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Corporations face ‘short-term pain’ amid disruptions in China, expert says

Business Environment Risk Intelligence CEO Saruhan Hatipoglu joins Yahoo Finance Live to discuss the risks multi-national corporations face in China and conflict over China's zero-COVID policies.

Video Transcript

RACHELLE AKUFFO: All right, well, now let's take a look at China's COVID policy concerns, and of course, that hawkish US Fed speak through an economic lens with Saruhan Hatipoglu, Business Environment Risk Intelligence CEO. Saruhan, good to see you. So I first want to pick up what Ines was saying about what's coming out of China and some of the decisions some of these multinational companies are having to make. How would you characterize the situation right now?

SARUHAN HATIPOGLU: Well, it is-- it's a big chaotic environment right now, unfortunately. But it is one that a lot of the corporations have been expecting, Rachelle, because things have not really improved between the two countries, even after former president Donald Trump has left the office. So there was this steady movement towards a crisis.

And that is going to be felt more often and more frequently, actually, in the next three to six months. And I believe that some multinational corporations have started to make alternative plans, as you mentioned earlier in the report. For example, India is becoming an interesting emerging market to host a lot of the multinational corporations that have a stake in China.

AKIKO FUJITA: Yeah, no question these companies have been thinking about it, but they haven't necessarily moved on it just yet. Those plans are in place. But there's still significant exposure to China. So when you think about the economic hit that China is likely to take from this latest uptick, how does that trickle over into the broader global economy at a time where we are seeing a slowdown already?

SARUHAN HATIPOGLU: Oh, it's going to make it worse, Akiko, that's for sure. Look, we're not only-- this is not only in China, right? You mentioned that there's a global economic slowdown taking place. Look at the numbers that came in the US recently with Consumer Confidence Index and all that. So there's going to be short-term pain.

But the clients' engagements that I've been involved with clearly tell me every time that I talk to clients, that there are alternative plans are being made, but there's going to be short-term pain. So the plans are in progress. But the supply chain issues that a lot of these corporations are experiencing is going to hit their bottom and top lines, and, again, in the short-term period.

RACHELLE AKUFFO: And Saruhan, when you think about things like delays throughout the supply chain, especially for a lot of these products that are made in China, in terms of how that trickles down to, then, inflation and then what we saw with the latest consumer sentiment numbers ticking just slightly lower, but still better than expected, the consumer is still resilient. But how long can they hang on if some of these inflation headwinds that we're seeing from other countries continue to trickle in?

SARUHAN HATIPOGLU: Well, I don't know, Rachelle, if I would say that they're resilient at this point. The numbers were a little better in the Consumer Confidence Index, but look, we're looking at three things that are happening in the country. One is the wealth effect. We're seeing it in the stock market. We're seeing it in the bond market and the property market where the house prices fell for the third straight month, according to today's data.

So that is going to have an impact on the consumers. It already is, actually, but it's going to get worse in the next six months or so. And the top 20 in terms of income in this country account for 40% of retail sales. If we take that into consideration, then that wealth effect is going to be a drag on consumer spending. Likewise, interest rates, they're not going anywhere. They're not going further down or anything. It's actually going to go up. If you listened to New York Fed president yesterday, they are going to increase rates more.

And then the energy costs. You know, everybody's talking about how inflation has peaked-- and it may have. And the energy costs are coming down, but winter is coming. And we're going to have that impact as well on the consumer spending. So overall, my expectations from consumer confidence, as well as retail sales and consumption, is not very positive.

AKIKO FUJITA: Really quickly, Saruhan, where does this put the Fed, going into the meeting later this month?

SARUHAN HATIPOGLU: Oh, they're going to increase rates. I mean, look, the forecast yesterday was, what, 5% to 5.5% inflation at the end of this year, 3% to 3.5% by the end of next year. That's still above the 2% limit that they have. So the Federal Reserve is going to raise rates.

And we're also seeing bank lending growth, bank credit growth highest in about 13, 14 years. So these are all inflationary things. We look at food prices that's increasing. Wages are increasing. So I don't see any way that our Federal Reserve is going to slow down. 50 basis points maybe if we're lucky, but 75 basis points is also a possibility.

AKIKO FUJITA: Saruhan Hatipoglu, Business Environment Risk Intelligence CEO, good to talk to you. Appreciate it.

SARUHAN HATIPOGLU: Pleasure to be here.