1 00:00:00,120 --> 00:00:02,719 Speaker 1: Let's get to Michael Spencer. Here is our guest. Michael 2 00:00:02,800 --> 00:00:05,480 Speaker 1: is the chief economist also head of research for the 3 00:00:05,519 --> 00:00:09,639 Speaker 1: Apac region at Deutsche Bank. He joins from Hong Kong. Michael, 4 00:00:09,680 --> 00:00:12,480 Speaker 1: thanks for being with us. What's up for discussion today 5 00:00:12,520 --> 00:00:15,160 Speaker 1: is the likelihood of recession. We know what the Fed's 6 00:00:15,200 --> 00:00:17,760 Speaker 1: position is right now, is it attempts to get inflation 7 00:00:17,840 --> 00:00:20,840 Speaker 1: under control. Do you think it's inevitable that we're looking 8 00:00:20,840 --> 00:00:25,280 Speaker 1: at a contraction in economic growth? I don't think it's inevitable, 9 00:00:25,280 --> 00:00:28,160 Speaker 1: but it's most likely. In fact, the US economy probably 10 00:00:28,200 --> 00:00:30,319 Speaker 1: today is already in what you might say is a 11 00:00:30,400 --> 00:00:34,559 Speaker 1: technical recession. We're expecting second quarter growth again to be negative, 12 00:00:34,600 --> 00:00:37,320 Speaker 1: but obviously the labor market is still extremely strong, so 13 00:00:37,600 --> 00:00:40,440 Speaker 1: we'd be reluctant to describe this as a proper recession. 14 00:00:40,880 --> 00:00:43,440 Speaker 1: But by middle of next year, certainly we think we 15 00:00:43,520 --> 00:00:46,040 Speaker 1: will be in the US in a proper recession with 16 00:00:46,280 --> 00:00:50,280 Speaker 1: declining real GDP and an unemployment rate that's rising. Uh. 17 00:00:50,320 --> 00:00:53,400 Speaker 1: And and and that given the pace at which the 18 00:00:53,440 --> 00:00:57,200 Speaker 1: FED is going to raise rates to try to suppress inflation. Uh, 19 00:00:57,320 --> 00:01:00,480 Speaker 1: you know, inevitable maybe too strong a word, but extremely likely. 20 00:01:00,560 --> 00:01:03,680 Speaker 1: The FED has never gotten inflation down from such levels 21 00:01:03,760 --> 00:01:07,000 Speaker 1: without pushing the economy into a severe recession. And how 22 00:01:07,000 --> 00:01:09,520 Speaker 1: does that complicate the things for things rather for the 23 00:01:09,560 --> 00:01:11,440 Speaker 1: FED going into this week when we know that they're 24 00:01:11,440 --> 00:01:13,959 Speaker 1: going to hike aggressively, but they have to be looking forward, 25 00:01:13,959 --> 00:01:16,680 Speaker 1: as you mentioned too, to these concerns about a potential 26 00:01:16,720 --> 00:01:20,640 Speaker 1: recession next year. Well, you can get quickly circular in 27 00:01:20,680 --> 00:01:23,000 Speaker 1: your logic. And that's the problem I guess with policy 28 00:01:23,040 --> 00:01:26,160 Speaker 1: makers is if they don't raise interest rates, that makes 29 00:01:26,200 --> 00:01:28,080 Speaker 1: it much less likely that we're in recession, but they 30 00:01:28,080 --> 00:01:31,200 Speaker 1: would have to accept much higher inflation. Um. So I 31 00:01:31,240 --> 00:01:33,240 Speaker 1: think what they will do is they'll raise rates. Were 32 00:01:33,240 --> 00:01:36,240 Speaker 1: expecting a seventy five basis point rate hike, we're expecting 33 00:01:36,280 --> 00:01:39,600 Speaker 1: them to signal that they will in the following meeting 34 00:01:39,640 --> 00:01:43,600 Speaker 1: again raise rates fifty or maybe seventy five basis points. Uh. 35 00:01:43,640 --> 00:01:45,319 Speaker 1: And they will know in the back of their minds 