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Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the

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Speaker 1: global economy to you. And the global economy today is

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Speaker 1: not a happy place. The recession in the US was

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Speaker 1: barely even on the radar just a few months ago.

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Speaker 1: Now Bloomberg's economists reckoned there's a seventy chance the US

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Speaker 1: will be in recession by the end of next year.

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Speaker 1: Stock markets have been falling. US households say they feel

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Speaker 1: gloomier about the economy now that at any time in

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Speaker 1: the last forty years. This can't be good news for

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Speaker 1: President Biden. When you think about the handful of one

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Speaker 1: term US presidents in the past half century, Jimmy Carter

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Speaker 1: or George H. W. Bush, the one thing they all

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Speaker 1: had in common was that the economy was in recession

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Speaker 1: during the second half of their time in office, and

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Speaker 1: those recessions were usually caused by the Federal Reserve slamming

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Speaker 1: on the economic breaks by raising interest rates, which it

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Speaker 1: did this week. You're listening to this outside the US,

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Speaker 1: you'll know others aren't doing so well either. In fact,

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Speaker 1: as Bloomberg TVs. Lizzie Burden reminds us a bit later,

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Speaker 1: the UK, in many ways has it even worse, the

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Speaker 1: exporters in Asia who rely on all those now very

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Speaker 1: gloomy Western consumers are already bracing themselves for a tough Christmas.

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Speaker 1: Our chief economics correspondent for Asia end the Current, has

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Speaker 1: spoken to some of those exporters in Hong Kong. And

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Speaker 1: you want to stick around for the interview with the

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Speaker 1: man who sells pop up swimming pools for docks. But

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Speaker 1: first we have our chief economist, Tom Warlick to guide

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Speaker 1: us through it all. Tom, thanks for being here. And

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Speaker 1: I should say we're speaking on Wednesday, a few minutes

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Speaker 1: after the Federal Reserve has raised interest rates by three

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Speaker 1: quarters of a percentage point. That's the biggest single increase

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Speaker 1: since Tom. We've talked about it a lot before. I mean,

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Speaker 1: the Fed has got plenty wrong in the past year,

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Speaker 1: especially the inflation forecasts. Have they now got this right?

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Speaker 1: So I think the challenge, Stephanie, is that there really

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Speaker 1: isn't a right response from central banks to the type

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Speaker 1: of inflation which the world now faces. If you want

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Speaker 1: to get inflation under control while minimizing the impact on growth,

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Speaker 1: what you really need to do is get Saudi Arabia

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Speaker 1: to increase oil production, get Russia to allow wheat out

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Speaker 1: of Ukraine and get Taiwan to produce more semiconductors so

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Speaker 1: we can get auto production back online. And the last

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Speaker 1: time I checked, Chair Powell powerful though he is, doesn't

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Speaker 1: have instruments to do any of those things. So a

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Speaker 1: seventy five basis point rate hike is necessary to get

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Speaker 1: inflation under control. But because it's not going to be

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Speaker 1: actually dealing with the root causes of that inflation, unfortunately,

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Speaker 1: the mechanism is going to be by destroying demand, putting

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Speaker 1: more people out of a job, and potentially tipping the

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Speaker 1: U s economy into a hard landing. Well, you're right

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Speaker 1: that this time does feel different. I mean, we've got

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Speaker 1: used to recessions and financial crisis, which I guess driven

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Speaker 1: ultimately by what's in people's heads, so that their confidence

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Speaker 1: in the future or or in the case of the

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Speaker 1: financial crisis, their fear that banks might be about to

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Speaker 1: go bust. And you can change the situation by just

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Speaker 1: making people feel differently about those things, and the economy

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Speaker 1: can pick up. But it is true that a big

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Speaker 1: part of the problem today in the US is that

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Speaker 1: there's too much demand, too much money washing around the

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Speaker 1: economy sitting in bank accounts. But that excess demand is

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Speaker 1: interacting with some real supply constraints, which, as you say,

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Speaker 1: the FED can't do very much about. They can't get

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Speaker 1: grain shipments going again out of the Black Sea, and

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Speaker 1: they can't reach a deal with Iran, say that would

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Speaker 1: get Iranian oil back into the globe market and maybe

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Speaker 1: pushed down the price of it. But I guess Tom,

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Speaker 1: amidst all this gloom, we should remember the other oddity,

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Speaker 1: which is that the U S economy in many ways

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Speaker 1: is in quite good shape. Households maybe feeling very downbeat,

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Speaker 1: but there's still decent growth, and we've got unemployment at

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Speaker 1: record low levels. Yeah, that's right, and I think that's

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Speaker 1: why Powell and co. Have got some hope of negotiating

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Speaker 1: a soft landing here. Household balance sheets are looking pretty robust.

