In the coming quarters, economic growth in the United States and the Eurozone should slow down and core inflation should move significantly lower. Monetary policy works with long and variable lags, so part of the impact of higher rates still needs to manifest itself. This is taking more time than expected. It has been a long wait thus far. In the US, the economy in general has been particularly resilient although some data have softened as of late. In the Eurozone, the labour market remains strong, yet, many data have weakened, including in services. A factor that will also play a role in coming months are the developments in China where activity indicators published during the summer confirmed the rapid slowdown in growth
GDP growth, inflation, interest rates and exchange rates.
Greenflation most often refers to inflation linked to public and private policies implemented as part of the green transition. Adapting production methods to low-carbon technologies, which emit fewer greenhouse gases, will require, on the one hand, massive and costly investments which will increase the marginal cost of each unit produced in the short term and, on the other hand, the use of rarer and therefore more expensive materials. This will create upward pressure on prices. The ecological transition will also require putting the “price signal” into play: increase the price of fossil fuels through taxation (carbon tax) and emission allowance markets (explicit price) as well as regulations (implicit price)
After several months of improvement, global supply-chain disruptions appear to have bottomed out, and some signs of deterioration are emerging again. The synthetic indicator of the Federal Reserve of New York (FRNY; chart 3), which measures these tensions, rose slightly in June, for the first time in 2023, as did the PMI delivery times index, which is part of the FRNY aggregate indicator.
GDP growth, inflation, interest rates and exchange rates
In July, there was still divergence between the main OECD economies. Economic surveys showed signs of a more marked slowdown in Europe than in the United States, where various indicators (non-manufacturing ISM, household surveys) even improved.
Even though economic growth in early 2023 was better than forecast for emerging countries, the slowdown scenario is seemingly coming to pass for the rest of the year. In 2024, the strength of the recovery will hinge on the geopolitical climate and on how far monetary policy is eased in the US and the euro zone. It will also hinge on the investment outlook for emerging countries. The UNCTAD’s annual report gives cause for optimism around the investment outlook, except for low-income economies.
The global composite PMI index stood at 52.7 in June, the lowest in four months, reflecting slowing global growth at end Q2 2023. However, the index remains comfortably within the range of expansion, buoyed by the services sector. On the other hand, the manufacturing PMI contracted sharply in June (48.8 compared to 49.6 in May).
For economists and central bank watchers, the ECB conference in Sintra (Portugal) and the Federal Reserve conference in August in Jackson Hole are the highlights of the summer season. As always, the presentations and panels at the Sintra conference were very stimulating but also sobering. Disinflation is too slow, there are upside risks to inflation compared to the pre-pandemic era, policy rates will have to remain elevated and economic forecasting is more challenging than ever.
Shelter is the main item in the Consumer Price Index (CPI) in the United States, accounting for 34.4% of the total basket. Its growth has accelerated sharply since 2021 and the post-pandemic economic recovery: the y/y rate strengthened from 1.5% in February 2021 to a peak of 8.2% in March 2023 and has decreased very slightly since, down to 8.0% in May. The large contribution of the shelter component keeps US inflation high. Excluding this component, the core inflation reading for May dropped from 5.3% to 3.4%. Moreover, the current gap between the standard core measure – i.e. excluding energy and food – and the core measure that also excludes shelter has been the widest since the early 1980s
In the major OECD economies, the slow pace of disinflation is expected to continue, while the slow slowdown in growth will eventually lead, because of the monetary tightening (particularly rapid and significant), to a recession in the United States and stagnation in eurozone GDP. Various supportive factors should limit the extent of the reversal, but the ensuing recovery would be equally limited. The slow convergence of inflation towards its 2% target would force central banks to maintain a restrictive policy despite the start of rate cuts in the first half of 2024.
Uncertainty about US economic policy, based on media coverage, fell in June after a rebound in May. The European Commission’s economic uncertainty index fell in June, continuing its decline since October 2022, as uncertainty in the various sectors of activity decreased, except in industry, where the index remained stable.
Which country is the most exposed to recession? Is it the United States or the eurozone? The first answer that comes to mind is: the eurozone. It has, indeed, “technically”, already slipped into a recession in view of the double fall in GDP in Q4 2022 and in Q1 2023. But, for now, this recession looks to be only “technical”: indeed, the contraction in GDP is small and not widespread across all growth components or among eurozone members.
The significant and fast paced monetary tightening by major central banks and the prospect that more is to come raise the concern of a monetary ‘overkill’. This could happen due to a non-linear reaction of economic agents to an umpteenth rate increase. Several factors can play a role in this respect: negative animal spirits, debt levels and their characteristics, asset valuations, bank lending, capital markets. This calls for increased gradualism and, at some point, taking a pause whilst insisting that this doesn’t represent an end to the tightening cycle.
Global export volumes fell sharply in April, a fairly logical correction after the strong growth in the previous month, linked in particular to the catch-up effects subsequent to the end of the lockdown in China.
In June, the main OECD economies experienced divergent trends, raising the question of the tipping point between a situation where growth continues – with inflationary pressures requiring further monetary tightening – and another where it slows down further and where the fall in inflation means that an end to rate hikes can be envisaged.
What characterizes the current business cycle? Whether it is the monetary squeeze, the growth slowdown or disinflation, the word that springs to mind seems to be "slow". Moreover, the prospects for recovery, which will mark the beginning of a new cycle, promise to be characterized as slow as well.
The global composite PMI rose to its highest level in a year and a half in May at 54.4 compared with 54.2 in April, the fourth increase in a row. However, this improvement in global activity conceals a clear disparity between the brisk momentum of the services sector and the weakness of the manufacturing sector.
The pace of inflation in the United Kingdom remains a cause for concern, while in Japan, market expectations are being cautiously adjusted to the new inflationary environment. Core inflation in the United States remained high in April, but some alternative indicators improved somewhat. In the eurozone, several services sectors are recording a faster rate of inflation, in some cases due to wage increases.
The European Commission’s economic uncertainty index fell in May, continuing the decline since October 2022, due to the reduction in uncertainty in various business sectors, apart from construction, which saw a marked rise.
