A (3:02)

I agree with you.

D (3:03)

Yeah, so I think it's the Fed's on hold or they're cutting. If we're right on where inflation goes, that can open the door to cuts. But to your point, where is the investor debate right now? I think the knee jerk reaction from markets is the Fed's on the sideline for let's call it the foreseeable future, which as you noted in this market is day to day, headline to headline and the Fed will assess where to go later this year. We think they can cut, but I think in general the Fed is either on hold or cutting. I think the wrong thing to do right now is raise rates.

B (3:36)

Yeah, let me jump in maybe here from Europe, where in theory it's the same problem. Just that the answer that the central bank is likely to give in Europe is slightly different from the one in the us. So the debate we have with clients is not so much about whether or not the ECB is going to hike rates, it's more about how much it will do or have to do this. I mean again, it has a lot to do with the way oil prices in the end end up trad will be a lot more inflation or less. But it has also to do with the way the mandates are constructed. So the ECB really has a single inflation mandate and not a dual mandate like the Fed in the case of the US So there's much more attention on inflation. Next to that we have stronger second round effects historically. We know that from the data. So it's clear and understandable why ECB policymakers all came out cautioning against that inflation coming and sort of mulling what had to be done there. We had some leaks out of the Governing Council meeting in March that maybe April you've already seen rate hikes. We pushed strongly back against that notion. Since then we had other policymakers coming out agreeing to that. Yet we likely have a discussion in the June meeting that may lead to a rate hike. We currently forecast a rate hike in June and one in September.

A (4:57)

What about the growth risks to the euro area? Is that part of why you think the hikes might come later? Is that part of why the ECB might only hike two times this year? How do you Think about the growth risks for the euro area in addition to the inflation risks.

B (5:13)

Yeah, no, I think that's a fair question. We have just updated our growth outlook for this year and next we have downgraded growth, obviously again, all of that is dependent on the scenario. In the end we are in for now we assume a scenario of elevated oil prices for this year, but then they will retrace. Now the ECB will look at that in a very similar fashion. So first of all, they will have their new projections. They will see whether there is any hope, reasonable hope, that we go back to close to target inflation. Mind you, we were below target, started the year on a very good footing here and now are projecting we will more or less come out at above 3% this year and 2.4 next. Both are above the 2% target. That already factors in a mild hit to growth. And I think here is really the crux of the matter. If the ECB has to see a more dramatic downward revision of its growth outlook, they may as well hold a little bit more back with rate hikes at the same time. For now, all the indications are that the hit to growth will be relatively mild. And herein lies if you want the basis for the rate hikes. It's a bit of a signaling device. It's a bit of lowering growth, but not really as much. It's not. We see a central bank leaning strongly against inflation, inflation. We are seeing them mildly leaning against it in a bid to stabilize inflation expectations mainly.

A (6:36)

All right, that's super helpful. Chetan, I'm going to come to you because we've talked with Mike and with Jens about the inflationary side of things and the growth side of things. But when I think about energy and Asia, I think of Asia as being a bit more exposed than other big economies, definitely relative to the United States. And I think about a lot of sensitivity, not just to the consumer but also to manufacturing. So how are you thinking about the exposure, exposure across your region, across Asia to this energy shock? Where are the biggest risks?

C (7:07)

So Seth, first of all, I agree with you. I think Asia is the most exposed region. The best metric for assessing that is how much is the net oil imports of each of the regions in the world. And Asia is at around 2% of GDP. Europe is around 1 1/2% of GDP and US is actually a minor surplus. Now, in terms of the transmission of this shock to growth, there are two elements to be considered. One is the price of oil and gas and second is the supply shortages. And in fact all my life when I have been doing this work of modeling on oil shocks to growth transmission, we've never had to really think about supply shortages. We've always been considering oil price increase and its impact. But in this cycle we have to also consider the supply shortages. When you consider both these factors, we think that there will be a meaningful growth damage to Asia from the evidence of oil price increase and gas supply shortages that we have seen so far. And we have just reduced our growth estimates for the region from 4.8% to 4.4%. Mind you, first quarter was fine. So this is all on account of the last 3/4 growth damage. And we are assuming that there will be some kind of normalcy that we see in ship transiting through the Strait of Hormuz. And we're assuming oil prices average around $110 in second quarter and then come down to $90. So in that sense, our base case is still expecting some kind of a resolution very soon. But if that doesn't materialize and you see oil prices rising up to $150, then we think region will take a much bigger hit and growth will come down to 3.9% in 2026.

A (9:03)

Chetan, you made a couple of really good points there. One I want to highlight is the difference between the quantities and the prices. I would say as economists, as people in markets, we're used to thinking about oil shocks as just about the price of oil and how that transmits through. But I do think there's a real risk now, given the virtual shutdown of traffic through the Strait of Hormuz, that we see physical shortages across different Asian economies. We have seen rationing already come into place. When you look across the region, how would you ran the specific economies that are most exposed, especially if we have to think about physical shortages?

C (9:40)

Yeah, right, Seth. So we've considered both the aspect price effect as well as the supply shortages. And on that basis we rank India, Taiwan, Thailand, Korea and Philippines are the ones which are most exposed. And on the other hand, China and Malaysia are least exposed. Japan and Australia are moderately exposed.

A (10:01)

Yeah, that makes a lot of sense. But I can't let you get away from the discussion on Asia without thinking about China. What are you thinking specifically about China? How exposed is it? What's going to happen with growth there? And you know, one of the themes you and Robin Hsing, our chief China economists, had been talking about now for over a year is the deflationary cycle in China. So how should we think about the effects in China?

C (10:25)

So I think yeah, China is uniquely positioned in this cycle. We are expecting China's growth to be down by just 10 basis points. So it almost is as if there is not much damage to China's growth estimates that we have made. And the reason why we see little damage in China's growth numbers is because of two reasons. Number one is that their net oil imports are relatively low. And second is that they have a lot of control on their supply chain. So for example, they have coal gasification facility. So when crude oil prices rise above $100 they can activate this coal gasification facility and use that for all the areas where you can use fuel. And they are also quite good in terms of their own electricity distribution management. They have a lot of surplus thermal power capacity, they have a lot of surplus solar electricity capacity. So they are able to toggle between gas based electricity supply into CO and solar. So that gives them a lot of leeway to manage this shock and not have much growth damage. Onto your second point on the impact on its deflationary situation. We think that there will be a rise in prices in China because of the input price increase. We still won't call that as a winning this deflation challenge that China has been going through over the last three years for us. If you want to have true sustainable reflation, you should see consumption demand picking up. At the same time you should see improvement in corporate margins. And neither of those will happen when you have a rise in inflation because of rise in input prices.

A (12:14)

Yeah, that makes a lot of sense. As always, China is an interesting but complicated story. So maybe this is a good place to stop. For today we focused on the immediate effects of the shock. Higher energy prices, central bank reaction. Tomorrow I think we'll be able to dig in deeper to some of the second order effects and then also ask the question, where are we going from here? What's going to happen to labor markets, productivity, the more structural questions so Mike Chetan, Jens, thank you so much for joining today and to the listener, thank you for listening and be sure to tune in tomorrow for part two of our conversation and if you enjoy the show, please leave us a review Wherever you listen to podcasts and share thoughts on the market with a friend or a colleague today,

E (12:57)

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