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Speaker 1: Many households still sitting on a bunch of savings from

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Speaker 1: that pandemic period stimulus business profits. Business profits are looking

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Speaker 1: pretty pretty healthy as well, so businesses can carry on hiring,

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Speaker 1: carry on investing. Bloomboog economics. One of the things we've

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Speaker 1: done is bundle together an unlucky thirteen set of indicators

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Speaker 1: into a recession probability model, and what that model is

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Speaker 1: telling us right now is that even with the aggressive

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Speaker 1: FED tightening, because I thought household savings are strong, because

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Speaker 1: business profits are strong, the chance of a recession this year,

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Speaker 1: chancefer a recession in two is really quite low. That's

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Speaker 1: some good news for Powell, some good news for Biden.

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Speaker 1: Of course, as he approaches the midterm elections, the chances

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Speaker 1: of a recession looking further out, though, get much higher.

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Speaker 1: Our model is telling us that by the end of

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Speaker 1: twenty three a recession is actually going to be pretty

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Speaker 1: hard to avoid. Well, they used to say, when the

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Speaker 1: U s sneezes, the rest of the world catches a cold,

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Speaker 1: and funny we saw a bit of that this week

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Speaker 1: with the European Central Bank coming out and worrying that

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Speaker 1: financial conditions were tightening even faster in the Eurozone than

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Speaker 1: in the US. Even though Europe's inflation problem isn't really

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Speaker 1: on the same scale as America's, when it comes to

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Speaker 1: the UK, you can't help thinking it really does look

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Speaker 1: like it's in a much worse state than America any

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Speaker 1: other major developed economy. So I think the UK is

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Speaker 1: a place which is in a sort of uniquely disadvantageous

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Speaker 1: position right now, Stephanie M. The UK, like Europe, are

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Speaker 1: not energy producers, so they are seeing all the costs

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Speaker 1: of high oil and gas prices and none of the benefits.

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Speaker 1: The UK, like the US, has an overheated labor market

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Speaker 1: which is adding to inflation repressure. In addition to those problems,

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Speaker 1: the UK has a leadership which love them or loathe

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Speaker 1: them right now, I think we could all agree are

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Speaker 1: not unequivocably focused on economics as their number one priority.

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Speaker 1: And of course there's the drag which comes from Brexit

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Speaker 1: and the additional regulatory burdens and uncertainty that brings. UM.

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Speaker 1: So we see recession risk for the United States heading

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Speaker 1: into the end of twenty twenty three. In the UK

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Speaker 1: the risk is actually a bit more front and center,

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Speaker 1: and indeed we think the UK economy is already going

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Speaker 1: to be contracting in the second quarter of this year. Well,

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Speaker 1: we can hear more on that subject now from Lizzie Burden,

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Speaker 1: who someone of you will remember from her days as

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Speaker 1: a lowly economic reporter. She's now an economy and government

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Speaker 1: correspondent for Bloomberg Television. The UK is sliding into a

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Speaker 1: recession in all but name in two statistical quirks, like

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Speaker 1: the extra bank holiday in June to celebrate Queen Elizabeth

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Speaker 1: the second Platinum Jubilee. May mean that Britain avoids two

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Speaker 1: consecutive quarters of contraction, but almost every other economic metric

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Speaker 1: is screaming slow down. Consumer confidence, for example, is already

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Speaker 1: below levels seen in any economic downturn since at least

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Speaker 1: the nine seventies, and that's before the full effects of

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Speaker 1: the fastest inflation in decades kicking. Meanwhile, the housing market,

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Speaker 1: which of course the British are obsessing a there is

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Speaker 1: showing some signs of cooling, with demand for mortgages dropping

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Speaker 1: as interest rates rise. Here's Bank of England Deputy Governor

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Speaker 1: John Cunliffe in an interview with I t V. We

