Welcome to the weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last few weeks.
UK GDP and inflation data point to economic downturn
UK gross domestic product (GDP) declined in March by 0.1% and inflation continued to surge, sparking concerns that the UK may be entering a period of stagflation. In addition, February’s growth number was revised down to 0.0%. This means that UK GDP grew by 0.8% over the first quarter of this year, significantly less than the consensus estimate of 1.0%.
Some of the recent weakness in growth can be attributed to a marked reduction in COVID-related spending as the UK government cut back on free virus testing and the vaccination programme was scaled down. This was compounded by a slowdown in new car sales, down 15.1% in March due to supply chain issues.
These disappointing figures add to concerns that the UK economy is heading for a slowdown just as inflation starts to bite into consumer spending power, which will face further challenges later this year when the energy price cap is raised again.
US inflation remains stubbornly high
US inflation, as measured by the consumer prices index (CPI), fell by 0.2% in April compared to the previous month, but remains at an annual 40-year high of 8.3% vs April 2021 and above economists’ forecast of 8.1%. There are still hopes that the current spike in price rises is starting to wane, but given the broad-based nature of the inflationary pressures, it may remain higher for longer.
The surge is being driven by a wide range of goods and services, including food, air travel, new car prices and rent. The war in Ukraine and ongoing lockdowns in China are expected to prolong inflationary pressures, particularly through supply chain issues, but labour shortages are also a contributing factor.
Bond and stock markets declined on news of the latest inflation figures. The tech-heavy Nasdaq Composite lost 3.2% by the end of Wednesday as investors priced in the increased likelihood of further US interest rate rises.
Markets again traded with a risk-off tone last week, the S&P 500 shedding another 2.4% to close on Friday below important technical levels at around 4,100. Emerging market currencies and higher-beta G10 currencies such as the Norwegian krone, Australian dollar and New Zealand dollar were weaker whilst government bonds (and consequently the yen) were stronger. On the other hand, European and Chinese onshore equities registered solid gains.
Market sentiment remains extremely bearish as ‘open-ended’ monetary policy tightening by the US Federal Reserve is expected to provoke a reset of risk premia across the broad spectrum of asset classes and, at worst, could trigger a US recession.
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