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.
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Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: This podcast was recorded on the 30th of November 2023 by HSBC Global Research.
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Speaker: Hello and welcome to the Macrobrief.
Speaker: I'm your host Piers Butler in London.
Speaker: Climate change is likely to be the defining topic for this century.
Speaker: The impact of rising global temperatures is already becoming abundantly clear with record-breaking temperatures and increasingly frequent and severe extreme weather events.
Speaker: Here at HSBC we track nine key themes ranging from the energy transition to automation and future cities to digital finance.
Speaker: And we've just published a major new report looking at how these themes can help tackle the effects of climate change.
Speaker: I'm joined by its lead author, global economist James Pomeroy.
Speaker: James, welcome to the podcast.
Speaker: Thank you for having me.
Speaker: So essentially in your report, you've taken a climate change lens and applied it over our nine themes.
Speaker: And I wanted to ask you a few questions around some of the themes.
Speaker: The first one is energy transitions, kind of the obvious one.
Speaker: And I was really interested to see you write that you see a tipping point.
Speaker: Maybe expand on that.
Speaker: Yeah, so in the years to come, there's going to be a huge amount of investment in the energy transition all over the world in terms of be it all sorts of clean energy or in terms of energy efficiency or you name it.
Speaker: It's basically this idea that we need to get much, much better at producing clean energy.
Speaker: Those investment needs are enormous.
Speaker: In some estimates, you're talking three or four percent of global GDP per year.
Speaker: This needs to happen in that.
Speaker: but if you continue to see the pace of investment that we're seeing in certain parts of the world be it in wind power be it in solar power be it in any form of renewable energy there's a possibility that you hit tipping points where actually the cost of some of this energy is materially lower than generating electricity from fossil fuels
Speaker: It also therefore means that we can almost accelerate that transition when you hit that point because suddenly you've got this huge web of power that's coming from these renewable sources that's cheaper, that's better for the planet and investment may pick up again.
Speaker: And if that happens, you get to this interesting potential tipping point where a lot of this energy, the cost of essentially the marginal cost of producing it is very, very low.
Speaker: And if that has an implication that feeds through to the economy in terms of much lower electricity prices, what could that do in terms of broader inflation, in terms of where we choose to produce certain goods and services across the world, the implications could be absolutely massive.
Speaker: So the energy transition matters both in the sort of near term for the macro economy in terms of that investment.
Speaker: But if we get to these tipping points, we're using much more green energy.
Speaker: I think that could have some really powerful implications for growth and trade and all of those things too.
Speaker: Is transport leading the way in that respect?
Speaker: It is to a degree.
Speaker: You can see that in certain adoption rates of electric vehicles.
Speaker: There's a lot of this happening where you hit tipping points in electric vehicle adoption where you get enough people get electric cars so people build enough of the infrastructure so then people get over their sort of anxiety about range or about charging so they start adopting more electric cars and it spirals and spirals and spirals.
Speaker: And there's a potential similar thing that can happen as long as you can get that grid capacity up, as long as you get the investment up in these areas, the cost of putting in solar panels or putting in batteries or putting in wind farms could fall quite dramatically.
Speaker: And what that then does is changes your marginal cost of that electricity and you get that virtuous cycle.
Speaker: So it's almost investment breeds investment in a lot of these areas because you get over some of the tech, basically technological challenges that we're facing today.
Speaker: Sort of virtual circle, I guess.
Speaker: Exactly.
Speaker: And we're probably at the very start of that virtuous cycle in a lot of these things.
Speaker: Let's shift to future cities.
Speaker: You and I have spoken about urbanization on a number of occasions, and we did go through this phase during COVID where we thought that perhaps a trend towards urbanization would go into reverse.
Speaker: But in fact, the reality is that urbanization remains very strong.
Speaker: The difference is that perhaps more people will be working from home, but within a city.
Speaker: So how does your analysis sort of work in terms of climate change and future cities?
Speaker: So it's interesting.
Speaker: So one thing that's happened during the course of the pandemic is that people have now got a greater flexibility on where they live.