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Speaker 1: see evidence of slow down in the housing market. I

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Speaker 1: think there are some some stores in the wind that

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Speaker 1: the market is starting to turn. As you know, the

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Speaker 1: bank expects the economy, it's that it's already slowing and

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Speaker 1: we expected to slow further slow quite a lot over

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Speaker 1: the next year or so. And I think yes, that

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Speaker 1: will have an impact on the housing lorge. Now that

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Speaker 1: leaves post pandemic Britain on course to underperform every other

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Speaker 1: major leading economy next year, posing a severe headache for

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Speaker 1: both Bank of England Governor Andrew Bailey and Prime Minister

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Speaker 1: Boris Johnson. With inflation set to peak in double digits

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Speaker 1: in October, five times the Bank of England's two percent target,

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Speaker 1: Bailey and his colleagues have little option but to keep

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Speaker 1: raising interest rates, even if it means making the cost

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Speaker 1: of living crisis worse in the short run. For Johnson,

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Speaker 1: whose own party almost toppled last week, rescuing the economy

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Speaker 1: is vital if he's to survive much longer. In an

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Speaker 1: interview with Bloomberg's Kitty Donaldson, even the characteristically tiggerish Prime

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Speaker 1: Minister had to admit the government's limits. We're going to

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Speaker 1: have a difficult period and we've got to be absolutely

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Speaker 1: clear with people. It is going to be difficult, and

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Speaker 1: the government cannot solve every problem and we can't cover

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Speaker 1: everybody's extra cost. But what we can do is make

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Speaker 1: sure that we deal with the underlying causes of inflation

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Speaker 1: but also keep our economy strong and open to investment.

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Speaker 1: We say we be strong, but usink we're headed towards recession.

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Speaker 1: That's not necessarily at all. I think that there are

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Speaker 1: ways forward for the UK that are incredibly exciting. So

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Speaker 1: if we make sure that we have a proactive approach

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Speaker 1: to talent from a broad order, control immigration but allow

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Speaker 1: the talent that we need to come in, we fix

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Speaker 1: our energy supply issue. Is we get we fix the

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Speaker 1: issues in the UK labor market. I mean, one of

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Speaker 1: the incredible things about the economy right now is that

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Speaker 1: unemployment is at its lowest level since I was ten

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Speaker 1: years old. Signs of the mounting pressure on households and

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Speaker 1: businesses were revealed in data this week. On Monday, the

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Speaker 1: latest GDP figures showed that the economy unexpectedly contracted in April.

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Speaker 1: On Tuesday we learned that real wages fell the most

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Speaker 1: and at least twenty one years, as pay rises were

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Speaker 1: devoured by price growth, And on Friday, data are expected

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Speaker 1: to show that retail sales also fell in May. Sandwich.

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Speaker 1: Between those reports, the BOE on Thursday is expected to

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Speaker 1: deliver an unprecedented fifth straight hike to take rates to

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Speaker 1: their hyacinths two thousand and nine. What's clear is that

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Speaker 1: the fragility of the economy as it emerges from the

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Speaker 1: pandemic means that the UK is facing a long period

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Speaker 1: in the dull rooms, hobbled by continued feeble productivity growth,

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Speaker 1: rather than a short, sharp downturn. New legislation that would

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Speaker 1: override the part of the Brexit deal pertaining to Northern

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Speaker 1: Ireland could make things even worse if the European Union

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Speaker 1: retaliates with the trade war. Take a listen to this

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Speaker 1: warning from Stephen Kelly, chief executive of Manufacturing Northern Ireland,

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Speaker 1: when he was on Bloomberg Radio. This is the one

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Speaker 1: thing that many in the UK don't understand. The EU

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Speaker 1: can within ours and produce particular controlled, particular aggravations do

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Speaker 1: will directly impact UK industry, the UK economy and consumers.

