Surveillance: OECD's Growth Prediction

Joins us now acting chief Economist at the O E c D intercourse with his Portuguese economics and i'd also point out of our your British Columbia cred which tells me that it's all econom metrics. How good are you now at O E c D of guessing the statistic? Is it? Do you have a lot of confidence and degrees of freedom and trying to guest estimate out to two thousands. It's a very very challenging environment, but we

have very confident of out our forecasts. We we we've been as you said, we we warned about to slow down, and right now we're saying that listen, we are. We are facing the largest energy crisis since the nineteen seventies, and we have a dramatic picture that shows exactly that governments around the U cd are spending around of GDP just in energy, and this is as as much as we did in the seventies and eighties and so very

challenging environment. So feel very comfortable about our forecast with your GDP growth slow down from whatever it wasn't two thousand twenty one down to three point whatever down to two point two how does China play into that vector? Well, for China, we are for remember this year was the lowest growth for China since the nineteen seventies, with the

exception of the height of the pandemic. And we are forecasting China next year to rebound to about four point six percent, but going down to four to twenty four. But there's two risks that we think that can plague this central scenario. First of all, um it's fairly possible that if the street COVID lockdowns continue and they become more pervasive, then certainly growth is going to be a lot less than we are forecasting. And the second one

has to do with real estate market. If the adjustment on the real estate market is less smooth than we would like it to be, it's very possible that also growth will be negatively affected in China. So we are seeing a bit of a rebounding in in China, but risks are certainly fairly high over there too. Although you pointed out that this is really an energy crisis, which isn't necessarily the way that everybody else would frame it.

They would view it as a pandemic crisis. They would view it as a free money for decades kind of crisis, that's kind that have come to a head. They would view it as an inflation crisis. More broadly, why do you view it through the lens of energy primarily? Well, first of all, the energy crisis is a direct consequence of Russia's aggression on Ukraine, right and so, which has led to lower growth and more prices rising everywhere. We see that even before the war, prices was starting to

go up, so you're absolutely right about that. But clearly inflation became a lot more pervasive, more entrenched, and also the pressures have intensified after the war. We have I think a very interesting estimation our forecast which is trying to see whether this is mostly because of a supply shock or it's mostly a demand shock. Well, if it started as a supply shock, right now in many countries of the U City you can see that it really right now, it doesn't matter, it's it's demand and supply.

In fact, in centric some some countries, like the UK, demand factors are now having more an impact than the supply factors. So right now, what we're talking about very large inflation. Uh in many parts of the world. Montery policy has to continue to be the size has to do what montary policy has to do in order to get out of this situation. I think we're starting to see some positive signs in some parts of the world.

So over all you say that you think that probably try to economy will recover next year, which might actually increase demand for certain goods, including energy. How will this factor into how much developed markets have to be hiking rates have to be countering that increase in demand, the increase momentum that we see heading over from the east. Well, what we highlight as well is that this inflation is

having a tremendous impact on people's incomes. Right if you all across the world, we have a dramatic picture on real wages and all across the world, real ways that are going down. And that's why we focus so much that right now, if you want to ease the pain. If you want to pain to be as short as possible, it is absolutely essential that we continue to be determined

in this fight against inflation. If the economy starts recovering as we expect in the second half of next year, then certainly this will will give a bit more pressures on prices. But I think as long as Monterrey policy is doing what it's doing and remain steady fast on on fighting inflation, we'll be able to have lower inflation going forward. Over when Bloomberg Surveillance visits you at Central Portugal for the ECB confab here next year, you're modeling

out six percent global inflation. Every single central banker is going to say that's unacceptable. Do you perceive that as a stopping point or do you have a different statistic where we get to a vaunted tent tailor perfection? What do we do when we get inflation down to six point eight or dare I say five percent? I think what matters right now is when when we're going to have inflation picking and uh and coming down steadily, and so the trend is going to be very important. I'll

give a good example Brazil. When they started there was one of The first kind is to face significant inflationary pressures, and there's central bank decided to hike interest rates very decisively for a few months, and now it's starting to pay off. I think the last reading we had also from the United States is positive, and so what we need to do around the world is exactly to assess the situation. Some countries have acted a lot more than others.