Speaker: And one thing we've written about over the course of the last few years is that means that cities now need to compete for people in a very different way.
Speaker: And one way that they can do that is by being clean and green, because unsurprisingly, people like clean air.
Speaker: People like actually good quality public transport.
Speaker: They like being able to walk around.
Speaker: And that gives you a whole load of different ways in thinking about cities and climate change because there's got to be a lot of urban investment to tackle climate change within cities, partly because cities are the areas most exposed in terms of climate change risks.
Speaker: They're also the areas that are most
Speaker: contributing in terms of greenhouse gas emissions.
Speaker: But they also have the greatest incentives to do that investment, partly because they're most vulnerable, but also because now it's a way of attracting people to live in your city.
Speaker: If your air quality is high, people like that.
Speaker: If you've got good public transport so you can get around the city easily, people like that.
Speaker: These are the sort of things that could actually lead to quite a lot of investment in both energy transition in terms of how we're being efficient in terms of buildings.
Speaker: and also in terms of transportation as well.
Speaker: There's a lot of opportunities here for urban investment to play a massive role in cleaning up the global economy.
Speaker: The other aspect is also related to the demographic theme.
Speaker: And as you write, one of the consequences of climate change is migration, that people are going to have to move from some areas of the world which are becoming much more uninhabitable.
Speaker: Is that going to have an impact on future cities?
Speaker: I think it's going to have a massive impact on the global economy.
Speaker: We did a standalone piece on this before where we sort of were going through some of the numbers and you look at how many people across the world could be displaced due to climate shocks in the years to come.
Speaker: You're in hundreds of millions of people.
Speaker: And as soon as you start looking at those numbers and you think about the impact that can have on migration flows across the world, it completely rips up the assumptions that are in a lot of demographic models.
Speaker: And where are those people going to go?
Speaker: Well, they're probably going to congregate on urban areas because that's where people typically move to.
Speaker: And that creates another stressful challenge, I think, for urban planning in terms of how we think about housing, how we think about a lot of these essentially resources in terms of infrastructure.
Speaker: That investment probably needs to be made today because we know almost for certain that migration flows across the world are going to pick up because of climate related shocks.
Speaker: Just sticking on the demographic theme for a minute, you've also looked at generational changes and particularly in terms of future consumer.
Speaker: Yeah, it's something that goes under sort of reported, I think, when you think about demographics.
Speaker: You spend a lot of time worrying about birth rates and ageing populations and population growth.
Speaker: But there's also a huge cohort effect and a cohort effect that probably drags along structural changes in the economy.
Speaker: And on the climate front, this is really interesting when thinking about new consumer patterns.
Speaker: And one area of this is the circular economy.
Speaker: with many more people we think in future being more accustomed or wanting to use circular economy type models and that can be more recycling, more sharing, more reusing, more second-hand products but also you're going to see more things like car sharing, you're going to see more things like clothes hiring for example or you're going to see a greater rise in second-hand consumption.
Speaker: These trends are really important in terms of helping to tackle resource usage.
Speaker: They also play havoc with economic data, because if you suddenly start buying all your clothes secondhand rather than new, well, actually, where does that appear in the economic statistics?
Speaker: And these are going to be huge challenges, I think, for economists and statisticians as well in the years to come.
Speaker: Something to keep you busy.
Speaker: One that was less obvious to me was digital finance.
Speaker: How does the climate change lens apply to that theme?
Speaker: So as I said earlier, there's going to be a ton of investment that's needed.
Speaker: Some of it's going to be private investment, some of it's going to be public investment, some of it's by individuals, some of it's by corporates.
Speaker: But we've got to work out how we're going to fund that.
Speaker: And a lot of the investment that's needed globally is going to be needed in those areas that are most exposed to climate change, which are typically in lower income economies.
Speaker: Those parts of the world which are facing higher temperatures today are more vulnerable to climate risks, more extreme weather events, those sorts of things.
Speaker: And those parts of the world need that financing.