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Speaker 1: This isn't necessarily about applying the applying huge tariffs on

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Speaker 1: British cheese or any other item. They could have a

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Speaker 1: whole series of things that would cause almost instantaneous problems

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Speaker 1: for the UK and that's a very dangerous thing to

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Speaker 1: do in the midst of across the living crisis and

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Speaker 1: across the down business crisis and the UK. Even before

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Speaker 1: the build the Bank of England saw a major dropping

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Speaker 1: output of around one percent in the final quarter of

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Speaker 1: the year followed by a small contraction in Tree and

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Speaker 1: stag nation in Similarly, the Organization for Economic Cooperation and

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Speaker 1: Developments outlook for the UK next year is the worst

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Speaker 1: among major nations. In an interview with Bloomberg Television, the

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Speaker 1: o e c d is chief economist Lohens Boon explained

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Speaker 1: why as here all reasons why and the UK has

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Speaker 1: lower growth than whether to seven economies next year. One

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Speaker 1: is the higher inflation, the other is tighter and faster,

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Speaker 1: faster monitary policy tightening and also fights the fiscal consolidation.

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Speaker 1: So what we're recommending to the UK is actually to

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Speaker 1: consider the pace at which fiscal consolidations taking place if

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Speaker 1: if it was was too slow as fast as what

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Speaker 1: we're describing, So more tax cuts needed, says the a

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Speaker 1: e c D. And a new fifteen billion pounds support

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Speaker 1: package from Chancellor Rishi Sunac only offers temporary relief. Here's

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Speaker 1: Rebecca McDonald, chief economist at the Joseph Rowntree Foundation, giving

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Speaker 1: evidence to lawmakers of the Treasury Select Committee. Even before

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Speaker 1: this period of inflation, there was a lot of people

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Speaker 1: who were in debt, a lot of people experiencing poverty.

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Speaker 1: It doesn't even start to kind of attack those longer

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Speaker 1: term issues. It simply is a It isn't effective, but

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Speaker 1: it's a kind of short term emergency in the package.

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Speaker 1: So even if the technical definition of a recession isn't

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Speaker 1: met all that adds up to one of the bleakest

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Speaker 1: periods for the UK economy in decades. So Lizzie mentioned

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Speaker 1: that this line about you know, it might seem like

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Speaker 1: a recession even if it isn't formally a recession. We're

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Speaker 1: certainly getting very poor growth forecast now for the UK

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Speaker 1: this year and potentially next year. The UK economy may

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Speaker 1: barely grow, but we might technically miss the definition of

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Speaker 1: a recession. That's something that you've looked at, I know,

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Speaker 1: particularly for the US, but also for some other countries,

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Speaker 1: this idea that we even it may not be a recession,

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Speaker 1: but it might actually feel worse than that for households

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Speaker 1: because of the peculiar nature of this shot. Do you

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Speaker 1: want to just tell us a bit more about that, Tom, So,

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Speaker 1: it's kind of an oddity of economics that the macro

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Speaker 1: picture often doesn't match up with the lived experience of

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Speaker 1: many households, and I think that's especially true in the

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Speaker 1: case of a recession. So if we think about a

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Speaker 1: really severe recession in the United States, you'd see perhaps

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Speaker 1: ten percent of workers unemployed. They're having a terrible time,

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Speaker 1: but for nine of workers, the recession means their wages

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Speaker 1: might go up a bit more slowly, but they still

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Speaker 1: have a job and they're not having too terrible at time.

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Speaker 1: Contrast that with the situation today, where we're not in

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Speaker 1: a recession. Unemployment is very low, but inflation is super high.

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Speaker 1: That's something which impacts a hundred percent of households. Whether

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Speaker 1: you're unemployed, whether you have a job, you're experiencing the same,

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Speaker 1: very very high increase in prices, which is eroding your

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Speaker 1: spending power. So we're not in we're not in a

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Speaker 1: recession right now in the United States, but for many

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Speaker 1: households it's going to feel not just like we're in

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Speaker 1: a recession, but in many ways worse than it would

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Speaker 1: do if we're in a recession. Finally, Tom, if you

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Speaker 1: can bear it, we should round this off and think

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Speaker 1: about the global picture and especially the prospects for emerging

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Speaker 1: market economies, because this this combination of rising interest rates

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Speaker 1: in the US slowing Western demand. I mean, historically that

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Speaker 1: has been very bad news for emerging market economies, and

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Speaker 1: now you have China lockdowns weakening the picture for China too.

