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, and now onto today's show.
Speaker: You're listening to The Macro Viewpoint, our weekly showcase of the key views from the team here at HSBC Global Research.
Speaker: This podcast was recorded on Thursday 24th November 2022.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Coming up this week, could gas rationing still be on the cards in Europe this winter?
Speaker: We explore the outlook for the region's energy markets.
Speaker: Supply chain pressures have eased considerably after years of disruption.
Speaker: We look at what this could mean for inflation.
Speaker: And we assess what the latest data are telling us about the economic prospects for Europe and the UK.
Speaker: Hello, I'm Peter Stegall.
Speaker: And I'm Piers Butler.
Speaker: We begin this week in the energy market, where there had been serious concerns around potential gas rationing this winter.
Speaker: But with exceptionally mild weather, have these fears eased?
Speaker: Let's hear from Kim Fustier, Head of European Oil and Gas Research.
Speaker: Kim, welcome to the podcast.
Speaker: Thank you.
Speaker: Great to be here.
Speaker: So Kim, gas prices have come down quite sharply over the past couple of months.
Speaker: What's behind that?
Speaker: No, you're right.
Speaker: Gas prices have fallen by almost 50% from where they were two months ago.
Speaker: A lot of that has got to do with the mild weather that we've seen in autumn so far, as well as extremely high storage levels.
Speaker: So storage peaked about a week ago at record levels, and that's three weeks later than normal.
Speaker: We've also seen a big contraction in European gas demand.
Speaker: Demand in October fell 20% year-on-year, and it was down by more than 30% year-on-year in the first half of November.
Speaker: Is it all about the weather though?
Speaker: A large part of it is weather.
Speaker: You're absolutely right.
Speaker: But I think there's more to it than just weather.
Speaker: We estimate that about half of those demand declines that we've seen in recent weeks is down to changes in consumer behaviour, driven by rising energy bills as well as voluntary energy savings.
Speaker: There had been some concerns about the need for rationing in Europe this winter.
Speaker: Have those fears receded?
Speaker: We no longer see risks of gas rationing.
Speaker: Effectively, we think Europe is probably going to be fine for this winter just because of how high storage is at the moment.
Speaker: And we think we'll exit next winter with reasonable levels of gas storage.
Speaker: However, I don't think we can relax just yet.
Speaker: Gas demand still needs to contract by about 9% year on year for the next few months and then stabilize at a low 2022 level.
Speaker: until the end of 2023.
Speaker: So as we've said before, this is a multi-year squeeze for Europe and we're not quite out of the woods yet.
Speaker: And what does it all mean for gas prices going forward?
Speaker: We have cut our forecast for next year by nearly 30%, albeit that forecast is still at quite a high level.
Speaker: And we haven't changed our forecast for 2024 and beyond much at all.
Speaker: As I said, we still think this is a multi-year gas squeeze for Europe.
Speaker: And the situation really only gets sorted out once there's more LNG supply.
Speaker: And that's not going to happen until 2025, 2026, when new capacity starts up in the US and Qatar.
Speaker: And until then, prices need to remain high in order to both suppress demand and also to attract LNG away from Asia.
Speaker: Kim, thanks very much.
Speaker: Thank you.
Speaker: The global economy has endured more than two years of unprecedented supply chain disruption.
Speaker: But with signs that bottlenecks are easing, James Pomeroy, global economist, has been looking at the potential impact on inflation.
Speaker: He joins us now.
Speaker: So James, where are we in terms of supply chain disruption?
Speaker: So supply chain disruptions have caused a whole load of problems in the global economy over the course of the last couple of years with very, very high shipping costs and shortages of products throughout supply chains all over the world.
Speaker: But in the course of 2022, we've seen some rapid improvements, a combination of slowing down demand for goods, businesses being able to receive the deliveries that they'd ordered over the course of the last couple of years, meaning a buildup of inventories,
Speaker: Those two things together, coupled with genuine improvements on the supply side, more boats being available, more containers being made available, have really helped take away a lot of these supply chain disruptions.
Speaker: And just as a barometer, the cost of sending freight from Asia to the US has now dropped by about 90% this year.
Speaker: There's still some categories where this is not the case, but by and large, globally, supply chain disruptions look like they're close to being over.
Speaker: Surely this is good news for business?
Speaker: Yeah, it's great news because that cost of shipping being down so much is really going to help them with their costs.
Speaker: But it also helps them in terms of getting the stock and also alleviating some of the shortages within those supply chains that have been causing a whole load of disruptions.
Speaker: So all of this together basically means that businesses have got more stock, they're paying less for it.
Speaker: And this should be quite good news in terms of basically being able to provide stuff to consumers, but also it could help to limit some of these inflationary pressures.
Speaker: And what will be the impact of slowing consumer demand?
Speaker: So that's the interesting case for businesses.
Speaker: They've got finally stuff to sell just as people want to buy less of it.
Speaker: And what we're seeing across the world at the moment is a slowdown in consumer spending, not quite falling off a cliff like we might have expected.
Speaker: But clearly there's a weakness in terms of goods demand, people shifting their spending towards services.
Speaker: So now we've got this situation where businesses are now competing in terms of trying to sell their stuff to fewer and fewer people.
Speaker: And what that could well mean is they have to discount product going forwards rather than being able to mark up those prices like they had previously.
Speaker: So this is a big challenge for a lot of businesses who, yes, they're seeing a big benefit, but they still face high wage costs.
Speaker: They still face high energy prices.
Speaker: But now there's much more competition in the goods markets.
Speaker: And what that's likely to mean is lower prices.
Speaker: So taken together, will this be enough to lower inflation?
Speaker: So on the good side of things, it looks quite likely.
Speaker: We saw the first sign of this in the October US CPI data with a whole load of goods categories seeing quite chunky month-on-month falls and a good chance of that happening now over the course of the next few months.
Speaker: We could continue to see goods disinflation or deflation in many categories over the coming months.
Speaker: Now that won't necessarily happen every single month
Speaker: data point, but the trend looks likely to be going in that direction.
Speaker: But it's not necessarily all about goods.
Speaker: There's a whole lot of other reasons why inflation could stay higher.
Speaker: Services inflation looks to be relatively solid and shows no sign of turning.
Speaker: You've got a similar story in rental inflation, particularly in the US, and which will likely to continue to move higher.
Speaker: It's also true that in Europe, where energy prices have gone up so much, you're still seeing this feed through into higher business costs.
Speaker: So the impact of this turn in goods prices may come a little bit later.
Speaker: And of course, food prices, where there's still a lot of supply disruptions still feeding through into many, many higher prices.
Speaker: So we are likely to see stickier inflation through 2023.
Speaker: But if you are looking for some good news, it's likely to come in the goods sector because a lot of these indicators are now pointing in the right direction.
Speaker: James, thanks very much for your time.
Speaker: Thank you.
Speaker: I'm Harold van der Linde.
Speaker: And I'm Fred Newman.
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Speaker: Let's focus on Europe and the UK now, where some of those supply chain issues that we just heard about are evident in the latest data.
Speaker: Chris Hare, European economist, has been assessing the latest numbers from the Purchasing Managers Index.
Speaker: So Chris, what are the latest figures telling us?
Speaker: Well, it's first worth noting that the latest headline PMI indices for Europe were a little bit less bad than expected, so I guess that's good news.
Speaker: But in terms of fundamentally what they're saying is two things.
Speaker: The first is that those PMI indices are a little bit below the 50 mark, and that points to an economic contraction.
Speaker: So that's not good news.
Speaker: But second, when we're looking at supply chains and those pricing indices, well, some of those headline price measures within that survey are easing a little, so I guess I take some comfort from that.
Speaker: So you're starting to see the impact of supply chain easing then?
Speaker: That's right.
Speaker: There's one particular index within the surveys which asks manufacturers about their supplier delivery times and that particular index has got a lot better over the last few months.
Speaker: An other index relating to manufacturers' input costs seems to be falling fairly sharply too.
Speaker: But there's an open question as to how that's going to lead to softer inflation pressures more broadly.
Speaker: Because if you look at the service sector, for example, those price and cost indices are still looking pretty elevated.
Speaker: So we could see some high inflation to come.
Speaker: And thinking about growth and recession risks, do you think these data suggests we're heading for a recession in the Eurozone or the UK?
Speaker: Yes, well, at face value, those PMI surveys are consistent with our call for a mild recession through the course of this winter.
Speaker: But of course, we don't just look at the surveys.
Speaker: Also, bear in mind the macroeconomic headwinds.
Speaker: We've got double digit inflation, a major income squeeze, and it's the energy related inflation which is really going to hit home through this winter.
Speaker: So yes, this winter looks recessionary for the eurozone.
Speaker: And of course, it's worth remembering for the UK in the third quarter,
Speaker: of this year, we actually had a contraction in GDP already, so the UK may already be in that recession.
Speaker: What does this mean in terms of policy?
Speaker: Well, for fiscal authorities, there's a question about to what extent governments might want to continue energy-related price support.
Speaker: We think those sorts of support measures will continue through the coming year, but they might be tapered.
Speaker: And then for monetary policymakers, well, the dilemma is still very much there.
Speaker: You've got the prospect of a recession, albeit a mild one, but then double-digit inflation.
Speaker: What we're looking at from central banks at the moment is the prospect, yes, of continued rate rises, but
Speaker: but the beginning of signals towards an easing in the pace of those rate rises.
Speaker: So, for example, from the ECB, they've been raising rates by 75 basis points last couple of meetings.
Speaker: We see a 50 basis point rise in the next meeting in December for the Bank of England.
Speaker: We see also a tapering in the pace of those rate increases as the recession starts to kick in.
Speaker: Chris, thanks for explaining all that.
Speaker: Thank you.
Speaker: So that's all from us this week.
Speaker: Thanks to our guests, Kim Pustier, James Pomeroy and Chris Hare.
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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