Transcript
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.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
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: Hello, I'm Aline van Dyne.
Speaker: And I'm Piers Butler.
Speaker: We're back from our summer break, ready to bring you the best of our research published over the past week.
Speaker: Coming up today… We look at how the deteriorating economic outlook could increase the pressure on UK businesses.
Speaker: We consider whether ongoing disruption is now the new normal for supply chains.
Speaker: And we assess the outlook for global bond yields as major central banks continue to raise interest rates.
Speaker: This podcast was recorded on Thursday the 1st of September 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Here in the UK, there's a lot of attention on the soaring cost of energy and the implications for households.
Speaker: But what about the impact on businesses?
Speaker: Liz Martins, senior UK economist, has been looking at why there are tough times ahead for UK PLC.
Speaker: Liz, welcome to the podcast.
Speaker: Thank you.
Speaker: So, Liz, just how badly are businesses being affected by this deteriorating economic backdrop?
Speaker: Well, I mean, clearly it depends from business to business.
Speaker: But what we are hearing a lot about at the moment is businesses starting to receive their energy bills for the next year.
Speaker: So a lot of businesses have energy costs fixed in for longer periods than households.
Speaker: The shock is only starting to come now.
Speaker: And the anecdotal evidence suggests that new bills are coming in five, six, seven times what businesses were previously paying.
Speaker: And for many smaller businesses in particular, that's proving a fatal blow and they're actually being forced to close down.
Speaker: So this is a very serious development for UK companies.
Speaker: And do you expect margins to be squeezed further?
Speaker: Yeah, I mean, UK companies are going into this with decent margins, but we do expect them to be squeezed.
Speaker: The pressure's already on and we expect that to continue.
Speaker: And we lay out four reasons for that.
Speaker: One is these huge energy bills that I've mentioned.
Speaker: Two is rising staff costs.
Speaker: You know, the higher inflation goes, the higher wage demands are going to be.
Speaker: And we're starting to see strike actions spill over into the private sector as well.
Speaker: The third is higher interest rates, which companies aren't in a terrible position for leverage, but a lot of the debt that they do have is on floating rates.
Speaker: So that pushes up on their costs.
Speaker: And the final one is limited pricing power in an environment where we're seeing household demand starting to fall.
Speaker: So if that's the case, then it's harder for them to put their own prices up to keep those margins stable.
Speaker: So all in all, yes, we do see
Speaker: further falls in margins, unfortunately.
Speaker: So what can companies do?
Speaker: And what about government support?
Speaker: Well, I think companies have really only two options.
Speaker: You put your prices up or you cut costs.
Speaker: Putting prices up, as I've just mentioned, looks pretty difficult in this environment, particularly because we also look in this inventory.
Speaker: And a lot of companies have built up inventories to quite
Speaker: healthy positions, which means they may actually be forced to cut costs to get rid of some of this stock into the winter.
Speaker: And that leaves us with job cuts, unfortunately.
Speaker: And although the labour market has been incredibly healthy, I guess, since the pandemic, you know, this next phase of our kind of economic journey does suggest that maybe job losses are ahead as companies cope with these higher costs.
Speaker: But as you said, government support is an additional factor that we need to take into consideration.
Speaker: And we simply don't know what support will be available.
Speaker: You know, we'll find out soon the UK's new prime minister looks likely to be Liz Truss.
Speaker: Presumably there will be something in her budget in September for companies.
Speaker: But she hasn't said very much about that other than the cut to national insurance contributions, which will help a bit, but not probably enough.
Speaker: So we'll be looking to see what additional support comes from the government.
Speaker: Finally, what does this tell us about the economic outlook?
Speaker: Well, I think if we put together the weak pricing power, those high levels of inventories and the weak demand in the economy, it supports our view that inflation is going to come back down towards the end of next year.
Speaker: But then if we look at the margin compression story, I think we can see risks to that.
Speaker: And I mentioned two risks.
Speaker: One is that demand in the economy stays higher, whether through government support, whether through higher wages,
Speaker: And that means that inflation stays higher for longer and actually that companies are able to put more of their cost increases through and pass them on to us as consumers.
Speaker: But the other risk for higher inflation is on the supply side, because, of course, if you are a company that's closing down, then you are decreasing the supply of goods and services.