Speaker: And that's where digital finance can be really, really important in terms of
Speaker: Getting credit to more people, using mobile money, using more digitised payment mechanisms, getting that money into the right hands can allow that investment to happen in the places that need it most.
Speaker: And there's a huge role, we think, for that side of the finance sort of infrastructure to play in making sure that capital is available so that investment can happen and tackle climate change where it's needed most.
Speaker: Yeah, I mean, I've just, funnily enough, come back from Cambodia, where the penetration of microcredits is very significant.
Speaker: So for some of these emerging markets, mobile money is a game changer.
Speaker: It is.
Speaker: It's a massive game changer, not just in terms of getting that investment into the economy, but it's something that can also spike a lot of broader consumption.
Speaker: If people have got access to investments and savings and all of those things, it can be a complete failure.
Speaker: game changer again in terms of what that means for economic growth, what it means for the financial system and all of those things.
Speaker: And if you can increase that access to credit and to savings, that can play a big role, we think, in actually helping the climate transition.
Speaker: So if I was to sort of summarize this, as you say at the start of the report, no one is underestimating the massive challenges faced by climate change, but it would be easy to become despondent about the sheer scale of those challenges.
Speaker: And what your report is saying is actually there are a number of things happening in these different themes that we look at, which are signs of optimism.
Speaker: I think that's a good way of putting it.
Speaker: It's very easy to be downbeat about climate change and for obvious reasons.
Speaker: We've lived through one of the hottest years in history this year.
Speaker: We're all the ranges of different extreme weather events that have been high profile news across the world and we can see the impact of that on the economy in very real terms.
Speaker: You can see it in crop yields, you can see it in economic activity, you can see it in trade being stopped because of water levels in certain areas.
Speaker: It's a huge problem but there are solutions.
Speaker: And I think it's very easy in so many parts of the global economy to just think about the bad news and not think about the opportunities.
Speaker: And these nine themes do create opportunities, be it in terms of the amount of investment that's going to come into the energy transition or businesses cleaning up their own operations, becoming more efficient with automation or AI or any sort of disruptive technology.
Speaker: or it could be these new consumption models that completely change the way we think about natural resource consumption.
Speaker: All of these things are happening and they're probably going to accelerate in the years to come because there's tons of investment coming to these parts of the economy and if it does it might help to tackle climate change, it might help to stop temperature increases, it might also help to grow the global economy in a much more sustainable way.
Speaker: I'm not saying that's definitely going to happen, but it's very easy to think about the bad news.
Speaker: And what we're trying to do in this report is acknowledge that bad news, but also talk about the possibilities of some of those good things happening too.
Speaker: James, thanks very much for joining us today.
Speaker: Thank you very much.
Speaker: James Bomeroy there on how the HSBC 9 themes can help tackle climate change.
Speaker: And if you'd like to stay up to date on our 9 themes research, then take a look at our monthly Talking Points report.
Speaker: For more information on how to access it, please email askresearch at hsbc.com.
Speaker: Before we go, here are a couple of other highlights from the team here at Global Research.
Speaker: In Europe, the market is increasingly focused on when the ECB might start cutting rates.
Speaker: And Fabio Balboni, our senior European economist, says the outlook for wages will be key.
Speaker: The latest data show wage growth starting to ease, but negotiated pay deals are likely to keep it high through 2024.
Speaker: Therefore, we think the first rate cut is more likely to come in the second half of next year and not the first half as currently priced in by the markets.
Speaker: And finally, Paul Mackel, global head of FX research, has assessed the outlook for emerging market currencies.
Speaker: It's been a tough time for EMFX with the Federal Reserve hiking interest rates.
Speaker: Now that the Fed seems to be done, is the outlook a little brighter?
Speaker: There's no guarantee, Paul says, and he sees better prospects for currencies in Central and Eastern Europe and Latin America than in Asia.
Speaker: And for more on Asia, check out our sister podcast, Under the Banyan Tree, which this week looks ahead to a bumper year for Asian elections.
Speaker: So that's it for another edition of the Macrobrief.
Speaker: Thanks very much for listening and we'll be back next week.