But what matters right now is to get to a situation which inflation picks and starts to come down durably. It has to be durably, cannot be only one data point, and this is what we need to monitor. In our forecast, we forecast that basically inflation will start to pivot around a mid next year and we will continue to come down, even though it will remain fairly high in some countries

at the end of twenty three. I don't want to get you in trouble, but I'm gonna get you in trouble with your academics and potically teaching at the University of British Columbia. How do you respond to a central banker gaining out a two year recession, as we got from the Governor of the Bank of England you have a confidence and establishing a real g d P view

our twenty four months or dare I say thirty six months. Well, listen in all these forecasts, you know, and I know that all these forecasts, our best scenario, are our what we expect. Things will evolve, Things change. You know, nobody expected a pandemic three years ago. Nobody expected award, you know, just just just a few months ago. So things change.

What I can tell is that our forecasts, given what we know today, what we see in the data, we fair we We are fairly confident about our central forecast right now. But risks, as as I said before, arising and so risks that think can go wrong are there. But right now our central scenario is not a recession. Sluggish growth, but not a recession. This has been wonderful. Don't prayer. Thank you so much for joining us of our prayer. At the O E c D. We migrate

to something more stable, and that would be economics. Dana Peterson joins US of Wesleyan and University of Wisconsin Economics at Madison and thrilled that she could join us. This morning, O E c D came out with a big fancy report Dana, yours is more important. How have you tweaked your view for next year on real g d P. Well, we think that the economy is probably going to be flat next year, and that incorporates a couple of quarters

of recession. Maybe the fourth quarter of this year is a little bit negative, but really most of the brunt we think will be in the first quarter of next year minus one and a half percent, and then second quarter and minus four tents and then kind of a moderate increase in the back half of next year, so all folding up into pretty much again flat growth for

the economy. Well, how do you respond to what the conference board is seeing over the many decades of what inflation spikes up as a general rule, it's stochastic and comes down with quite a plunge with great a pidity. Do you buy that that we could see that? Well, when I look at the components of what's driving inflation right now, a lot of its rents, right and then

the other aspects are services, um, non housing services. But when you look at rents, they're really sticky and they tend to reflect what has already happened in the housing market. And we know that rents are are difficult to come off because certainly, people being pushed out of the new and existing home sales market, they're going to go into the rental market. So that means that we're probably going to have a period of time where rents are still

going to continue to push up inflation data. How much do you buy this idea of a shallow recession, Well, our own forecast suggests that, yes, the recession will be shallow, and indeed, along with that you might not have a really big hit to the labor market. And a lot of that's a function of labor shortages. So if you have companies hoarding workers and still also hiring people, especially in those in person services and other types of jobs where you physically have to be at work, that's going

to support con omption. And so we may not have a really deep procession. But that sort of is a bit of a bed on the fact that things will deteriorate quickly enough for the FED to pause, for the lag effects to actually kick in and show us that there is some sort of active deceleration and inflation that gives the FED confidence, right, I mean, without that if there is momentum, how much does that really cast this idea of a shallow recession aside, Well, I think the

FED is looking at the data right. So already the housing market tends to react very quickly to interest rate hikes, and we're also started to see consumers dial back their expectations for how many like durable goods they're going to purchase, especially things that need to be financed. So the FED is already seeing some of that evidence. But certainly there are lags, and it's not clear how long those lags are.

