Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
US economy contracts unexpectedly
US gross domestic product (GDP) declined unexpectedly in the first quarter of 2022, its first drop since the onset of the pandemic almost two years ago. Underlying the fall were a resurgence of COVID-19 cases, lower government spending and falling net exports driven by a stronger dollar.
GDP fell by 1.4% in the first three months of this year vs consensus estimates of a 1.1% increase – a marked contrast with Q4 2021’s rise of 1.7%. However, there are reasons to remain optimistic: domestic demand remained robust and actually accelerated from Q4 levels, allaying immediate concerns of a recession or stagflation. Consumer spending, which accounts for two-thirds of US economic activity, grew 0.2% in the quarter compared to Q4 last year.
The sharp increase in imports driven by business’ concerns over supply chain disruption and shortages due to the war in Ukraine, combined with a decrease in exports, shaved 3.2 percentage points of GDP growth from the headline figure. Given the high inventories, strength in consumer spending and labour market tightness, it seems likely that the US Federal Reserve will persevere with their rate hiking cycle when they meet later this week.
Eurozone inflation surprises by not surprising
Eurozone headline inflation came in at 7.5% year-on-year, an increase of 0.1% in April and in line with consensus estimates. It is the first time in ten months that the figure has not exceeded consensus expectations, and could be an early sign that energy prices are stabilising and that the headline rate has peaked. However, this is the sixth consecutive month of record inflation, and the impact of a phasing out of Russian oil and gas would put more pressure on the upside.
Looking under the bonnet, the effects of consistently high energy prices and supply chain disruptions are starting to feed through to other costs. Inflation in food, alcohol and tobacco, non-energy industrial goods and services prices all accelerated further. Food prices, in particular, continue their steep ascent, rising by 2.7% month-on-month in March.
Whilst there are concerns about a slowdown in economic growth, high-frequency growth indicators such as purchasing manager indices (PMIs) have been more resilient than first feared. The service sector and job growth have helped to offset the impacts of the war on manufacturing and have been supportive of household spending.
China’s lockdowns continue to bite
The ongoing lockdowns in China that form part of its ‘dynamic zero-COVID’ policy led to a sharper-than-expected fall in PMI data in April. The decline was broad-based, affecting manufacturing and services sectors.
Manufacturing, as measured by the Caixin PMI (-2.1% in April) was particularly impacted by a slowdown in output. The index focuses on smaller businesses that were less able to use ‘closed-loop’ production by providing workers with accommodation and food within their factories in order to maintain production levels. However, the NBS PMI data, which includes larger companies, also saw weakness driven by a fall in demand and a reduced ability to fulfil orders.
Non-manufacturing data fell sharply, particularly services data, which recorded its second-lowest level in history, reflecting the acute impact of restrictions on travel and recreational activities.
After another volatile week, the MSCI All Countries World Index ended down 2.2%. Declines were mainly focused in developed markets, with the tech-heavy Nasdaq Composite Index down 3.3% after several mega-cap tech stocks reported disappointing earnings and warned of potential supply chain and demand issues ahead. The picture was more positive in emerging markets, with the MSCI China Index up 9.8% over the week.
Bond markets continued to fall as yields rose, reflecting persistent inflationary concerns. Longer-dated bonds were impacted the most, with the Bank of America UK 10-year Gilt Index falling by 1.7%. Despite the volatility in equity and fixed interest markets, gold registered a decline of 1.8%.
Commodity prices have been extremely volatile in the past month, with the result that there is often more value in assessing longer-term trends rather than daily or weekly movements. As measured by the IMF Global Price Index of All Commodities, commodity prices fell by 5% in April, down from the all-time highs seen in March. Oil, energy and metals prices all fell despite the sanctions imposed on Russia and Russia’s retaliatory measures. This was largely due to short-term relief provided by the release of strategic reserves by the US and International Energy Agency. However, the looming threat of a phasing out of Russian oil and gas by the EU is likely to put further upward pressure on energy prices, and there are concerns that the price of coal will also increase as demand shifts.
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