges
00:03:00
Speaker
investment.
00:03:00
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And Pranjal, what's happening in India and some of the ASEAN economies? Yeah, so India is quite significantly impacted given that it's a large energy importer, especially because of its geographical proximity with the Middle East.
00:03:13
Speaker
And this is not just about you know crude oil and high prices. It's also about gas and its availability. I think what we're seeing in India right now is a lot of rationing, lots of quotas across different sectors on how much energy will be available to them, from fertilizer to petrochemicals and so on and so forth. We're also seeing that the government right now is taking on a lot of the burden.
00:03:35
Speaker
It is not really increasing pump prices of petrol and diesel. So this is good for inflation because it makes sure that inflation doesn't rise very quickly. But I don't think it's that good for growth. I think it's better if there's more burden sharing across public and private sector. And interestingly, what we saw in India last week was the central bank actually taking some very sharp regulatory steps to stabilize the currency. And I think the real aim there was to ensure that the FX pass through into inflation is not very much.
00:04:04
Speaker
So a lot of very different, you know, ah actions from both the government and the central bank. And did I read correctly that in the Philippines, they're encouraging people to work from home? ah so Not just in the Philippines, you're seeing this in a few different places. I think we're in this sort of world where it's let's use as little energy as possible. And that means less transport, that means anything we can do to not heat homes as much or to cool them down
Data Scarcity and Inflation Challenges
00:04:25
Speaker
as much. And there's a lot of restrictions being put in place in different markets to basically do anything you can to limit your energy usage.
00:04:31
Speaker
So, so far it's all been about headline analysis. energy prices, but are we starting to see the real economy starting to suffer? Sort of. Now, this is a sort of this is a very difficult question, it's a very economic answer, but essentially a lot of the economic data that we get for March hasn't been released yet.
00:04:49
Speaker
So we're currently only really dealing with a handful of data points, some inflation prints in some parts of the world which are seeing the sign of the energy shock. and But you've got to remember the oil price has been very volatile through the month and you'll start to see that impact come through over the course of the coming weeks and months. But in terms of the activity data, the only things we've really got a handle on at moment is survey data. So consumer confidence surveys, business surveys like the PMIs, and they are showing an impact. They're showing an impact both on an activity side, which is people saying, or businesses saying, we're feeling a lot more uncertain. We're not maybe going to invest as much. We might cut cut back a little bit. Our output's maybe a little bit more unclear. Maybe our employment hiring plans are a little bit more subdued. But where you can see it much more clearly in the data is on the inflation side, in the surveys. So you can see a lot of business surveys saying, look, our input costs are going through the roof because of energy crisis. And the big question for us in the next few months is how does that ripple through, both into headline inflation rates, but also in terms of how businesses and consumers behave?
00:05:48
Speaker
Does this cause consumers to be much more reluctant to spend? Does it lead us to get a little bit more concerned about what businesses are doing as well? And if it does, you'll start to see that impact rippling through the real hard economic data over the course of the next few months.
Central Banks and Inflationary Strategies
00:06:01
Speaker
And one market where you started to see the impact is in bond markets, where they've started to discount a potential inflationary shock. Meanwhile, central banks are trying to hold a discourse that they can look through oh this if inflation expectations remain anchored. Maybe expand on that.
00:06:19
Speaker
It's a really, really difficult time to be a policymaker because you could really justify anything right now. You know, you could say there's a surging energy price shock here that's going to mean much higher inflation and we as a central bank need to get ahead of it.
00:06:31
Speaker
And there's an obvious reason to do that, which is 2022. Not too long ago, we had a big inflation shock. Central banks were far too late in raising rates and and they're probably feeling maybe the pressure that that's brought around this time around. So they want to show that they're ready to act if they need to.