But I would suggest that the Fed, you know, still has some way to go in terms of raising interest rates, but that those interest rate hikes are probably going to be smaller than what we've seen. Dana, I'm fascinating did And again this is the heritage of the Conference Board, which going back to seven has always aggregated our economics. Are we so polarized as a society of the halves and have nots that you can't aggregate your macro analysis

as the Conference Board is done for decades. Well, I mean the good news is that even though we do have arrogance, we also look at individual income groups, especially with our consumer confidence. What do you see them? Well, the youngest and the oldest groups are you know, a little bit more disgruntled than the folks in the middle, and certainly um people who are at the lower end of the income spectrum are being hit harder by inflation,

So we can look at those details there. I'm well, I'm actually wondering just how much this has to do with home ownership, right If the younger people are not able to get into homes and they're seeing their rents increase, and it's absolutely prohibitive to go and buy a home for the first time because interest rates, because mortgage rates are seven percent, how much is that the distinguishing feature right now between the halves and I have not Well,

certainly is a distinguishing feature. But let's not forget during the pandemic, the biggest increase in homeownership was among the younger groups, right, Jen, Jen, Well, the millennials, right, because many of them, you know, have children. Now, they have been able to get jobs, and they've accumulated some savings, and certainly there were injections of cash for the fiscal stimulus, so that did help them at least during the pandemic. Those who were going got in there early to buy homes.

The millennials have their kids playing investing in Doge off their couch. I mean, that's how bad it is. Dan, I want to go back to what we're gonna see here on the inflation guestimate for December before the FED meeting. Is that a mystery to you? Already have some confidence in the conference board pick for what inflation will be before December four. Well, we think that inflation is going to continue to ease. We probably reached a peak earlier

this year. Um. We're seeing food and energy prices come off certainly in the last few months in terms of their contributions, and that's really important in terms of bringing down the aggregate level of inflation, and also things like utilities for for hope for people who know all the people who live in homes. Um. But certainly we're concerned about again the rents and services prices continuing to rise

and place pressure on upward pressure on inflation. Dania Peterson, thank you so much with the conference board on Denmark, I believe playing it against nord Vic joins this, founder and CEO of Accenting Data. Come on, Yen's World stops Denwark, Denmark, Tunisia as well. What do you think Denmark is really percolating with a chance here to make some noise. Yeah, we'll hope they can do a little bit like England and yesterday. Okay, sours Furst comment there. Yeah, let's get

to it with a dollar. What is the two thousand twenty three view here on the dollar? There's been big figures moves, uh this year? Can there be big figure moves next year? So this year has been essentially one of the strongest in the history of the dollar, right, massive run up against some of the biggest currencies in the world, Like I've seen the yen move and so forth, and then in the last couple of weeks we've seen, uh,

a big reversal within that ball move. And like our opposition in indicators that we track at Exante Data have have had some of the most extreme signals. Right, real money investors were very very overweight dollars, all the trend following investors were really max long dollars, and we had this very violent washout. So now everybody kind of has to decide, Okay, is this really a big change in trend or is it just some kind of repositioning in

the market. And the reposition was Steph only a big piece of what was going on, and we could already see as soon as the news from China, which was actually quite important to the turn in the dollar overall, as soon as that is less positive, the dollar kind of looks like it wants to go back to the appreciating trend. Right, So I think for me, the key is global growth. We can talk about the fete on the fet is important, but the most important verbal for

the dollar is what's going on with global growth. And if we still have a problematic growth situation in China, if e doesn't recover, then it's hard for me to see that there's going to be a strategic turn in the dollar. We can have like wiggles, and we had a big wiggle now over the last couple of weeks, but a strategic turn requires that global growth is going to get better, and for me, that's too early to

make that call. We can go into detail with that. Yes, you're talking about China, and that was sort of giving some fuel to this risk capitite, the idea that perhaps they were tiptoeing away from COVID zero. It seems like it's the opposite today, and yet the narrative and the market is not cooperating. You're not seeing the off move in equities, You're not seeing a strengthening dollar. What do you make of this the idea that a lot of the reasons behind the rally are turning on their head,

but the market is not so. So the first thing I would say is that there's been optimism around China, right, and the optimism was based on the notion that there was going to be a move away from cyri COVID policy. And what we're seeing in China is that there might be a desire to somehow relax those policies that have had a disastrous impact on the economy. But is it really feasible? Right, We now have cases that are skyrocketing.