36 00:01:45,400 --> 00:01:48,160 Speaker 1: that this is increasing the risk that the economy goes 37 00:01:48,200 --> 00:01:51,760 Speaker 1: into recession. But at this point inflation seems the more 38 00:01:51,840 --> 00:01:54,680 Speaker 1: imminent and more serious risk of the economy threat to 39 00:01:55,120 --> 00:01:58,840 Speaker 1: prosperity than than a recession next year. I think that's 40 00:01:58,840 --> 00:02:01,720 Speaker 1: pretty much what FED Chair FED Chair J. Powell has 41 00:02:01,760 --> 00:02:04,600 Speaker 1: already said that it's important to get the price stability 42 00:02:04,600 --> 00:02:09,480 Speaker 1: component right before you even consider the consequence, and recession 43 00:02:09,600 --> 00:02:13,200 Speaker 1: is obviously one of those consequences. We've got US housing 44 00:02:13,280 --> 00:02:16,919 Speaker 1: data on Tuesday, a couple of key data points that day. 45 00:02:17,160 --> 00:02:19,960 Speaker 1: Do you think that we're already looking at enough contraction 46 00:02:20,000 --> 00:02:22,919 Speaker 1: in the housing market where the FED can feel reasonably 47 00:02:23,000 --> 00:02:25,480 Speaker 1: confident that that part of the economy is beginning to 48 00:02:25,520 --> 00:02:29,840 Speaker 1: cool down a little, cooled down a little, but probably 49 00:02:29,880 --> 00:02:33,440 Speaker 1: not enough. No. I think the Fed's views that even 50 00:02:33,480 --> 00:02:36,040 Speaker 1: in that sector and broadly in the US economy, this 51 00:02:36,160 --> 00:02:39,919 Speaker 1: is an economy that still looks like it's generating more 52 00:02:39,919 --> 00:02:44,320 Speaker 1: inflationary pressures and they've got to act aggressively against that. 53 00:02:45,560 --> 00:02:48,080 Speaker 1: We're also looking at the strength of the consumer. But then, 54 00:02:48,120 --> 00:02:50,000 Speaker 1: as we were just talking about with our previous guests, 55 00:02:50,000 --> 00:02:53,320 Speaker 1: it does really show the two speed economy too, when 56 00:02:53,360 --> 00:02:56,160 Speaker 1: you have those that are still quite buffeted by savings 57 00:02:56,160 --> 00:02:58,360 Speaker 1: from the pandemic and those that are really struggling with 58 00:02:58,400 --> 00:03:01,200 Speaker 1: these higher prices. How does that all play out in 59 00:03:01,280 --> 00:03:06,720 Speaker 1: terms of the doomsday scenario as well? Doomsday maybe a 60 00:03:06,800 --> 00:03:09,560 Speaker 1: little strong, but but absolutely And I think look for 61 00:03:09,600 --> 00:03:15,840 Speaker 1: central banks. The distributional effects of monetary policy things that 62 00:03:16,000 --> 00:03:19,240 Speaker 1: I think central banks struggle with. UM. It's hard to 63 00:03:19,240 --> 00:03:23,240 Speaker 1: set policy for an for a broad macro outlook for 64 00:03:23,240 --> 00:03:28,920 Speaker 1: an economy without almost necessarily hurting some parts of the 65 00:03:29,000 --> 00:03:32,000 Speaker 1: population worse than others. And and that's really the job 66 00:03:32,040 --> 00:03:35,960 Speaker 1: of fiscal policy to try to to to counteract those 67 00:03:36,000 --> 00:03:39,600 Speaker 1: distributional impacts. So that the Fed's view would be that overall, 68 00:03:39,680 --> 00:03:43,680 Speaker 1: the US consumer still looks to be in reasonably robust shape. 