Surveillance: OECD Outlook with Boone (Podcast)

is so qualified. She's chief economist at O. E. C. D. Lawrence Boon joins us now on a trip around the world. And Lawrence, I'm gonna be selfish and go to the growth through session you call for in the United States where you've got an ugly statistic and then the next year it gets uglier for the United States. Well take that out to a global economy and the benchmark you and I studied in school of three percent global growth, as being allows, is our global economy heading or in

a growth recession? Why the kitem and thanks for inviting me, um. The global economy is is bating a very hefty price for the war that RuSHA is leading into Ukraine. And yes, this is pushing down growth quite a lot to three percent, as you say, which is UM just about one of the low rates we have seen, and it's pushing inflation even higher. We're getting close to nine percent or a little more than six if we're excluding Turkey in the

O E c D economies. Do you ascribe to the idea that the only way to break Laurence Summers stagflation, the only way to break this, given the war and given the rest is tight monetary policy. Is that the only way you get this done? So I think we have a little more messages than this in THEIRS, and as far as monetary policies concerned, we have you know,

still healthy growth, employment and high inflation. So what we're saying is remove some monetary policy accommodation UM monetary policy as you they well, no, cannot address supply shock, but they can signal that they will target this, you know, by telegraphing what they're doing, and in those countries where there is obvious success demand and yes, military policy should be tighter. Or also what's the main swing factor that led the downgrade and that could potentially more downgrades ahead.

So the main storing factor is really Richard aggression into Ukraine. UM. As you know, we were already having UM inflation going up because of the pandemic. And the issue is China SUPPLIESHAIN and they will COVID policy. Um. So that was already affecting us. Now the options and the kit to the production of cereals of energy coming out of the war is obviously raising inflation, and this higher inflation is

undermining consumer confidence and therefore consumption. One of the things we say, if you allow me just thirty second sentence on this, is it has the burden of inflation. The costs of the of the war should be fairly shared between employers and employees wages and profits, so as to avoid a wage face file. So this is one of the reasons why perhaps you accuse the United Kingdom of having taxes that were too high and saying that they had to cut them in order to give people more

buying power. How much does there have to be in some ways fiscal expansion despite the idea that people are pointing to some of the physical expenditures as being the cause of inflation. When I say all reasons why and the UK has lower with them whether to seven economies next year, one is the higher inflation, the other is tighter and faster, faster monitary policy tightening and also finds

the physical consolidation. So what we're recommending to the UK is actually to consider the pace at which physical consolidation is taking place, if if it goes was too slow as fast as what we're describing Laurence O E C as part of the alphabet soup of the O E C D are the people that actually prosecuted the martial plan. How do you respond when we hear so many people in a flippant way say what we need is a new martial plan on Ukraine and the rest as well? How does O E C D and you actually feel

we will affect a modern martial plan. So I think the two things. One is what's happening in Ukraine, where as we can see everything is being destroyed, all the infrastructure and so the a large part of the infrastructure and the capacity of the productive capacity of the economy,

and this will need to be rebuilt. The Marshall plan goes and in hand, as you very well, not a tomb um money on the one side, but also reform structural policy reform on the other hand, to ensure that the moment the money is very well channel So that's one thing The other thing I think people have in mind more immediately at the moment, and that we have in mind as at least is globally to avoid a food crisis. And for this, um, we're just saying a

couple of things. One is ensure the transport and logistics of the cereals around the world so that it reaches Middle Eastern Africa where it's most needed, where it could cost not only starvation but also social and political unrest. Um. And for this we might need more foreign add which in a sense is also part of what we call Martian plans. Lawrence, You've got a whole host of policy descriptions, and I just wanted to finish on the UK because

you do offer some advice to the British government. Out of the developed economies at the moment, that's the one that seems to be really fighting with low growth and much higher prices in a much more pronounced way than say the United States or Europe for that matter. Can you run us through your thoughts on what you think this government should do right now? UM? I can try, um, what the what's very um? What makes the UK different

from other G seven economies? As I was saying, higher inflation, UM, faster tightening of monetary policy but also faster fiscal consolidation. And then the description to manufacturing supply chain as we know between China and some of the breaks in discussion. So there are two things I think which stand out.