We have a population that has been told that COVID was very scary and something that should be avoided at all costs. And this could go on for a long time in the sense that they only have around called the cases today, right, Like go back to when we had a peak in United States, which is a smaller coun tree population wise, where we had a million a day. Right, So this were in the early phase of an acceleration, and this could go on for a long time. And

they are they're just gonna let it run. That's that's would be a pretty pretty strange way for them to go from one extreme to the other. So it's gonna be a gradual, messy process here. I think it's going to be hard for the market to cope with that, although that seems like they're coping with it right now. Heading into three, it seems like the consensus is you might see some more dollar strength and then it will

turn into dollar weakness. You will see Europe start to outperform, you will see Asia start to outperform, you will see the US underperform. Where do you push back against the consensus right now? Yeah? Um it all it all comes down to the inflation and inflation expectations. Right. We saw after the CPI print, one CPI print that was better than the trend we have had, market rallied enormously. There was also after that that the dollar had one of

the one of its biggest moves ever in a few days. Um, So it really comes down to inflation. Have we turned the corner? Well, we're gonna have stick services prices. We I think it's it's pretty clear that goods prices are sounds are normalize. But the market is also hoping that that services prices will also normalize. If that's not the case, it's going to be a big problem of risk ances, right because that's been priced now that the worst is over inflation. If that's not the case, we're gonna be

back to having risk asses under pressure. Yes, thank you, go down. Markins Norg with us is a sounding day. I want him to point out again he want the beauty contest institutional investor three years in a row in foreign exchange. I can think I can say no one's ever done there. I may stand corrected on that. Here's what you need to know. Zeteco Pipeline was a phenomenal song by Aaron Novel years ago. Daniel Leno produced it down to New Orleans and it is a key, key

oil pipeline along the Gulf of Mexico. It is the focus now of our next Stephen. Short is principle of narrowness and acuity on the hydrocarbon market. It's short, group Stephen, let me summarize for our audience. We're up to our eyeballs and petroleum and the price is gonna go down. Do I have that right? Well? In the near term, we certainly our risk to the downside. So we had

the market that switched into contango. This is the no mix w t I crude oil market contango, meaning that the price this month is cheaper than the price next month that occurred on yesterday's expiration in the December contract. Why are we in contango, Well, simply because to your point, the Ydeico pipeline, which is a significant pipeline that takes oil from the shell patch in West Texas that's being

produced and takes it to the export market in Houston. Well, there's maintenance now that's gonna last well into December on that pipeline. So your oil flows are lower, but you're still producing oil in West Texas. So if you can't move it into Houston, you have to put it somewhere. And it's very important as far as the NAMIX is concerned, because where that something is going to be is up

at the NAMIX Terminal complex up in Christian, Oklahoma. So we're looking at a situation where we're gonna be building supplies at the NAMIX Terminal Complex in the next Week's a surprise to me. Stephen is an amateur. Is West Texas Intermediate breaches seventy dollars, we get a sixty nine print on American oil? Is that in your realm of possibility? Excuming yes, with regard to now, this was one of our more bearish cases, and this is really at the tail end of our modeling of where we could go.