69 00:03:44,080 --> 00:03:47,040 Speaker 1: Consumption is shifting at the margin away from goods towards 70 00:03:47,040 --> 00:03:51,200 Speaker 1: services as was expected. Households still have a fairly large 71 00:03:51,280 --> 00:03:55,320 Speaker 1: part of savings accumulated since two thousand that they are 72 00:03:55,360 --> 00:03:59,800 Speaker 1: now eating into, and that's likely to sustain consumption for 73 00:04:00,040 --> 00:04:03,200 Speaker 1: some time going forward. UM. And I think the FED 74 00:04:03,240 --> 00:04:06,240 Speaker 1: will just hope that the fiscal authorities can can can 75 00:04:06,240 --> 00:04:10,520 Speaker 1: help redistribute income if necessary, as they're raising interest rates. Energy. 76 00:04:10,720 --> 00:04:13,360 Speaker 1: That story has been critical to understanding what's going on 77 00:04:13,440 --> 00:04:15,520 Speaker 1: with inflation. Now. You could make a case that a 78 00:04:15,600 --> 00:04:19,000 Speaker 1: stronger dollar for American consumers of crude oil products would 79 00:04:19,040 --> 00:04:21,559 Speaker 1: take some of the sting out, but for the rest 80 00:04:21,560 --> 00:04:25,039 Speaker 1: of the world, because oil is denominated in dollars, that 81 00:04:25,200 --> 00:04:28,200 Speaker 1: it's not going to be the same. Are you confident 82 00:04:28,279 --> 00:04:30,960 Speaker 1: that that will be able to look at lower energy 83 00:04:31,000 --> 00:04:34,440 Speaker 1: prices in in any way just because of demand destruction 84 00:04:34,440 --> 00:04:36,760 Speaker 1: in the near term, and might that supply a bit 85 00:04:36,760 --> 00:04:41,279 Speaker 1: of relief? Uh? Confident? No, I guess because because still 86 00:04:41,360 --> 00:04:44,760 Speaker 1: we have this huge overhang of geopolitical risk over world 87 00:04:44,839 --> 00:04:48,520 Speaker 1: energy markets. You're right that to some extent, US consumers 88 00:04:48,560 --> 00:04:52,760 Speaker 1: are shielded at the margin, um by these rising prices, 89 00:04:52,839 --> 00:04:55,279 Speaker 1: by virtue of a stronger dollar and by being self 90 00:04:55,279 --> 00:04:59,880 Speaker 1: sufficient uh in in energy, but uh and in emerging markets, 91 00:04:59,880 --> 00:05:04,080 Speaker 1: including my region in Asia, the combination of weaker currencies 92 00:05:04,080 --> 00:05:10,040 Speaker 1: and rising dollar costs for oil and gas is in 93 00:05:10,160 --> 00:05:13,440 Speaker 1: some places the most important source of inflation. Le's get 94 00:05:13,440 --> 00:05:15,400 Speaker 1: back to our guests, Michael Spencer, Chief economists in a 95 00:05:15,440 --> 00:05:17,680 Speaker 1: head of Research Asia Pacific at Deutsche Bank, joining us 96 00:05:17,680 --> 00:05:20,200 Speaker 1: from Hong Kong and focus more in on Asia. We've 97 00:05:20,200 --> 00:05:23,799 Speaker 1: been looking at the impact of energy security and food inflation. 98 00:05:23,880 --> 00:05:26,159 Speaker 1: To just tell us, I guess the concerns you have 99 00:05:26,279 --> 00:05:30,560 Speaker 1: for both of those flowing through to Asian countries. Certainly, 100 00:05:30,600 --> 00:05:33,799 Speaker 1: I mean food is the single largest component of consumer 101 00:05:33,839 --> 00:05:38,480 Speaker 1: price indicries and what we're seeing globally is is essentially 102 00:05:38,520 --> 00:05:40,800 Speaker 1: a repeat to the two thousand ten two thousand eleven 103 00:05:40,839 --> 00:05:44,039 Speaker 1: food price shock, which was devastating in this region. Now 104 00:05:44,360 --> 00:05:47,000 Speaker 1: we've been spared the worst of that so far because 105 00:05:47,120 --> 00:05:50,480 Speaker 1: rice prices have not been