One to carefully wagh was happening with fiscone policy and make sure that not only the most vulnerable but the working class just to both the most vulnerable is actually being sheltered from the cost of war and the wising global oil prices defecting everyone as we know. UM. And the second thing that we're saying is obviously trade has to resume faster in the UK. Noe spoon thank you, thank you very much from the O E c D looking for three percent clubl GDP over the World Bank

looking at two point nine. We're gonna talk economics right now and save the show. But first with David blanche Flower of Dartmouth College, I must ask pages out saying that Gareth Gareth has to play regular games to get to the World Cup for Wales. I mean it sounds to me like it's dustin for Cardiff. What do you think sounds like it? We survived this year, but Whales into the World Cup seems so quite a big deal,

are you. Are you willing to donate some money here for Cardiff to play the big ticket for Mr Bill versus going to the top He sounds pretty expensive to me. You and I will send up twenty bucks. John, pick it up here. You know you want me to get us out of this. You know, I think what you've been tremendous over the last ten fifteen years particularly is to provide this different perspective to the consensus view. You did that in the previous cycle with the labor market.

Everyone used to talk about a tight labor market, and by the time we got to the end of that cycle, a lot of people look back and said, maybe not, you're trying to do that again. I want to start with the data point, and that was the amount of credit, the amount of borrowing the consumers are making at the moment.

What do you make of that and what does it speak to Well, obviously that's the starting point is mortgages are now obviously pretty high, and we're seeing slowing in applications and presumably we're seeing slowing in the in that housing market. I mean, the other part of it is presumably what we're seeing a people being stretched, um, and and you might expect as they're being stretched that they resort to credit cards and you know, trying to pay the bills as they go. So so I'm not exactly

sure what to make of it. I mean, I think the answer is that you know, down the road, we're probably going to see some defaults. But I think I think your point is good in the sense that much of the discussion that I hear is really quite unbalanced. I mean, we're hearing all the conversation about the Fed's gonna the last commentator the fens going to to two rate rises. It's on, Well, that's fine. Um. It really depends, however,

on the data. And I think you know, something that really sets us going is the O E c D forecast this morning, which again to me, looks really too optimistic. But they cut global they cut the global growth forecast from four and a half to three, and it certainly looks to be too optimistic. So I think the evidence going here is that you know, we're gonna wait till

we're going to look at the data. But I think everyone seems to be saying the same thing, and there's a clearly credible argument to make that output is going to slow much quicker than you think. It's time to sit and watch and wait. And essentially that's the position that the ECB and the Bank of Japan have taken. So I don't think we've seen a very balanced discussion. I'm not saying I'm right, but I think, yeah, let's just clarify this for a second. What is the correct

policy prescription in your view? Is it to not raise rates at all any more? In the FED? By the FED? No, I think the answer is that we really have no idea. We have no historical precedent or what to do. There's no data points. Perhaps the only data points we have a two thousand and eight and nine, and so we really have to be dependent on a set of scenario. Scenario one is inflation keeps rising, scenario to his COVID moves onwards. Scenario three is output collapses, people start to

default on things. Depending upon those sets of scenarios, we will we would have to respond. The FED has to say we're dependent on the data. And my view is that it's perfectly feasible to argue right now that rate cuts are on the table. I mean, one possibilities. They are on the table, we're sitting, we're waiting, we'll watch. But suddenly some bad data comes and all the commentators saying they're going to raise ex times as on and we know what's coming and the only issue is whether

it gets to four percent or three percent. Well, that depends on the data. And the first thing to say today the only CD realizes that they've got their output call wrong. And I was looking at France forecasting positive growth for France, the weakest for the UK. They all look overly optimistic. France has just had its first quarter at DP reduced from zero to negative point to So you're really going to argue that it's all going to be just finding quarter two, quarter three and quarter four.

I think the answer is we really don't know, Lisa, we really don't know. And to actually argue we know what's coming, it's just a wing and a prayer. We don't account. There are counter arguments on the side that the labor market is much looser than you think. I have strong views about that. I think it is thin. People completely got the labor market wrong. As I've said for a decade, I happily talked to talk more about it, and I'll be a gonna work a lot more recently.

But Danny, do you think that the reason why the third is taking the approach that they have is because it is politically infeasible for them not to come out with a much harder line despite the fact that, as you say, there could be a more material slowdown. But right now, that is not the main economic problem facing the US. Well in a sense that, I mean, you may be right, but the reason that you have an independent FED is to try and cut through that political push.

I would have liked to see a more balanced discussion on the one hand. On the other hand, I mean, yes, you argue that politically, but that's the reason you have an independent central bank to say, hang on, folks, we're going to cut through the political rhetoric. We're going to cut through what politicians want us to do, and we're going to try and look at the data and understand

what's going on. And I don't really see that. I mean, I think if you go to the UK, the UK that the votes on the NPC for the rate rises last month and three people wanting more, a meeting coming next week, and basically there is a counter argument to say that you shouldn't raise it. Also, I'm not saying that you shouldn't, but I'm just saying that the argument is much more balanced output. Potentially it's going to fall. And the big thing we know is that at points

