UBS On-Air: Paul Donovan Daily Audio 'Accommodating spending'

0:00Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6 o'clock in the morning, London time. On Tuesday, the 21st of April, US President Trump said that the ceasefire with Iran would expire Wednesday evening, Washington time, implicitly extending the duration another day, but also added that an extension or a further extension was unlikely. Markets are increasingly focused on the Iranian response as being the key to the credibility of any negotiations. However, some commentators have suggested that the focus of Trump's social media posts suggests that the United States may move to accept some repackaged version of President Obama's Iran deal, although the risks around or moves control would change market perceptions about the balance of future risks in that case. Overall, that would probably be viewed as a more positive development by financial

1:01markets, which are anyway biased towards a more optimistic interpretation of current events, as being seen as moving the situation towards a more rapid resolution. ECB President Lagarde was stressing a double challenge for policy makers with uncertainty about the impact of higher oil prices per se and uncertainty about the duration of the war, both relevant to the economic consequences. There is another layer of uncertainty to add, namely the potential for accelerated structural change in economies as a result of the war. China's March export of solar panels, batteries and electric vehicles hit an all-time record, and there are more than four times the level of exports of five years ago. The electrification process involves investment in the short term and changes reaction functions and economic costs in the long term. UK governments move to divorce the price of electricity from the

2:02price of gas is another example of structural change, and this complicates how policy makers need to react. US March retail sales data offers an insight into the initial reaction function of the US consumer to the higher oil prices. The expectation is that consumers will keep increasing their spending. One should never underestimate the willingness of the US consumer to keep increasing their spending. On an annualized basis, the cost of higher oil prices to the consumer, all told, is very similar to the cost of tariffs last year, and consumers were able to absorb tariffs costs by reducing their savings rates. The distribution of the oil price impact is not even, however, and lower income consumer spending is more vulnerable here. A combination of lower savings and tax rebates should provide a cushion of support for average US consumer spending for now. However, per legards remarks,

3:05the longer the duration of the war and its associated disruptions, the thinner that cushion becomes. From the UK, there is labour market data still with health warnings about the data quality. The payroll data calculated from payers you earn tax data has shown a decline in employment, but that may reflect just a decline in payrolled employment. Other tax data has suggested a significant increase in self-employed income streams, for instance, and the rise of the side hustle further adds to potential consumer spending power. From Germany, we also have the release of the ZDW business confidence poll. That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. Its subsidiaries or affiliates

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