rising. Uh and that's probably 106 00:05:50,520 --> 00:05:52,600 Speaker 1: for for a number of countries, that's the most important 107 00:05:52,640 --> 00:05:58,120 Speaker 1: staple in the diet. That seems unlikely to continue when 108 00:05:58,160 --> 00:05:59,839 Speaker 1: you look at what energy prices are doing to the 109 00:06:00,000 --> 00:06:02,520 Speaker 1: auster fertilizer. No other farmers are going to be using 110 00:06:02,600 --> 00:06:06,400 Speaker 1: less fertilizer or there's going to be charging more for rice. 111 00:06:06,480 --> 00:06:09,080 Speaker 1: So the likelihood is that over the next year, food 112 00:06:09,080 --> 00:06:11,960 Speaker 1: price inflation in Asia is probably gonna get worse before 113 00:06:11,960 --> 00:06:14,760 Speaker 1: it gets better. And then on the straight energy front, 114 00:06:15,000 --> 00:06:18,000 Speaker 1: as we were discussing earlier, um, you know, the weaker 115 00:06:18,040 --> 00:06:21,000 Speaker 1: growth in the US and Europe is beginning to put 116 00:06:21,000 --> 00:06:24,320 Speaker 1: a bit of downward pressure on energy prices. But the 117 00:06:24,360 --> 00:06:28,280 Speaker 1: geopolitical risk and the possibility of maybe another shutoff of 118 00:06:28,360 --> 00:06:32,719 Speaker 1: Russian gas supplies to Europe escalation and the conflict in Ukraine, 119 00:06:32,720 --> 00:06:36,440 Speaker 1: it's probably too much to expect that energy prices decline, 120 00:06:36,960 --> 00:06:39,400 Speaker 1: even if they just stay where they are Gradually the 121 00:06:39,400 --> 00:06:42,400 Speaker 1: inflation impulse starts to come out, so we can reasonably 122 00:06:42,440 --> 00:06:45,480 Speaker 1: I think expect second half of next year inflation starts 123 00:06:45,480 --> 00:06:47,920 Speaker 1: to decline, but I think from most economies in Asia, 124 00:06:48,360 --> 00:06:51,360 Speaker 1: inflation headline inflation is likely to rise over the next 125 00:06:51,360 --> 00:06:55,120 Speaker 1: few months before we see any relief, maybe by sort 126 00:06:55,120 --> 00:06:57,760 Speaker 1: of Q two next year. Yeah, we've seen monetary policy 127 00:06:57,800 --> 00:07:02,320 Speaker 1: tightening already in places like sing A, war South Korea, Australia, 128 00:07:02,400 --> 00:07:06,279 Speaker 1: New Zealand, even the Philippines. Where are you in terms 129 00:07:06,320 --> 00:07:08,719 Speaker 1: of the outlook for global growth right now? Are we 130 00:07:08,760 --> 00:07:11,200 Speaker 1: going to see? How we were talking about the idea 131 00:07:11,200 --> 00:07:13,600 Speaker 1: of recession earlier? I mean, if even if you put 132 00:07:13,640 --> 00:07:17,680 Speaker 1: that aside, the technical deficit definition of recession, how much 133 00:07:18,960 --> 00:07:20,960 Speaker 1: will growth kind of weakened to the point of it 134 00:07:21,080 --> 00:07:26,520 Speaker 1: becoming parallelously close to recession if we're not over ready there. Well, 135 00:07:26,560 --> 00:07:29,400 Speaker 1: I guess at the global level people sort of think that, 136 00:07:29,440 --> 00:07:32,440 Speaker 1: you know, a growth rate below three percent is the 137 00:07:32,480 --> 00:07:35,280 Speaker 1: counterpart two or would classify as a recession in the 138 00:07:35,280 --> 00:07:37,600 Speaker 1: global economy, And I think we're likely to be there 139 00:07:37,680 --> 00:07:41,080 Speaker 1: next year. Um So in that context, you know, the 140 00:07:41,200 --> 00:07:45,440 Speaker 1: demand for