00:06:46
Speaker
But equally, if it is just an energy price shock and it doesn't ripple through into wage setting behaviour, inflation expectations, then does the central bank actually need to do anything about it? So what we've seen over the course of the last, I guess, two or three weeks when most central banks have had a meeting, they're all saying we're ready to do something if we need to. And the only thing that's going to determine if they need to is how long this crisis goes on for, what happens with energy prices, but also those sort of second round effects that come through as well in terms of implications for food prices or to shipping costs or to travel prices because of much higher jet fuel prices, All of these things will impact that overall inflation story. And if some central banks think we can't let this get carried away, they'll nip it in the bud and they'll raise rates. But our base case is for most central banks to not be hiking this year, but they're all going to be showing that they're willing to do s so if they need to.
00:07:36
Speaker
And is there um a dichotomy between financial markets and energy markets? By that I mean that is the former being somewhat sanguine about the duration of the conflict? One of your charts, for example, in your latest chart book shows the geopolitical index has actually come off its highs. But you've got to remember this is still an extraordinarily elevated level and the way these some of these indices work is they're calculated essentially of what's changed. So the change is the bit at the very beginning. And now you've just got this period of it's become almost just a new normal for for the last few few weeks. And that is a problem in many ways, because if you start to get that it becomes normal, you're talking about a continual disruption to supply chain, you're talking about disruption in the straight up Hormuz. What all of this does is it keeps energy prices higher. The longer the energy prices are high, the more likely is that this ripples through into other things that I've talked about, like food, like shipping prices, like inflation expectations. And if it does, then you've got a much more
00:08:30
Speaker
much much bigger economic problem and from this inflation shock. Pranjul, you mentioned that the Indian government is intervening to try and minimize the effects of the shock. But how much room for maneuver do they have? And what lessons can they draw from previous crisis such as the pandemic, are given that there are some important differences?
00:08:52
Speaker
Yeah, I'm glad you brought that up. I think if the current problem lasts for a couple of more weeks, I think the situation could start looking a lot more like the pandemic than the 2022 Ukraine-Russia oil problem. And I think at that point of time, ah it would be very clear that the growth shock is higher than the inflation shock. and the playbook of the government could be quite different. So for instance, the central bank could become a lot more growth supportive. It could give a lot more liquidity. It would make sure that it doesn't really increase rates as a currency defense.
00:09:24
Speaker
The fiscal policy could start giving a lot more sector-specific credit guarantee schemes. And also, pump prices of petrol and diesel would be raised because it would be very hard for the public sector to take on the entire burden for such a long time. So
ASEAN Countries and Oil Shock
00:09:38
Speaker
my sense is that the playbook could be significantly different if the sense is that the growth shock is bigger than the inflation shock.
00:09:46
Speaker
And what about some of the other ASEAN economies that you cover? What are the vulnerabilities there? Yeah, it's a multi-channel oil shock for all of ASEAN, you know, where inflation goes up, growth weakens. I would say Thailand, Philippines and Vietnam are big energy importers and would have similar implications as India.
00:10:06
Speaker
Indonesia is an interesting one because it's an importer of crude oil, but it's a net exporter of natural gas. And out of all the ASEAN countries, I would say Malaysia is best off because it's a large exporter of energy. I think Indonesia is an interesting one. ah It is a big exporter of coal as well.
00:10:24
Speaker
And if at some point it is clear that gas availability is going to be a problem for longer, many industries in many countries may want to switch from gas to coal, and that would actually benefit Indonesia on the margin.
China's Energy Strategy and Vulnerability
00:10:37
Speaker
It's not something a lot of people are thinking about right now, but these could be some of the longer term implications.
00:10:42
Speaker
James, what are the charts telling us about China? China's an interesting one because obviously we've only really had a lot of the data for January, February combined and it looks sort of OK, the data sets that we've got. So you're looking sort of pre-war ah data here, but you had seen a bit of a recovery, particularly on the trade side at the start of the year, suggesting maybe there's a little bit of economic momentum building. But now the challenges are appearing in China just like there are elsewhere. and The survey data is turning down, there's a greater risk of higher prices, there's the same risks around some potential energy shortages. even though China's probably better protected than most given the enormous investment in renewables recent was going to say they're a big alternative energy champion. Is that really going to put them in a but and better place? It should do. And we put this together in our and our global quarterly a few weeks ago saying actually when you look across the world and you look at that energy vulnerability, the playbook for China today is very, very different how it was just in 2022, whereas most of the world in that short space of time, those four years, hasn't dramatically changed their energy mix. In China they have. And that means that vulnerability is maybe slightly less extreme than it is in some of those other economies in Asia.
