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, where we speak to the economists and strategists behind some of our key reports published over the past week.
Speaker: Coming up this week, we assess the growing challenges facing the world economy and trade amid rising military and economic conflicts.
Speaker: And we consider how Asia is positioned to counter economic headwinds.
Speaker: This podcast was recorded on Thursday, the 24th of March, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline Van Dyne in New York.
Speaker: And I'm P.S.
Speaker: Butler in London.
Speaker: Russia's invasion of Ukraine has dramatically altered the outlook for the global economy, curbing growth, pushing inflation higher and causing big headaches for policymakers.
Speaker: Our economics team have just published their outlook for the second quarter.
Speaker: And Janet Henry, global chief economist, joins me now.
Speaker: So Janet, just when we thought we were emerging from the worst economic impacts of the pandemic, along comes another enormous broad-based supply shock.
Speaker: Yes, you're absolutely right, Piers.
Speaker: Obviously what we've seen over the last 18 months is inflation surprise increasingly on the upside.
Speaker: We were just starting to see that the worst of the supply chain disruptions were starting to ease a little bit.
Speaker: And now we know that the impact of the military conflict in Ukraine and the economic conflict that's followed, the sanctions and some areas of retaliation coming through.
Speaker: from Moscow actually is worsening the supply side again.
Speaker: So it's going to weigh on growth and most immediately it's going to push inflation somewhat higher and it's already started from a higher level.
Speaker: So Janet, we've seen commodity prices rise across the board.
Speaker: Tell us about the impact in terms of redistribution of income from commodity consumers to commodity producers.
Speaker: You're right, Piers, it's not just an energy story.
Speaker: Yes, oil and gas prices are rising, but so are metals prices and so are food and agricultural prices.
Speaker: So those countries that produce those products will see higher income.
Speaker: As a consequence, that will help their public finances and their external balances and relatively speaking, will be more supportive for their growth.
Speaker: For commodity consuming countries, particularly parts of Europe, that are most reliant on energy supplies from Russia, this represents terms of trade losses.
Speaker: So they'll see opposite effects.
Speaker: Growth there, particularly in Europe, is going to be more affected and inflation potentially rise by more than it will elsewhere.
Speaker: So I guess the question is, is a hard landing inevitable?
Speaker: And more to the point, can central banks prevent it?
Speaker: Who would want to be a central banker at the moment?
Speaker: Good question.
Speaker: So I think it's fair to say that when we think about, for instance, the majors, like the US and the US Federal Reserve, most Fed tightening cycles do end in recession.
Speaker: No central banker typically wants to deliver a recession.
Speaker: They want to deliver a soft landing.
Speaker: People are also asking the question of, you know, is it just recession?
Speaker: Is it outright stagflation?
Speaker: Perhaps of this type that we saw in the 1970s of double digit inflation and really quite severe recessions.
Speaker: This is an incredibly uncertain outlook.
Speaker: And much of the outlook itself will hinge on political decisions.
Speaker: But central banks have a job to do.
Speaker: The inflation was already too high.
Speaker: Now it's actually moving higher as a consequence of current developments.
Speaker: Potentially, they are going to have to become much more restrictive on the policy front.
Speaker: And a genuine soft landing is going to be somewhat harder.
Speaker: So I would say an outright recession is by no means possible.
Speaker: certainty, but they have got a very difficult job on their hand in trying to gauge how much of a slowdown is going to be acceptable.
Speaker: Are they even willing, if necessary, to deliver a recession in order to get inflation down reasonably quickly?
Speaker: So that's what they're going to be weighing up in the coming year as they try to set policy.
Speaker: So taking all of that into account, what are your new forecasts?
Speaker: Our new forecasts are for lower growth and higher inflation.
Speaker: On the growth side, we've trimmed annual GDP growth for 2022 by just over half a percentage point.
Speaker: So we've lowered growth from 4.1% to 3.5%.
Speaker: And we've lowered 2023 from 3.2 to 2.9.
Speaker: And in terms of this year's downward revision, it's to Europe, both East and West.