where would turn downs calm, the revisions get you. So the consumer confidence data around the world is predictive of recession, predicular recession in the United States, in the UK, in Japan and in Europe. Now you can ignore it, but this is the best data we have. And it just strikes me that all these folks maybe polically being pushed there,

but they're being pushed into making an error. And what you need to see is a balanced discussion saying on the one hand, the consumer confidence data are saying this. In Europe, we've certainly seen a collapse in the last two months, collapse in people's views about their financial situation, collapsing consumer conference which presume and we know with Christine Lagarland the ECB is taking very seriously. So if they're taking it very seriously, why is there not a serious

discussion at the FED? The worry is the FED is beaten by events and it starts to see some horrible data that it's really not prepared people for horrible data on the real economy, on the labor mark, on output, on retail sales, on default. Yeah. So I think it's just we need to balance this discussion. And I certainly think that you know that if you look at the f O m C and you look at the NBC,

discussion is unbalanced and that's potentially dangerous. Danny. One thing we can agree on group think is deadly it's going to catch up, Buddy, gonna hear from you, Danny, Blanche feud there of Dartmouth and a Stagia Amarro. So the chief Investments trying to just eye capital joins us now and I stay, let's start here. You're looking for a soft dish landing. Let's talk about the issue. Any evidence of that developing at the moment as you look at

the incoming data. Yeah, John, get to see you. I think there's a few things that I look at the give me a hope that we meet actually have a wider path to a soft landing here. The first one is you look at the growth numbers. I mean, even with the O E c D down grading growth today, it's still a part of number. And if you look at the US, we're expecting two point six percent this here, two percent next year. This has not fallen off the cliff.

It is still hanging in there. So yes, we're squarely in a slow down part of this, but this doesn't yet have to be in amin a recession. You know. The second thing that I look at and frankly, I've not been able to say that, yes we have seen peak inflation, and yes this is it. But now I feel like there is more and more evidence building that maybe we are starting to see peek inflation. I mean, look at use car prices, they are starting to decline.

Look at the businesses intentions to continue raises prices. They just can't do it anymore. So more and more of them are saying we're gonna pause. If you look at businesses intentions to raise wages, they're pausing as well. So they're starting to be sort of a preponderance of evidence that maybe inflation is in fact easing. And this is commodity is notwithstanding, but the other inflationary pressures seem to

be easy. And then the third thing John that really gives me some confidence that maybe we can engineer soft landing is the FED is starting to sound a little bit more are balanced. Yes, of course they need to fight inflation, but maybe it doesn't have to only be by raising rates well into tightening territory, you know, maybe they can pause and let the hype prices naturally bring

down demands. So I think if they back away just in time, we might end up with the ninety four scenario versus the seventies and the stage everyone wants to game out where we're heading right now? What does that mean for what you're actually buying? Because you have to come up with a thesis before we have all of the dots of what the Fed willer won't do and how the data is going to come in. How risk going are you right now? Yes, So it's all about

the balance of risks. And and I would say, just a month or so ago, it seems like we have priced in a lot. We were already at that point the equity markets were pricing in a fifty seven probability probability of recession, and now we've re traced some of that. Where I am today is I think we're trapped in a rage. I always thought the thirty night hundred for this economic environment could sort of be the level of support.

We seem to have bounced off that level. But at the same time, how much are you gonna pay for two thirty five dollars worth of learnings? Sixteen and a half times is fair? Maybe seventeen and a half times is fair, which is roughly where we are today SMP. But how much more do you push that? So? I think you know, Tom, we are trapped in arrange for now, but still there's some investment opportunities to look at. You know that I've liked technology, but one of the calls

I have now is actually on financials. You have an un financials. But part of this is the overarching theme, and that goes back to expect the unexpected, and I'm talking about overcome by events July. There's a mix of dynamics on the screen which are clearly out of sorts. What's the thing you're looking at for July that could be the unexpected? Well, I think the big thing, well, I don't know if it's unexpected, Tom, but maybe you

could still surprise us. Um is the commodity shock, right, even though I'm saying the supply chain bottomlegs are raising another inflationary pressure. Easy the commodity shortages are kind of away. I'm going to stop the show. You, more than anyone we know, have a visceral understanding of the coast of the Black Sea. You own the high ground on this. How do you respond to the idea that Odessa with one S or two s is could be shut down. Look,

this has a big implication for the commodity market. And you know, as I mentioned, the world is short of everything. The world is short of wheat, the short the world is short of drains, the world is short of oil and natural gas. To the extent that you close off that corridor, to the extent that the tension is continuing to escalating, you can get product out of that region. That is that is really really tough. I mean, I think that's what people perhaps don't fully price it and

