The chief financial officers of US companies have become gloomier about the outlook for the US economy. The latest Duke University CFO survey shows that 20.8% of the participants expect negative GDP growth over the next 12 months. The assessment about the own-company prospects has declined far less, leading to a record high gap with the outlook for the economy as a whole. This is a source of concern: how long can own-company confidence remain high if the overall environment continues to deteriorate? Interest rate developments will play a key role in this respect. Of those US companies that plan to borrow, two-thirds would reduce their investments in case of an increase of borrowing costs of 3 percent. It is a sobering message considering the expected tightening of monetary policy.
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 eased slightly in recent weeks after a significant increase, triggered, at least in part, by concern about the prospect of aggressive rate hikes by the Federal Reserve. In the US, business uncertainty about sales revenue growth has increased slightly as of late but it has decreased significantly with respect to employment growth. The European Commission’s uncertainty index has edged higher.
On the economic front the eurozone has seen a succession of similar-looking months, with inflation continuing to rise and confidence surveys continuing to fall to different extents. Although there is a clear deterioration in the economic situation and outlook, its scale and duration remain uncertain. A recession is getting more likely but is not (yet) a certainty, first because activity levels remain strong and not all the economic indicators are flashing red (particularly when it comes to the labour market) and secondly because growth has some tailwinds or, at the very least, shock-absorbers.
The latest results from the Tankan survey show a fragile but stable outlook for Japanese industry (the balance moved from 2 to 1), whilst confidence in the service sector improved (the balance rose from -2 to 4). The total balance of opinion improved from 0 to 2. Amongst large companies, the improvement in confidence was the biggest in personal services (up 32 points to 18) and hotels and restaurants (up 25 points to -31), even though confidence in the latter remains very low. Conversely, the sectors suffering the biggest falls were lumber and wood products (down 20 points to 0) and iron & steel (down 16 to -6).
Inflation has continued to accelerate, at 5.8% y/y in June, and has not yet reached its peak. Most significantly, the energy component saw a further monthly rise of 5.3% in June, having already risen by 9% in March. Not only had the initial shock not yet fully passed through into other prices (food, manufactured goods, services), but this new increase signals a further acceleration in inflation, particularly in the food component which suffered the most from the initial shock (1.4% increase month-on-month and 3.1% over 3 months): In June, this food index has increased by 5.7% y/y, below July 2008’s 6.4% peak, but should rise above and reach 9% in December 2022, according to our forecasts.