00:11:43
Speaker
Maybe to finish, James and Pranjal, can we think about even if the conflict ends, we're probably not going to go back to where we were before
Long-term Energy Market Changes
00:11:52
Speaker
it started. do you have some thoughts about the longer term consequences? Pranjal, you mentioned perhaps a resurgence of coal.
00:11:59
Speaker
um Any other thoughts along those lines? James, you first. Yeah, I think that renewable story is going to keep building. It's something we've written a lot about in our in our big thematic reports over the course of the last few years, that that sort of underlying momentum that's happening in things like solar and wind is is really, really strong. And it's probably going to get a significant kick here, both in terms of that relative cost. you know Those of us who are who are driving electric vehicles at the moment are having a lovely time in terms of the cost of ah filling up your car compared to filling up with with petrol. And that's as a reason that you might see electric vehicle adoption pick up. You might see more and more households and businesses thinking about putting solar panels on their roof. You might see more national policies that accelerate that that investment as well. And I think that will be one of the big shifts we see in the next few years. But also we're probably talking about a world now where energy prices are going to be a little bit higher for some time. This is great frustration. ah Back end of last year, we were talking about potentially a structural move lower in energy prices because of the excess gas that was coming onto the markets and this oversupply pulling down prices. And we had oil prices. We're talking maybe they're $50 this year. Maybe not. Maybe not. We don't get that far. But we're talking about those sorts of numbers.
00:13:05
Speaker
And now we're not. And it becomes very, very hard to talk about in the short to medium term. We're talking 2026, 2027.
00:13:12
Speaker
energy prices being anywhere close to where they were at the start of the year. And that does add a little bit of ah a longer running shock for the global economy in terms of households having to deal with higher energy payments, potentially rippling into the other sectors. It has clearly weakened, at least in the next couple of years, that global growth and inflation trade-off.
00:13:30
Speaker
Prenjil?
Ongoing Inflation and Trade Diversification
00:13:31
Speaker
Yeah, I would just add to what James is saying. My sense is that ah inflation could remain elevated and sticky for a while more. You know, we know that energy prices take some time to feed into core inflation. So we could start seeing core inflation rise, but not immediately more over the medium term. I also think that many countries would now start to build a lot more reserves than they have in the past, and not just energy, it could be other strategic products, for example, API, which is a very important input into pharmaceuticals, semiconductor chips, perhaps, as well. So I think a lot of country will really rethink security. And finally, a lot of them could also want to diversify trade, basically buy and sell to many more countries than they have in the past.
00:14:14
Speaker
James and Pranjal, it's a difficult time to be an economist at the moment. So I wish you luck with ah future forecasts. But thank you very much for joining us today. Thank you. Great to be here. Thanks.
Podcast Conclusion and Next Episode Preview
00:14:30
Speaker
James Pomeroy and Pranjal Bhandari there on the economic impact of the war in Iran. A reminder that you can keep up to date on all our latest reports, videos and podcasts by downloading our app from Apple's App Store or Google Play.
00:14:43
Speaker
And don't forget to check out our sister podcast, Under the Banyan Tree, where hosts Fred Newman and Harold van der Linde put Asian economics and markets in context. And if you've got any questions or comments, then you can get in touch with us at askresearch at hsbc.com.
00:15:00
Speaker
So that's a wrap. This week's Macrobrief was hosted by me, P.S. Butler, and produced by Tom Barton. Please listen, like, and subscribe wherever you get your podcasts. And tune in next time for a special edition of the Macrobrief.
00:15:13
Speaker
We'll be coming to you from the HSBC Global Investment Summit in Hong Kong. So until then, thanks very much for listening.
00:15:45
Speaker
Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.