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Speaker 1: Um in a few months time, do you think we're

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Speaker 1: gonna be looking at a string of emerging market crisis. Yeah,

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Speaker 1: I think that's right, Stephanie. I think there's there's two

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Speaker 1: trends globally which you're having a negative impact on all

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Speaker 1: emerging markets. So the first is the sharp slowdown in

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Speaker 1: global growth. You mentioned the China lockdowns. That's a big

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Speaker 1: blow to demand from China. Europe obviously slowing sharply, partly

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Speaker 1: as a result of Russia's invasion of Ukraine. Global growth

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Speaker 1: bad news for the emerging markets. At the same time,

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Speaker 1: you've got the FED aggressively hiking rates seventy basis point

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Speaker 1: rate hike at the June meeting. Global borrowing costs are

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Speaker 1: going up, and that's bad news for emerging markets which

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Speaker 1: are dependent on foreign capital to finance their operations. At

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Speaker 1: the same time, you've got another crucial trend for the

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Speaker 1: global economy right now which is going to be playing

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Speaker 1: in a different way for different emerging markets, and that's

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Speaker 1: the sharp increase in commodity prices. If you're a commodity importer,

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Speaker 1: like Sri Lanka for example. All three of these trends

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Speaker 1: we could global growth, higher global borrowing costs, and higher

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Speaker 1: commodity prices are hitting you at exactly at the same time,

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Speaker 1: and that's why Sri Lanka has slid into crisis. And

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Speaker 1: that's a risk facing other emerging market commodity importers as well.

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Speaker 1: If you're a commodity producer, though, like Brazil for example,

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Speaker 1: big producer of iron ore and soybeans, the increasing commodity

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Speaker 1: prices is actually a positive for you and it's offsetting

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Speaker 1: some of the negative impact of weaker global growth and

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Speaker 1: higher global borrowing costs. Well. Our chief Asia economics correspondent

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Speaker 1: in the Current has gone to talk to some of

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Speaker 1: the exporters who are bracing themselves in Hong Kong for

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Speaker 1: declining demand in the West. Is his piece. We have

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Speaker 1: a patent on this one. We'll opened up by this. Normally,

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Speaker 1: for pool you need to put air by pumping air

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Speaker 1: into the wall, and that is Sydney you. He's showing

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Speaker 1: me how to use their pop up swimming pools for dogs.

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Speaker 1: His company, Prime Success Enterprises makes all kinds of cooling

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Speaker 1: products in China for pets to use in hot weather,

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Speaker 1: you know, so that your dog would not be a

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Speaker 1: hot dog. So so as long as you moists the

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Speaker 1: pop up pool he's shown me now was their best

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Speaker 1: seller during the pandemic. Demand for pet products rocketed over

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Speaker 1: the last two years as people spend more time at

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Speaker 1: home with their pets. Well, things are changing. Like other

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Speaker 1: manufacturers across Asia, you is seeing signs that soaring inflation

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Speaker 1: and rising interest rates in the West are starting to

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Speaker 1: impact consumer demand for his full range of products that

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Speaker 1: include children's play tents and other items for families. We

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Speaker 1: have been expecting a better growth than what we have

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Speaker 1: been seeing now because like a last two or three months,

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Speaker 1: we see that the overseas market opening up, you know,

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Speaker 1: a lot of restrictions are being lifted in Western countries.

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Speaker 1: We were expecting a very like a stronger growth, you know,

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Speaker 1: in terms of demand, but we did not see that

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Speaker 1: trend clearly yet at the moment, you know, the business

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Speaker 1: has been steady, but then we expect it to be stronger.

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Speaker 1: This could be an important signal from Asia, known as

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Speaker 1: the world's factory floor, for where the global economy is headed.

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Speaker 1: Robust exports from Asia, especially China, have been a major

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Speaker 1: dynamo in the recovery from the pandemic, but there are

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Speaker 1: signs that that demand is fading as inflation hits consumer

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Speaker 1: pockets and as consumers shift their spending from goods to services.

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Speaker 1: Supply blockages stemming from China's COVID lockdowns and the Russia's

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Speaker 1: invasion of Ukraine are also impacting. Steve Schwong is one

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Speaker 1: of those who has noticed a shift. He runs a

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Speaker 1: company called pro Vesta Group. Yes we are that are

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Speaker 1: and d and manufacturing company with headquarters in Hong Kong,

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Speaker 1: two factories in Donguan and one in Manila, the Philippines.