Speaker: And for inflation, a substantial upward revision for 2022.
Speaker: We've revised up inflation from 4.6 to 6.5.
Speaker: And to pretty much every economy, we have seen upward revisions of the big ones, aside from Russia itself, and of course, Turkey.
Speaker: The biggest upward revisions to our inflation forecasts have been to the US and to Europe, but even to Asia, we have seen some upward revisions, although in a global context, Asia is still a low inflation region.
Speaker: Janet, thank you very much.
Speaker: Thank you, Piers.
Speaker: Let's look at how the conflict has been affecting trade, where the effects of sanctions and logistical disruptions are adding further pressure to supply chains.
Speaker: Shanela Rajanayagam is our trade economist.
Speaker: Shanela, can you start by running us through the key trade restrictions that have been imposed on Russia?
Speaker: So various economies have implemented restrictions impacting Russian exports and imports.
Speaker: These range, for example, from bans on dual-use goods.
Speaker: Some economies have banned exports of oil refinery equipment to Russia, as well as bans on exports of aviation and space goods and luxury products as well.
Speaker: The US has also restricted exports of sensitive technologies, and this ban essentially extends to
Speaker: non-US goods produced using these technologies.
Speaker: So that would cover chips, for instance.
Speaker: Some economies, including the US and UK, have also banned certain energy imports from Russia, while the EU will ban imports of Russian iron and steel.
Speaker: And then in addition to these export and import restrictions, the G7 economies have also moved to revoke Russia's MFN status, or most favored nation status.
Speaker: So this essentially paves the way for these countries to impose higher tariffs on Russian exports.
Speaker: And taken together, these measures have already seen Russian exports of energy trending a bit lower this month, although this is more likely due to self-sanctioning by businesses than the outright import bans.
Speaker: And how has Russia responded?
Speaker: So Russia has retaliated to these trade restrictions by announcing its own export bans.
Speaker: So it will ban exports of more than 200 products, including, for instance, medical equipment, vehicles, agricultural machinery, but notably excluding energy.
Speaker: It has also suspended exports of wheat, barley and corn to certain countries until the end of June.
Speaker: And it will ban exports of wood to other economies as well.
Speaker: And these restrictions really matter for European manufacturers that, for example, might be producing vehicles in Russia,
Speaker: as well as economies that are highly reliant on Russian wheat exports.
Speaker: What trade measures has Ukraine taken?
Speaker: So Ukraine has moved to essentially secure its own domestic supply of food.
Speaker: by banning exports of various agricultural commodities, so including rye, barley and sugar, until the end of the conflict.
Speaker: It has also moved to restrict exports of wheat and sunflower oil via export licenses, and it will also close all its ports.
Speaker: And now this matters for global agricultural supply because Ukraine typically exports its grains and vegetable oils by ship, and so that means some traders are now trying to send Ukrainian grain exports via
Speaker: neighbouring economies to other ports in Europe.
Speaker: And Shanela, what's been the knock-on effect for other economies?
Speaker: So the knock-on effects really manifest via rising commodity prices and amid this several economies have taken steps to curb their own food exports.
Speaker: essentially in order to protect their own domestic supply.
Speaker: For example, Hungary, which is a key export of corn animal feed to the EU, has suspended grain exports.
Speaker: In another economy, Egypt, which imports more than 80% of its wheat from Russia and Ukraine, will ban exports of key food staples, including flour.
Speaker: On the other hand, some economies are looking for trade opportunities.
Speaker: So a good example of this is India.
Speaker: It's the world's second largest wheat producer, but it's not currently a very large exporter of the grain.
Speaker: But now it is looking to plug some of that supply gap, for example, by working with ports to prioritise wheat exports and also by looking to test the quality of the grain by government approved labs.
Speaker: Janela, thanks for your time.
Speaker: Thank you.
Speaker: Let's head to Asia now, where the region is facing a growing list of challenges, including rising commodity prices, slower consumer spending, and elevated COVID-19 cases.
Speaker: Frederick Newman is co-head of Asian Economic Research, and he joins us from Hong Kong.
Speaker: Fred, welcome to the podcast.
Speaker: Thank you very much.
Speaker: So we've heard from Janet about the commodities spike globally.
Speaker: How is this affecting Asia?
Speaker: Well, the global commodity price spike is essentially an inflation shock for Asia, will drive up inflation across the region, but it will also depress growth.
Speaker: And one thing to remember is that Asia is a big net energy importer for the most part.
Speaker: We have economies like Korea, mainland China, Taiwan.
Speaker: Thailand, India, all being very large energy importers and, of course, higher prices than both inflationary, but also drag on growth.
Speaker: Now, there are three economies that actually are doing relatively well in an environment of higher global commodity prices.
Speaker: And those are Indonesia, Malaysia and Australia, all because they are economic.
Speaker: energy exporters, and also exporters of other commodities.
Speaker: And so these are the relative winner when it comes to the spike in global commodity prices.
Speaker: And what does inflationary pressure mean for domestic demand?
Speaker: Well, it really represents a drag on domestic demand.
Speaker: So higher energy prices really hurt the pocketbooks of consumers and the profitability of companies as well.
Speaker: Most of Asian governments have actually dismantled price controls and subsidies over the years.
Speaker: There's still a few that kind of cushion the impact of rising global prices on local consumers.
Speaker: But it's
Speaker: Even there, ultimately, there's going to be some adjustment.
Speaker: And so higher energy prices really are going to be a drag on the consumption recovery in Asia and potentially even investment.
Speaker: And then there's food inflation and particularly urban consumers are going to feel it in terms of the purchasing power.
Speaker: They'll have to spend more of the money on food, less on other items.
Speaker: And that's a drag on growth as well.
Speaker: So urban consumption suffering.
Speaker: The only kind of positive, perhaps, is that rural consumption might actually pick up because of rising global food prices at the margin could actually lift the income of farmers.
Speaker: So COVID-19 is still rife in many parts of Asia.
Speaker: How much of an economic threat does it pose?
Speaker: Well, it still represents a very significant drag on the growth across the region.
Speaker: Mainland China, of course, grappling with it.
Speaker: It's a drag on consumer spending in mainland China, places like Hong Kong.
Speaker: have seen very subdued, to say the least, consumer spending as a result of this outbreak.
Speaker: But even elsewhere, still, places like Korea, for example, Japan, are struggling with the current wave.
Speaker: Now, we do think that in most economies, the wave will probably abate in the coming weeks and months, and that will allow reopening of domestic markets,
Speaker: Perhaps most interestingly, travel in Southeast Asia might actually start to resume.
Speaker: We see most ASEAN economies from Thailand, for example, Indonesia opening up the borders of tourists, and that should help kind of revive their tourism sectors.
Speaker: And that also tends to help the domestic economy as well.
Speaker: So there are signs here that things are thawing in Southeast Asia, certainly.
Speaker: And what's your outlook for economic policy in the region?
Speaker: Well, higher inflation really requires that most central banks will need to raise interest rates.
Speaker: And the Fed is obviously laying the course here for a very aggressive sharp rise in interest rates.
Speaker: Most central banks in Asia will not act
Speaker: quite as aggressively, but they still need to nudge rates higher.
Speaker: So if you look at India, if you look at Indonesia, Malaysia, the Philippines, all expected to raise rates quite a bit actually over the next several quarters.
Speaker: Interestingly, less of mainland China.
Speaker: Actually, mainland China, we have the PBOC running very accommodative monetary policy to aid the recovery.
Speaker: It's still really about delivering stimulus in China.
Speaker: And then you have Japan, where the Bank of Japan will probably keep its foot on the gas as far as the eye can see, despite slightly higher prices.
Speaker: It's not enough for the BOJ to relax.
Speaker: And so they'll keep pushing ahead with their very aggressive easing.
Speaker: Fred, that's a great summary.
Speaker: Thanks very much.
Speaker: Thank you very much.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Janet Henry, Shanela Rajanagam, and Fred Newman.
Speaker: Thanks very much 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.