But certainly I do expect to see um oil find a base here, assuming we do not go into a

significant recession. And we have to keep in mind, this is the Biden put right, This is the level seventy dollar oil and low seventies that the White has a said, this is the level we're going to start buying oil to refill the spr So if you're sitting there, why would you sell seventy dollar oil when the United States government's gonna come in and start buying two hundred million barrels at that price, so they're in effect without recession? Is your floor in the market, tome? So what about

the ceiling? Right? Because we were talking about the type market about you know, two minutes ago, and we were talking about how oil prices are going to rise beyond a hundred and twenty barrel on certainly Brent and close to that on w T I what's changed so materially in the physical market to make that completely an obsolete argument. Yeah, well absolutely so the one hundred thirty, which is where we were in the first quarter of second quarter of

last year, that's unattainable. That to say that we can get back up there, but we can't stay there because that's where we sell. The demand destruction so that is short of something catastrophic happing and supply in the market, that market cannot go up and beyond that. So what has changed now, of course, is the weekending economies around the globe. So it is a near term barished picture at this point. As we said, the Russians are front running the price caps, so they've dumped a lot of

oil on in the market. There are fineries in Europe fearful of that price cap, have bought all that oil. So you're having a hard time now selling physical oil. So a lot of the physical oils getting rolled forward into the first quarter, which is going to keep the market supplied. And the fear now, of course is COVID with China. When is that economy finally going to reopen? There is some optimism that it can reopen fully by next summer, but there's still a lot of skepticism in that.

So without that demand in the market, you've got this low scenario of oil prices. I think in that low seventy low eighty, I think this is the bottom of the market, and therefore we're waiting for the demand. Because we think about this cap x is challenge. Interest rates are are moving higher, your hurdle rates for apacs are that much higher. So you're still looking at a market that's going to be a dearth of capital, which is not going to go, of course, obviously to bringing more

oil to the market. So your long term picture is still bullish. That still gets you back to that one hundred dollar range, but we just have to get over these short term hurdles. Could you foresee a time where you see the price of gasoline go down and the price of diesel stay high and even go higher. Well, that that's the new dynamic that we're in, Lisa, because right here in my hometown, Philadelphia, the once great epicenter of the East Coast refinery um, we've lost our refinery capacity.

So three years ago we had a refinery in South Philly that produced our process three thirty thousand barrels of crude oil day. That was a lot of gasoline, a lot of distant fuel that went right into our whole market here in Philly, and then of course ninety miles up the Jersey Turnpike into Lynden, New Jersey, in the New York Harbor market, we no longer have that, so that diesel fuel has to come from somewhere. And keeping in mind that gasolene is your best margin for a refiners,

so this is where they maximize. So this is where you bring more gasolene to the market at the expense of distillate fuel diesel fuel. So now we have to yes, I'm sorry, I just this is so important socially, Stephen Short and you've been so dead on this. If we affect a shortage of heating whatever fuel in New England, in the Greater Northeast, how do you perceive a government response of this? I mean, what is the linkage of not in my backyard to government regulation, investment incentives to

fix this problem. Well, the short term fix is for for this winter is the Northeast Northeast Heating Oil Reserve, which you have two million barrels of heating oil sitting in tanks up in Connecticut and Massachusetts, and you also have that for gas line too, so that isn't in fact, and I'm surprised we haven't seen that yet because here in Philadelphia, forty five minutes up the Northeast Extension, Allentown was aut of diesel that they had closed down one

of their gas stations up there because they were out of diesel fuel. So we are running shortages into this market. Seven Again, I don't mean to interrupt. I was in parison on the way out to c d G. There were lines, lines, lines I've never seen waiting for a girl and a gas Are you predicting that for Allentown or for Albany, New York? Well, certainly that that is the risk. I think, guess Lean, we're going to be uh, you know, we'll we'll get through this because that's where

the price incentive is. Both distal fuel with diesel fuel. We're already running shortages and that was shortagees time before we even had any sort of heating demand in the market. So we're looking at the Northeast, the mid Atlantic New England markets that are seventy percent of the homes or market he heats with heating oils, so that that is an absolute risk that will continue all through the cold months. Absolutely brilliant. Here the Short report, folks, I can't say

enough about it. Yeah, I've got the emails. No, we protect the copyright of all of our guests. See Stephen Shark of the Short Group for five pages every day of shocking acuity on the hydro carbon market. 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