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, our weekly review of the key reports from our economists and strategists across the globe.
Speaker: Coming up this week, we look at why Asia's economies face a bumpy second half of the year.
Speaker: We examine China's fiscal and monetary response to the latest wave of COVID-19.
Speaker: And we look at what's next for the oil market as concerns mount over the global economy.
Speaker: This podcast was recorded on Thursday, the 30th of June, 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Aline Van Dyne.
Speaker: And I'm Piers Butler.
Speaker: We begin in Asia, where our team has just published our latest quarterly report.
Speaker: And headwinds in the region are stiffening with inflationary pressures, including rising food prices and a weakening trade cycle, posing risks to growth.
Speaker: Fred Newman is our chief Asia economist, and he joins us from Hong Kong.
Speaker: Fred, welcome to the podcast.
Speaker: Thank you for having me.
Speaker: So Fred, what's your broad outlook for Asia over the next quarter?
Speaker: It's a bit of a convergence is a theme we like to run with.
Speaker: And what we mean by this is that China's economy will likely pick up steam in the third quarter, partly because they're snapping back, quote unquote, from the virus restrictions that we saw, containment measures that impacted the economy in the second quarter.
Speaker: And so China's economy should improve at the same time and the rest of Asia, we may see the beginnings of a slowdown.
Speaker: So in that sense, Asia's economies are converging because China's picking up, the rest of Asia's slowing down.
Speaker: So we're going to meet in the middle again.
Speaker: And the slowdown in the rest of the region is really due to slowing exports.
Speaker: We see already in electronic space, for example, that new orders have decelerated quite rapidly.
Speaker: US consumers are starting to pull back.
Speaker: So broadly speaking, that export engine is starting to sputter.
Speaker: And that's why really there's a bit of a convergence in growth rates across Asia.
Speaker: Like everywhere else, interest rates are going up across Asia.
Speaker: What sort of impact is that having?
Speaker: Well, rising interest rates certainly slow down economic growth and many Asian economies really have to ramp up their interest rate hikes.
Speaker: If you think about ASEAN, for example, Indonesia hasn't even started yet, but we think they will start soon.
Speaker: Malaysia, Thailand, Philippines, India, Australia, Korea, all of these economies will continue to raise rates in the third quarter and that will slow down domestic demand in addition to the slowdown in exports.
Speaker: But there are two important exceptions, actually, to the tightening story.
Speaker: One is the PBOC in China actually has an easing bias still because they need to pump more stimulus into the economy to get the engine running again.
Speaker: And in Japan, the BOJ is not really wavering from its path, which is to keep maximum easing, obviously reflecting the weaker yen.
Speaker: But those are the two standouts, central banks and Asia, just simply not budging at this point.
Speaker: Fred, is there any threat of a recession?
Speaker: So we don't think there's really a recession lurking in the wings for Asia just yet.
Speaker: Might be an issue for late 2023, perhaps in some markets like New Zealand, but it's not really a broad-based risk.
Speaker: Now, we talked about the slowdown in exports.
Speaker: That certainly is always a headwind for Asia.
Speaker: But remember that we also expect China's demand to stabilize.
Speaker: And that's very important because it puts a floor under export growth for the rest of the region.
Speaker: In fact, China is a more important export market than the U.S. or Europe.
Speaker: And so to the extent that we do see stabilization demand in China, pickup in demand, that actually helps us avoid a recession in the rest of the region.
Speaker: And so from that perspective, you know, the recession risk really isn't all too high at this stage across Asia.
Speaker: Now, food inflation is a key focus of the report.
Speaker: What's the main takeaway?
Speaker: So it's still a risk that we felt strongly needed to be highlighted because so far, actually, food inflation in Asia has lagged global food prices.
Speaker: And you might wonder why, because, of course, globally food prices are up quite sharply.
Speaker: The reason why they're lagging is in part because Asian diets are more rice-based than wheat-based and global rice prices have actually gone sideways.
Speaker: So unlike wheat, which has soared in price, although it's starting to stabilize, but we haven't really seen that same impact on rice.
Speaker: Now one of the risks going forward is that we might see disruptions in trade for rice.
Speaker: India accounts for 40% of global rice exports, more than Thailand and Vietnam combined, which are the next two and third biggest rice exporters.
Speaker: Should we see, potentially, disruptions to rice exports from India, that would potentially have ripple effects across the region.
Speaker: Therefore, we still think that there's a risk here that food prices in Asia will continue to rise.
Speaker: And so in this next few months, we really urge investors, our client base, certainly to keep a close watch on food prices because it could be quite disruptive.
Speaker: 25% of Asia's CPI baskets is food.
Speaker: Only 10% is energy.
Speaker: So food potentially is much more disruptive.
Speaker: Fred, thanks very much.
Speaker: Thank you very much.
Speaker: Fred mentioned China's battle against COVID-19.
Speaker: This week, our economists and rate strategists teamed up to examine the government's fiscal and monetary response to recent outbreaks.
Speaker: Jing Liu, Chief Economist for Greater China, can talk us through the details.
Speaker: Jing, you've been comparing the latest COVID wave in China to the initial outbreak in 2020.
Speaker: What have you found?
Speaker: Right.
Speaker: So I think, you know, this is basically consistent with the nature of Omicron variant versus the original one.
Speaker: So this time around, we have seen it spreads more widely, prolongs longer.
Speaker: And, you know, in response, the government also
Speaker: have imposed quite stringent containment measures in order to stop the transmission chain.
Speaker: So I think, you know, in that sense, people start to worry about will the economy get a hotter heat or comparable heat as back in 2020.
Speaker: And what about the economic policy response?
Speaker: Is that comparable?
Speaker: Right.