don't appreciate. Commodity prices are up a lot this year, and you know, I think a lot of investors say, well, how much more do you chase that? But what people probably underappreciate is that we have a structural deficit of many of these commodities. So this is not just a tactical trade for this year, but this is longer lasting. Such a good point, honesty, Thank you said that of

my capital. This is the privilege that we have not only working with Haveve Blass, so Will Kennedy and all of Bloomberg Hydrocarbons and commodity coverage, but also digging deep into the analysis of global thinkers. The giant of all this is Edward Morris with Daniel Jurgen separate, looking at

the global macro moment of this commodity boom. He is global head of Commodities at City Group, and as John says, has a bit of an outlier call right now at Morris, how do we migrate back to your oil fundamentals under ninety dollars a barrel? What are the trigger points or catalysts that break the ascent of oil? So the catalysts really are very simple. They're called supply and demand. And we've got to get through the next few weeks to see whether there actually is going to be a driving

season this summer. But under lying the the differences of you is really what we think is raising prices now, and we think of raising prices now are the dislocations that have occurred as a result of countries and companies refusing to take on Russian oil. There's no easy substitute for urals. We're not in a one oil pricing system or the two oil pricing system. And we have to remember that while w T I maybe at a hundred and twenty a brent, maybe at the hundred twenties something,

urals is trading at thirty lower than that. So it's it's not one clear market, and it's the disruption of that lower price that we have to think about and ask why we have these higher prices. And I'm gonna just say that we're planning a trip Lisa, John and I to Abu Dhabi, and of course we're gonna have an oil summit there, and we're gonna have on stage Francisco Blanche, Christian May, look of JP Morgan, Blanche of

Bank of America, You and other worthies. And the singular distinction seems to be the guests at hydrocarbon investment will or will not come on if we get higher oil prices. Are you more optimistic than others that investment will materialize? Well, I think we first started. I don't think there's that problem. I think we have more than enough investment in hydrocarbons. I think we have a problem in the hydrocarbon world in that the United States, the short cycle Big Guy,

has lost a lot of oil production. The US was producing we have to remember, thirteen million barrels a day in March of they went down to ten point two million a day. Is now at eleven point nine million a day. It's well below where it was and where it would have been had we not had that drop in drolling, we would have been at fourteen and a half million barrels a day and they would not be this problem. We have more than enough spending into oil

and gas finding and development. It's shifted a little bit. But if we look at the next two or three years and compare expectations of demand and supply, we think the market is oversupplied. And have you seen any signs that demand is starting to cool for driving for flying? That gives you confidence that perhaps we might not see the driving season that some people are expecting. Well, we

actually just we're trying to observe that. And we decided to look at not only the four week average this time a year for NASH for gas excuse me, gasoline and diesel demand in the United States, and we went back and discovered at first glance that it was the

lowest it's been in five years. Other than in that that that big year when demand collapsed completely, We've now gone back ten years to find a time when demand for gasoline and diesel were as low as it is, and we had to go back to So if we think the e I a weekly data have a semblance of reality to it, Gasoline demand is down yearine year, Diesel demand is down yearine year, and it's the lowest

it's been for a decade. And that's a sign that the price of oil has had an impact on where demand is going and what still is the biggest oil consuming country in the world. So, ed, why did you end up shifting your expectations, your forecasts higher if you still hold to that conviction that we might not see the driving season, uh that a lot of people are saying we will. Well, we drove prices higher first of all,

to mark to market. We had second quarter results that are marking it to market higher than what we where we were at, and we try to figure out what was really happening. What was really happening was that companies and countries were for swearing Russian crude. They could find no substitute for it. So they had to bid up the availability of light suite crude in the world that is not the same as yours. They bid it up from the country that has the most amount of this,

namely the US with our open borders. Uh. And the fact of the matter is that US exports have been booming are combined exports of crude oil and petroleum products in recent weeks have been at the ten and a half million barrel day rage. That would make the US the largest liquids provider in the world, bigger than Russia, bigger than Saudi Arabia. That's up by a couple of million barrels a day from where we were. So when companies had to look away from Russia for diesel, where

did they go? They went to the US. When companies had been worked for crude oil, where did they go? They came to the US, and our inventories came down, giving a misleading impression that the whole world was going down in the inventory side the same way the US is just quickly. And if iin't got a minute, and this deserves a much longer conversation, of course, how sustainable do you think that is? Politically? Because I don't think those numbers are that well known outside of conversations like

this one. Well, I I agree with you if the if it became political, people would start talking about stopping the exports, just as they talked about stopping the exports of natural gas. But it could be politicized in a way that it would be in an election year with gasoline prices being as important as they are. And most thank you, sir as always of City Greek refreshing. Just to have someone site we'll mark into market, Lisa, That's what we had today. This is the Bloomberg Surveillance Podcast.

Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg