The latest cyclical surveys show the impact of the war in Ukraine. Confidence of households and companies has dropped, although, concerning the latter, significant differences exist between countries and sectors. In Germany, the IFO business climate has plummeted whereas in France, the decline is more limited. Services tend to be doing better than manufacturing. Importantly, employment expectations of companies remain at an elevated level. It is a key factor to monitor in view of what it signals about companies’ confidence in the medium outlook as well as for its influence on households’ sentiment about their future personal situation. This last point is particularly important given the plunge in household confidence, which is largely related to concern about the general economic outlook
Our different uncertainty gauges are complementary, in terms of scope and methodology. Starting top left and continuing clockwise, US economic policy uncertainty based on media coverage has declined since the start of the year but the latest data are for February and do not yet reflect the impact of the war in Ukraine. That also applies to uncertainty based on business surveys, which has been declining since the beginning of the year. Geopolitical risk – based on media coverage – has seen a huge jump following the invasion of Ukraine. For the same reason, the cross-sectional standard deviation of daily stock market returns of individual companies – a measure of financial uncertainty – has risen in the US and the euro area, although to a rather limited extent.
Bottlenecks in shipping transport are already intense and could get worse. First, it is becoming very difficult, not to say impossible, to move merchandises by rail and road networks between China and Europe, because of the routes crossing Russia and the conflict zones in Ukraine. Furthermore, many Chinese production lines, and logistics around the country’s ports, have been disrupted by a resurgence of Covid-19 cases and the authorities’ ‘zero-Covid’ policies.
After a week of rises, figures for the Covid-19 pandemic have stabilised worldwide, albeit at a high level. 12 million new cases were recorded around the world in the week of 17-23 March, a figure similar to that in the previous week. However, the picture is uneven around the world.
After trending downwards since the end of January, Covid-19 figures have been ticking upwards again around the globe: 11.7 million new cases were reported between 10-16 March, a 9% increase over the previous week. This increase is due to the highly contagious Omicron variant and to the easing of health restrictions in several countries. The increase in the number of new cases was especially striking in Asia and Africa, up 15% and 12%, respectively.
With the Omicron variant now becoming dominant in most countries, the number of new Covid-19 cases worldwide continues to fall. However, the pace of this decline has slowed during the week of March 3-9 (-2% compared to the previous week). By region, South America and Africa saw big falls, at 38%, followed by North America (-30%) and Europe (-7%). In contrast, case numbers in Asia rose by 15%. Meanwhile, 64% of the world’s population has now received at least one dose of a Covid-19 vaccine.
The war in Ukraine has caused a jump in commodity prices that will trigger a further increase in inflation and will weigh on GDP growth. Unsurprisingly, the narrative that stagflation is in for a comeback is gaining ground, as shown by the increasing number of media references to this topic. Stagflation is a multi-year phenomenon of high inflation and a high rate of unemployment. Although inflation is high, the other conditions are clearly not met today. Monitoring financial markets developments is useful in gauging whether stagflation risk is on the rise. This can be done by comparing the developments in breakeven inflation and the high yield corporate bond spread
The global manufacturing PMI moved slightly higher in February on the back of a sizeable increase in the US and a slight weakening in the euro area where the index improved strongly in France and declined in Germany. Brazil and Mexico recorded better data but the index is still below 50. The PMI in China improved and crossed the 50 line.
The number of new Covid-19 cases continues to decline in most regions of the world. Moreover, retail and leisure traffic held to an upward trend in Spain, Belgium, France, Germany, Italy, the UK and the US, even though some declines were observed for the most recent data points. In Japan, retail and leisure traffic continues to improve.
After a spectacular rebound in 2021, global trade in goods is likely to see slower growth this year. The World Trade Organisation’s latest forecasts show that trade in goods will rise by 4.7% this year, following a jump of 10.8% in 2021. The global PMI manufacturing new orders index also fell below the 50 threshold in January, for the first time in a year and a half. That said, the slowdown will not be visible in all sectors. Indeed, demand for semiconductors remains very high, and this dynamic largely explains why Taiwan continues to record rapidly rising export orders.
The question of the persistence of high inflation matters because it will determine the extent of monetary tightening necessary to bring inflation under control. Key factors are growth of unit labour costs, the price elasticity of demand and its mirror image, the pricing power of companies. The latter two are conditioned, at least in part, by the cyclical environment: when growth is very strong, price elasticity of demand will be lower and pricing power higher than normal. A regression analysis between the PMI output prices index and the PMI input prices index (explanatory variable) shows that recently in the US and the euro area, pricing power has increased quite significantly
Sixteen million new Covid-19 cases were confirmed during the week of 9-15 February, a 20% decline from the previous week. All regions reported declines, with new cases down 44% in North America, 34% in Africa, 26% in South America, 14% in Europe, and nearly 12% in Asia.