Asian exports, which is still the main driver 141 00:07:45,560 --> 00:07:48,240 Speaker 1: of the business cycle in Asia that that that demand 142 00:07:48,320 --> 00:07:50,120 Speaker 1: is going to get weaker and weaker and weaker. It's 143 00:07:50,120 --> 00:07:53,840 Speaker 1: already slowing down, but to be honest, quite gradually so far. 144 00:07:54,080 --> 00:07:56,520 Speaker 1: But our modelings suggested by the end of this year 145 00:07:56,560 --> 00:07:59,760 Speaker 1: export volume growth for a number of the smaller economies 146 00:07:59,760 --> 00:08:01,920 Speaker 1: in a it could be essentially zero and negative for 147 00:08:02,000 --> 00:08:05,520 Speaker 1: much of the next year. Um there are some countervailing 148 00:08:05,720 --> 00:08:09,200 Speaker 1: forces at work in this region that will help, i think, 149 00:08:09,240 --> 00:08:14,240 Speaker 1: to offset some of that good exports slow down. Firstly, 150 00:08:14,320 --> 00:08:17,960 Speaker 1: services as economies are opening up, you've seen a surge 151 00:08:18,080 --> 00:08:21,320 Speaker 1: in tourist arrivals in places like Thailand and Singapore, and 152 00:08:21,360 --> 00:08:24,680 Speaker 1: historically that's been very important for those economies. The numbers, 153 00:08:24,720 --> 00:08:27,840 Speaker 1: of course, is still by historical sounds extremely small, so 154 00:08:28,120 --> 00:08:30,960 Speaker 1: it's maybe only later next year that it starts to 155 00:08:31,000 --> 00:08:34,880 Speaker 1: have a macroeconomically meaningful impact. But that's one source of 156 00:08:35,600 --> 00:08:39,079 Speaker 1: growth that may be uncorrelated with goods exports that we're watching. 157 00:08:39,760 --> 00:08:42,400 Speaker 1: And secondly, it's just for a number of economies in Asia, 158 00:08:42,480 --> 00:08:46,880 Speaker 1: domestic demand just feels like it's still slowly recovering from 159 00:08:46,880 --> 00:08:51,679 Speaker 1: the COVID pandemic. Social distancing restrictions have been eased, if 160 00:08:51,720 --> 00:08:55,719 Speaker 1: not removed. We did see a strong recovery and consumption 161 00:08:56,440 --> 00:08:58,680 Speaker 1: through the winter months, but it still feels that there's 162 00:08:58,720 --> 00:09:00,920 Speaker 1: some way to go for an umber of economies. So 163 00:09:01,040 --> 00:09:04,240 Speaker 1: domestic demand might hold up better than it normally does 164 00:09:05,600 --> 00:09:08,560 Speaker 1: when export growth slows. Uh. And and we're looking at 165 00:09:08,600 --> 00:09:11,600 Speaker 1: tourism for a number of economiess being potentially an important 166 00:09:11,600 --> 00:09:15,120 Speaker 1: source of growth next year. So the global recession maybe 167 00:09:15,120 --> 00:09:18,080 Speaker 1: a little bit less damaging to growth prospects in this 168 00:09:18,200 --> 00:09:21,199 Speaker 1: region than it ordinarily would be. Yeah, and we've just 169 00:09:21,280 --> 00:09:23,360 Speaker 1: been looking at some of the latest tourism data out 170 00:09:23,360 --> 00:09:26,000 Speaker 1: of Singapore as well, with hotel room rates at the 171 00:09:26,080 --> 00:09:29,760 Speaker 1: highest in almost six years. Great to have you with us, Michael. 172 00:09:29,800 --> 00:09:32,319 Speaker 1: Michael Spencer of Chief Comments and Ahead of Research Asia 173 00:09:32,360 --> 00:09:35,240 Speaker 1: Pacific at Deutsche Bank on the line from Hong Kong. 174 00:09:35,480 --> 00:09:37,319 Speaker 1: Here for us on Bloomberg Daybreak Asia