Speaker: So I think, you know, basically this time around, the good thing is Omicron, the variant is not as toxic as our original one.
Speaker: But given the widespread and long lasting nature, we see the government, you know, already try to put together the measures which are
Speaker: in large sense comparable to the 2021.
Speaker: For example, when it comes to the fiscal policy, we see the very familiar measures such as tax cut, you know, basically the issuance of special government bonds.
Speaker: as well as various deferrals of the Social Security payment, you know, and also the rental waivers, so on and so forth.
Speaker: So I think for the fiscal policy, in many ways, it's comparable.
Speaker: When it comes to monetary policies, probably this time around,
Speaker: PBOC is not giving as punchy kind of policy support as last time for obvious reasons.
Speaker: The Fed is hiking, so there is some concern on the divergence of monetary policy.
Speaker: But still, if they want to, they can inject liquidity through the relending schemes and so on.
Speaker: And is there anything that's concerning investors in terms of the current policy response?
Speaker: Yeah, sure.
Speaker: Because last time we saw China rebounded with a very sharp V-shape.
Speaker: And accordingly, the focus for the PBOC and other financial regulators start to be, you know, the kind of speculation in the market.
Speaker: So they start to become very hawkish and withdraw some of the support in the second half of 2020.
Speaker: So the question naturally from fixed income,
Speaker: investors is will China rebound very quickly so the policy support will fade away in the second half of this year.
Speaker: We don't think so.
Speaker: I think basically this time around because of the nature of the Omicron, actually the lifting of containment measures by the government tend to be slower than last time.
Speaker: As a result, the disruption to, for example, supply chain
Speaker: will also only normalize with a longer time.
Speaker: So the recovery path will be more like a U-shape or a V-shape with a much slower slope going upward.
Speaker: With such, in order to engineer a moderate recovery, the government will stay accommodative on all policy fronts.
Speaker: Ying, are there any concerns from investors when it comes to funding the recovery?
Speaker: I think one question we get a lot is where does the money come from, especially given the local government seem to be having some kind of stress on their balance sheet.
Speaker: Our answer is this time around we actually will count on central government support quite a bit and we see that's not our base case but there's a possibility for central government to issue special treasury bonds in the second half of this year and then use that proceeds to transfer to local governments and local government also have the capacity to
Speaker: front load the quota from 2023 in order to satisfy their fiscal needs.
Speaker: So I think with those things together, you know, we are confident China should have enough funding to support the economic recovery.
Speaker: And on top of that, when the local official reshuffle coming to an end, you know, the policy implementation will be more rigorous.
Speaker: That's a great summary, Jing.
Speaker: Thank you.
Speaker: Thank you.
Speaker: A recovery in Russian supply and growing concerns of the global demand outlook have combined to take some of the heat out of oil markets in recent weeks.
Speaker: So what's next for prices?
Speaker: Gordon Gray, Global Head of Oil and Gas Equity Research, joins me now.
Speaker: Gordon, welcome to the podcast.
Speaker: Thank you.
Speaker: So, Gordon, let's take Russian supply first.
Speaker: How is it that it's rising again?
Speaker: What are the factors behind that?
Speaker: Well, immediately after the start of the war in Ukraine, supply fell by at least a million barrels per day as a number of buyers pulled out from the market.
Speaker: But what we've seen is a sharper pickup in buying from Asia, I think, that most people expected with buying in China, buying in India, ramping up by a combined level of over a million barrels per day.
Speaker: But the picture is very different in Europe, isn't it, where it's all about bans.
Speaker: What's the situation there?
Speaker: It is.
Speaker: We've just had within recent weeks an announcement by the EU of an embargo on importing Russian oil, as well as an embargo on insurance of shipping Russian oil cargoes worldwide.
Speaker: But none of those have actually kicked in yet.
Speaker: They're effective towards the end of this year.
Speaker: So what we've seen in Europe is a significant reduction of buying of Russian crude oil.
Speaker: It happened quite quickly.
Speaker: in April, May.
Speaker: There's still more to happen, but those measures haven't officially kicked in yet.
Speaker: And the third element is what is kind of developing now, which is this fear of a recession.
Speaker: How is that going to play into the supply and demand equation?
Speaker: Well, demand in the first and second quarter is actually down a bit from the fourth quarter last year anyway.
Speaker: Part of that has been a bit of a slowdown because of price effects.
Speaker: There's some seasonality in there as well normally at this time of year.
Speaker: But also there's been a quite significant effect from the lockdowns in China.
Speaker: If we look from here towards the back end of this year, I think you can expect a bit of a boost to demand as and when those lockdowns are eased.
Speaker: Playing off against that, though, we're already seeing signs of erosion to demand in the latest figures in the US, for example, for gasoline demand, diesel demand.
Speaker: And I think demand estimates have come down.
Speaker: I think they could well come down even more, particularly looking into next year.
Speaker: The uncertainty is leaving a very, very clouded picture for demand.
Speaker: But I do suspect consensus estimates on demand growth into 2023 are probably too high.
Speaker: Nevertheless, you're telling us that we shouldn't get too carried away about the supply and demand situation.
Speaker: It's still going to remain relatively balanced?
Speaker: Well, I think there are a couple of big ifs around this.
Speaker: If buying of Russian crude by India and China continues to ramp up as we think it will, and if demand growth expectations come down, then the market looks like it could be broadly balanced over the next one to two years, but broadly balanced at a level where OPEC's bear capacity is falling to levels that by historical averages are extremely low.
Speaker: where there's just very, very little flex in the system.
Speaker: So you need demand growth expectations to come down.
Speaker: You need for the equation to work, I guess, and for the market not to get overheated once more.
Speaker: Gordon, thanks very much.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Fred Newman, Jing Liu and Gordon Gray.
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.
