The US yield curve has flattened, giving rise to comments that, given the historical experience, risk of a recession is increasing. Yet, when drawing conclusions, caution is warranted. Market-based inflation expectations, which are very high, should decline after a number of rate hikes. This could pull down long-term nominal bond yields, leading to a further flattening or even an inversion of the curve. However, a decline in inflation is growth-supportive. Another reason for caution is that due to past central bank asset purchases, the slope of the yield curve is less steep. Past QE may thus reduce its quality as a leading indicator of economic growth. For these reasons, an alternative indicator has been developed
French inflation hit 4.5% y/y in March according to the final INSEE estimate, due mainly to another jump in energy costs (up 9% in March alone, a 29.2% increase year-on-year). At the same time, this inflation appears to be starting to bite when it comes to consumer spending on goods: having fallen significantly in January (-2% m/m), this saw only a limited recovery in February (+0.8% m/m). The latest INSEE survey of household confidence was anything but reassuring about the prospects of a short-term rebound. Consumer confidence has fallen sharply, particularly because of fears of further price increases: the balance of opinion on the outlook for prices rose by 50 points, taking it to record levels.
Inflation in Italy reached 6.7% y/y in March, the highest level since July 1991. In addition to the spectacular rise in energy prices (electricity, gas & fuel) – up 50.9% y/y – there are now significant increases in prices for food products (+5.8% y/y), furniture (+8% y/y), as well as for the hotels & restaurants sector (+4.6 % y/y). That said, two consumption items are still in deflationary territory: education (-0.5% y/y) and communication services (-2.9% y/y). Nonetheless, the hardest part has yet to come: the latest PMI survey for March showed once again a significant increase in input prices, which was the strongest on record (+6.7 points to 81.5). This will feed through to higher consumer prices: this PMI index is indeed very well correlated with the CPI.
Economic growth strengthened over the first two months of 2022, but is likely to slow in the near future due to inflationary pressures. Industrial production rose 3.6% year-on-year (y/y) in February, suggesting that economic activity picked up in Q1 2022 (provided that this rise continued into March) relative to Q4 2021. In services, the business climate has improved continuously since Q3 2021, taking the PMI to 62.6 in February 2022. Meanwhile, retail sales rose 15% y/y in February, confirming the recovery that began in late 2021.
The number of new Covid-19 cases reported worldwide fell for the third consecutive week. For the first time since January 2022, the number of new cases for the week has fallen below the symbolic level of 10 million on average for a moving seven-day period. Some 8 million new cases were recorded between 7 and 14 April, a fall of 21% on the previous week (Chart 1). Numbers continued to fall in Europe, Asia, South America and Africa, although North America saw an increase after three months of virtually continuous falls. Meanwhile, 65% of the world’s population has now received at least one dose of a Covid-19 vaccine (Chart 2).