In the week of 2-8 February 2022, 19.9 million confirmed new cases of Covid-19 were reported worldwide, 14% less than the previous week. This is the second consecutive week of decline. All regions contributed to this decline: North America (-38%), Africa (-24%), South America (-17%) and Asia and Europe (nearly -5% each).
The global manufacturing PMI declined in January, which is partly related to the drop in the US, whereas the euro saw a further increase. The index jumped in Austria and moved higher in Germany, after having been stable for several months. The data were weaker in Greece and Italy. The improvement continued in Japan but the situation worsened in Brazil and Mexico with the respective PMIs dropping further below 50. The Chinese PMI weakened and has moved below 50.
According to the latest data from Johns Hopkins University, more than 22 million new cases were recorded around the world between 27 January and 2 February, a fall of 3% on the previous week. Nearly 61.3% of the world’s population has now received at least one dose of a Covid-19 vaccine. The last two weeks have brought an increase in visits to retail and recreation facilities in Spain, Belgium, France, Germany, Italy and the USA. The UK saw a bigger increase, probably due to the removal of nearly all health protection measures, whilst the downward trend in Japan continued.
The number of new daily cases of Covid-19 has continued to rise in most parts of the world. Over the same period, several individual countries saw falls (Chart 4, black line): United Kingdom (-11%), USA (-9%), Argentina, Spain (both -5%), and Italy (-3%). Meanwhile, Japan (109%), Brazil (70%) and Germany (58%) stood out for their soaring case numbers. At the same time, vaccination doses hit the symbolic 10 billion mark.
For the first time since May 2019, 10-year Bund yields have moved back in positive territory. Three factors explain this development. Firstly, the traditional international spillover effect of developments in the US Treasury market where following a more hawkish tone from the Federal Reserve, yields have been on a rising trend since early December 2021. Secondly, markets are pricing the end of PEPP and the tapering of net asset purchases by the ECB. Finally, there is the prospect that, at some point, the ECB will raise its policy rate. Bond markets in the US and Germany have become highly correlated since 2021. This is an important factor given the imminent start of a rate hike cycle in the US and its possible influence on Treasury yields and, by extension, yields in the euro area.
Last month, our analysis of uncertainty indicators showed, on the whole, a slight increase. Based on the latest readings, the same conclusion applies and several indicators have continued to move slowly higher.
2022 will be another tense year for international trade. Although some of the tensions are easing, visibility is still limited and supply-chain bottlenecks will probably continue for much of the year, affecting the outlook for growth and inflation.
On a weekly basis, the highest number of new cases in a single country was in the USA, followed by France and India, which stands out with a 117% surge in cases of). Visits to retail and leisure facilities remain on a downward trend in Spain and Italy, and although the most recent figures in Germany, Belgium, France, the US and the UK show an increase, the trend remains downward. In Japan, mobility now is falling fairly sharply after previously showing positive momentum for several months.
The weekly number of new Covid-19 cases remains very high in most regions because of the Omicron variant. On a weekly basis, the highest number of new cases in a single country was in the United States. France was next, followed by India, Italy, the UK, Spain, Argentina and Australia. On the mobility front, visits to retail and leisure facilities remain on a downward trend in Germany, Belgium, Italy, France, Spain, the US and the UK, although the most recent numbers show an uptick. In Japan, mobility is falling fairly sharply after previously showing positive momentum.
The current business cycle is atypical and this influences the analytical approach, with a focus on the supply side and whether it will be able to meet the level of demand in the economy, rather than on the demand side. Supply side disruption has been a key issue but recent PMI data suggest that we may have seen the worst. In the euro area and the US, the percentage of companies that are confronted with rising input prices and are contemplating to increase their output prices has started to decline and delivery lags are shortening. The Federal Reserve of New York’s global supply chain pressures index seems to have peaked. However, anecdotal evidence suggests visibility remains very low
The global manufacturing PMI was stable in December and has hardly moved since the spring of 2021. However, this masks significant differences between countries. Focusing on the most recent data, the US and the euro area saw a slight decline. Data for France and Germany were essentially stable whereas Italy and the Netherlands recorded a decline. Italy continues to have the highest score of euro area countries. The Czech Republic and Poland saw a further increase. China is doing better than last month whereas India saw a rather considerable decline.
The highest number of new cases in a single country was the was the United States (3,141,071, a 100% increase from the previous week). It was followed by the UK, France, Italy and Spain. Some 9.33 billion Covid-19 vaccine doses have been administered worldwide since vaccination campaigns began in the fourth quarter of 2020, including 547 million booster doses. Nearly 60% of the world’s population has now received at least one dose of a Covid-19 vaccine.
Judging by the latest forecasts, the outlook for growth in 2022 is positive and, at some point during the year, inflation should start to decline. Uncertainty remains elevated however so there is a risk that key economic variables evolve differently than anticipated. The biggest ‘known unknown’ concerns the future development of the pandemic. Real GDP growth could surprise to the upside should inflation decline faster than expected. A tightening of financial conditions, more supply disruptions and inflation staying high for longer are the key sources of downside risk to growth.