Speaker: in the economy.
Speaker: Or the example we give in the report is airlines.
Speaker: Airlines are cancelling flights in the winter to save on costs and because of staff shortages.
Speaker: Now, that means there are fewer places on planes flying this winter, and that may drive up the prices of those seats that are remaining.
Speaker: So two risks, I guess, of higher inflation.
Speaker: One is higher demand and one is weaker supply.
Speaker: Liz, thank you very much for your time.
Speaker: Thank you.
Speaker: High energy prices aren't the only issue facing corporates.
Speaker: Port worker strikes and even low water levels are all impacting freight movements.
Speaker: Shanela Rajaniagam, trade economist, has been looking at what these disruptions mean for supply chains.
Speaker: So, Shanela, let's start with some good news.
Speaker: It looks like pandemic-related supply chain strains are continuing to ease.
Speaker: That's right.
Speaker: So there are some bright spots on the horizon when it comes to trade.
Speaker: It does look as though some of those pandemic-related trade disruptions are starting to abate.
Speaker: When we look at the New York Fed's Global Supply Chain Pressures Index, for example, that actually reached an 18-month low in July.
Speaker: Global container spot rates are also tumbling.
Speaker: Rates are down nearly 50% from their pandemic peak in September 2021.
Speaker: Global supply delivery times across a range of sectors are also starting to ease a little bit, although they do still remain quite extended.
Speaker: So all up some positive signs for these pandemic-related trade disruptions.
Speaker: And what's been the impact of soaring energy prices?
Speaker: So when it comes to energy on the trade side, it is very clear that supplies do remain constrained.
Speaker: And last week, for example, capacity through the Nord Stream pipeline was actually at only at around 20% of full capacity.
Speaker: And then just recently, flows have actually been shut from the 31st of August for three days.
Speaker: So we're in this world where there's constrained supply and high energy prices as well.
Speaker: And this is really impacting trade balances for some economies.
Speaker: So, for example, the UK goods and services trade deficit actually widened to the largest on record in the second quarter this year.
Speaker: And similarly for Japan, its goods trade deficit hit an all time high in July.
Speaker: However, it is also worth mentioning that the flip side to all of this, so you do have economies like Norway and Canada who are benefiting from higher prices for their energy exports.
Speaker: What are the data telling us about a potential slowdown in trade?
Speaker: So this is something that we have been flagging for some time now, because over the past couple of years, there was this very strong pandemic induced boom for trade.
Speaker: And mechanically, we do expect this to start to wane as economies open up.
Speaker: And that is starting to play out to a certain extent now.
Speaker: So when we do look at some of those macro indicators like the PMIs, we do see that global new export orders, for instance, declined for the fifth consecutive month in July.
Speaker: And this was broad based.
Speaker: So you have export orders falling for the auto sector, for construction materials and even for industrial goods as well.
Speaker: And even when it comes to electronics, new export orders for Taiwanese electronics also declined in July.
Speaker: And this was really as customer inventories continued to grow.
Speaker: And this issue around inventories is
Speaker: something to flag because over the past couple of years, businesses have built up quite large stocks of inventories in some sectors.
Speaker: So there is a question around how they will maybe deplete these in the face of slowing consumer demand.
Speaker: And so overall, we do expect trade growth momentum to actually start to moderate in the coming months and quarters.
Speaker: So are these disruptions the new normal for trade?
Speaker: So I think we can say that we're not really out of the woods yet when it comes to trade disruptions.
Speaker: So yes, as we mentioned, there are some signs that these pandemic related disruptions are starting to ease.
Speaker: But it's very clear that businesses are now grappling with a host of new trade challenges.
Speaker: So you have
Speaker: high inflation, you have port worker strikes, low water levels in some German rivers, and of course, ongoing geopolitical issues as well.
Speaker: So it is a very uncertain landscape for exporters and importers.
Speaker: So I think, you know, to answer the question, I think we can say that ongoing disruption certainly seems like the new normal, at least for now.
Speaker: Shanela, thanks very much.
Speaker: Thanks for having me.
Speaker: Before we move on, we'd like to invite you to HSBC's Global Emerging Markets Forum, which will take place online from the 13th to the 30th of September.