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Speaker 1: Provis that makes products such as power systems for campervands

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Speaker 1: and other recreational vehicles like Sydney. You Chung also saw

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Speaker 1: his order book hit records during the pandemic as people

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Speaker 1: were forced to vacation closer to home. So for me,

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Speaker 1: actually during year twenty twenty and year one, we have

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Speaker 1: a record high growth. UH during my twenty five years

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Speaker 1: of business, basically thirty to increase every year. Chuan told

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Speaker 1: me that overall demand remains are bust, but it doesn't

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Speaker 1: think export orders will repeat the levels that did during

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Speaker 1: the first years of the pandemic. Well, you know, you

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Speaker 1: can feel the in freshion and also the very high

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Speaker 1: interest rate. The spending power in our major markets, as

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Speaker 1: I mentioned in 'sa in Europe is becoming very soft,

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Speaker 1: so trail will still go, but it won't be as

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Speaker 1: high as I mentioned in E one. Some manufacturers are

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Speaker 1: even seeing weakening orders as far ahead as for the

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Speaker 1: Christmas shopping season. Ens Jam is a sales manager for

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Speaker 1: a Guang Joe based manufacturer. They make a wide variety

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Speaker 1: of products from watering cans and tablecloths to Christmas themed

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Speaker 1: storage bags for customers in the US and Western Europe.

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Speaker 1: Well then they compared to last year, orders have declined

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Speaker 1: quite a lot down on the same I think the

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Speaker 1: inflation in the US and Europe has had a very

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Speaker 1: big impact on our business. I manage our online orders

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Speaker 1: and they have declined by more than half from last

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Speaker 1: year that you banished. The slowdown isn't yet at the

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Speaker 1: point of a trade recession. Both analysts and manufacturers say

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Speaker 1: underlying demand remains solid and consumers have money to spend.

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Speaker 1: Chinese exports have rebounded from lows hit during shanghai'st lockdown,

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Speaker 1: suggesting they're still demand still this year's big inflation surge

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Speaker 1: and the hawk is turned by central banks are going

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Speaker 1: to show up and order sooner or later. That's according

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Speaker 1: to Stanley Zito. Hi. I'm Stanley Zito, the executive chairman

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Speaker 1: of leaver Style, a Hong Kong listed government apparel supply

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Speaker 1: chain company. Details company makes high end garments for leading

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Speaker 1: global brands. He told me up till now, shipments have

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Speaker 1: remained strong because of the post COVID rebound, but he

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Speaker 1: doesn't see it lasting. But I must admit that I

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Speaker 1: don't see this continuing into deep into the second half,

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Speaker 1: especially from Q four onwards. So we're seeing there is

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Speaker 1: a perfect storm of several macro economic factors that are

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Speaker 1: going to seriously dampen consumer demand. While policy makers are

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Speaker 1: trying to calm investor fears about the hard landing and

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Speaker 1: they say they're consumed have enough resilience to cope with

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Speaker 1: rising interest rates, manufacturers like Zito remain to be convinced. Yeah,

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Speaker 1: I think it's uh what what what happened last year

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Speaker 1: when the FETE said, oh, inflation is only temporary, but

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Speaker 1: it turned out to be very uh structural. Uh show

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Speaker 1: showed us that even the FET you know, with all

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Speaker 1: that's analytical powers and you know, all the data it has.

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Speaker 1: UH is not a perfect forecaster. And so right now,

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Speaker 1: whatever central bankers and governments say, you know, I hope

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Speaker 1: that they are right, that the consumer can can take that,

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Speaker 1: but you know I don't. I won't believe in it

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Speaker 1: until I see it and the current Bloomberg News. That's

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Speaker 1: it for this episode of Stephonomics will be back next

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Speaker 1: week with, among other things, news from Sri Lanka and

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Speaker 1: that debt crisis that Tom Aulick mentioned. In the meantime,

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Speaker 1: do please rate the show if you like it, and

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Speaker 1: check out the Bloomberg News website for more economic news

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Speaker 1: and views on the global economy. You can also follow

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Speaker 1: at economics on Twitter. This episode was produced by Magnus Henrikson,

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Speaker 1: Summer Sadi and Elina Ganatra, with special thanks to Tom Alick,

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Speaker 1: Lizzie Burden, You, Jane You, and Young Young. Mike Sasso

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Speaker 1: is executive producer of Stephonomics and the head of Bloomberg

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Speaker 1: Podcast is Francesca Leag