Speaker: Over three weeks, policymakers, thought leaders, corporates and our team of experts here in global research will be sharing their views on the outlook for emerging markets.
Speaker: If you're interested in attending, please contact your local HSBC representative for more details.
Speaker: Our fixed income team have long held the view that bond yields will be lower for longer.
Speaker: Stephen Major, Global Head of Fixed Income Research, has revisited the topic and explains why he thinks it is as relevant as ever.
Speaker: He spoke to Graham McKay in Hong Kong earlier.
Speaker: So, Steve, the message from Jackson Hole has been pretty clear.
Speaker: Interest rates are going to stay elevated, at least until inflation starts to come down.
Speaker: What's your initial response to that?
Speaker: Obviously, it's a challenge to the lower for longer thesis.
Speaker: That's fair enough.
Speaker: And actually, Jackson Hole was a motivation for going for this paper.
Speaker: And I guess the other motivation was we were due to check in on the theme.
Speaker: But I look at Jackson Hole slightly differently.
Speaker: The narrative, without doubt, has been higher for longer.
Speaker: And central banks have been quite concerted and coordinated in getting that message across.
Speaker: But looking into the transcripts and the discussions and the panels, there's a much deeper discussion going on, which I think is consistent with lower for longer rates.
Speaker: Can you elaborate on that?
Speaker: Well, yeah.
Speaker: So whilst it's true that the market implies rates being 3% or high threes for the policy rate and above three for the 10-year right now, whilst that is what you can see,
Speaker: the key variable for valuing a 10-year bond is where policy rates will be five years hence.
Speaker: So look, imagine if the average yield for a bond was 3% for the next five years and then 1% for the following five years.
Speaker: The average of those two is 2, 2.0.
Speaker: That's why when bond yields are above three, they're implying that not only are rates going up, they're going to stay up for a very long time.
Speaker: So my thinking is the higher they go near term, the increase in the probability needs to be considered and where they go in the longer term.
Speaker: The determinants of what drives the longer run policy rate are the ones that matter and they don't change overnight.
Speaker: Remind us what the key pillars of Lower for Longer are.
Speaker: Well, it starts with debt, then aging populations, inequality, the central bank QE becoming QT, and then the connections between markets and how money flows from one place to another to get more yield.
Speaker: They are connected.
Speaker: So think about aging populations and high debt, like in Japan.
Speaker: And think about how wealth inequality interacts with savings and debt.
Speaker: It's the poorer cohorts who don't have the savings but do have the debt.
Speaker: So when rates go up, there's a disproportionate impact.
Speaker: I think this is all being underestimated.
Speaker: So these rate hikes are going to really pack some punch.
Speaker: Right.
Speaker: And what are the key areas of pushback against your view?
Speaker: Yeah, they come thick and fast.
Speaker: So there's a general view out there that higher for longer means the opposite of lower for longer.
Speaker: Well, it's true.
Speaker: Rates are going to, perhaps, if the Fed is right, they're going to stay high for the next year or so.
Speaker: The Fed is often wrong, by the way.
Speaker: But if we just take a base case that they do what they say they're going to do, and
Speaker: But that isn't itself a proper pushback because we're talking about the rates five years from now.
Speaker: The big pushback that I think starts to be difficult to argue against is reverse globalization, the way supply chains are being reimagined, tariffs and that kind of thing.
Speaker: The labour market's a big pushback in that labour starts to take a bigger share of profits.
Speaker: I look into those two and I think, well, we don't really know on the first one, because to me there's a sort of multimodal trade reconfiguration going on such that you have a big free trade zone that we know about here in Asia.
Speaker: And there's a big one in the EU and the Americas.
Speaker: And do you know, for example, that Mexico is offering a cheaper unit labour cost than China at the moment from a US perspective?
Speaker: So there's a few things to consider.
Speaker: On labour and unit labour costs on labour in general, I think most ordinary people will feel quite poor at the moment.
Speaker: Even if their wages have gone up, they haven't kept pace with inflation.
Speaker: So I push back on the pushback, if you know what I mean.
Speaker: Thank you very much, Steve.
Speaker: Thank you, Graham.
Speaker: So that's it for today.
Speaker: Thank you to our guests Liz Martins, Shanela Rajanagam and Stephen Major.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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