In many developed countries, housing prices have risen very sharply since the Covid-19 crisis. In the United States they jumped 37% between the 4th quarter of 2019 and the 2nd quarter of 2022. In Germany and the United Kingdom, the increases have also been significant and were 23.8% and 18.6% respectively over the same period. The increases in Italy (+7.4%) and Spain (+10.8%) were more restrained, while France (+14.1%) and Japan (+15%) were somewhere in between. Can such price increases be justified in terms of fundamentals or are they more indicative of a real estate bubble? In order to quantify this, the Dallas Fed publishes a housing prices exuberance index each quarter
In recent months, the huge and rising gap between observed and target inflation has confronted central banks with an urgency to act. It could be called the panic phase of the tightening cycle. What followed was a swift succession of significant rate increases. Tightening was frontloaded, rather than gradual, to avoid an unanchoring of inflation expectations. This perseverance phase will be followed by a long wait-and-see attitude once the terminal rate -the cyclical peak of the policy rate- will have been reached. During this patience phase of the monetary cycle, the central bank will monitor how inflation evolves. With the risk of further rate hikes having declined, the government bond market should stabilize, which can have positive spillovers to other asset classes
The downward trend in the number of new COVID-19 cases has continued worldwide for the seventh consecutive week. 3.6 million cases were reported between 6 and 12 September, down 16% from the previous week (Chart 1). Overall, the situation is continuing to improve noticeably in South America (-33%), North America (-20%) and Asia (-18%), but it has stabilised in Europe after falling for eight weeks. In Africa, the number of cases fell again (-12%) after rising slightly during the previous week. Meanwhile, vaccination campaigns are continuing to progress worldwide, but at a much slower pace. Sixty-eight percent of the world’s population has received at least one dose of a vaccine (Chart 2).
2022 is not over, but it is likely to set an absolute record for greenhouse gas (GHG) emissions after the 2019 peak. The resumption of air and road traffic, the intensification of the use of coal as a substitute for Russian gas, or simply the fact that the global economy has continued to expand despite a lagging China and the United States, leave little room for doubt. In its latest Global Energy Review, the International Energy Agency (IEA) notes that 2021 already saw CO2 emissions rise sharply in comparison to 2020 (by 6%) due to the post-Covid recovery. Coal, on the other hand, was one of the main drivers of the upturn
There is a large consensus that 2023 should be a year of disinflation. Monetary tightening will play an important role in that respect. However, it is difficult if not impossible to estimate when and at which level of official interest rates, inflation will have sufficiently converged to target. This explains why the Federal Reserve and the ECB have decided to frontload their rate hikes. It should reduce the risk of inflation surprising to the upside. A lot will depend on how inflation expectations evolve. Recent research shows that firms use price information to which they are directly exposed to form an opinion of future, aggregate inflation
The downward trend of the manufacturing PMI has continued in August. In most advanced economies, the index is below 50, which corresponds to a contraction of activity in the manufacturing sector. A significant deterioration could be noted in the UK last month. The Chinese index has also dropped below 50. The drop in terms of new orders has been particularly large since the month of May. It is also widespread. In the euro area and most of its member countries as well as in the UK, the index has moved below the 46 mark. The readings are also very low in Mexico, the Czech Republic, Poland and Turkey. The situation has also deteriorated in China.
The downward trend in the number of new Covid-19 cases continues worldwide. For the first time since the end of June, the number of infections has fallen below the symbolic 5 million weekly mark (seven-day moving average). Thus, 4 million new cases were recorded between 1 and 7 September, a 15% drop compared to the previous week (Chart 1). The situation continues to improve markedly in South America (-32%), North America and Asia (-18), but also in Europe (-5%), while it has stabilised in Africa, after two months of almost continuous decline. At the same time, vaccination campaigns continue to progress worldwide, but at a much slower pace. Sixty-eight percent of the world’s population has received at least one dose of a vaccine (Chart 2).
Recent economic data paint a picture of increasing concerns about the economic outlook. In the US, high inflation and rising interest rates play a key role. In the euro area, the same factors play a role -although interest rates are still below those in the US- but skyrocketing energy prices and gas supply disruption are additional forces that should drag down growth. Easing price pressures in business surveys are a hopeful development but selling price expectations remain nevertheless exceptionally high given the weakening of order books. This could point to input price pressures that force businesses to charge higher prices to protect their margins. It is to be feared that slowing demand will make this increasingly difficult, forcing companies to cut back on investments and new hirings
US economic policy uncertainty based on media coverage has increased slightly recently, reflecting the hawkish tone of the Federal Reserve and hence concern about the extent and the impact of additional monetary tightening. In the US, business uncertainty about sales revenue growth has declined slightly as of late after a rising trend lasting several months.
The last twelve months, inflation has continued to surprise to the upside, due to a combination of a series of supply shocks (covid-19, disruption and shortages, the war in Ukraine, weather conditions) and the strength of demand, which had been underestimated. Today, the broad-based nature of inflation and its persistence are the real issues, which reduce the visibility in terms of future inflation developments. Therefore, central banks have decided to change their approach. The theory of inflation and monetary policy has been put aside, the only thing that matters are the data. The main worry of the ECB and the Fed is that inflation expectations become unanchored and influence pricing decision of companies as well as wage negotiations
At the Jackson Hole symposium, Fed chair Powell and Banque de France governor Villeroy de Galhau have insisted that their responsibility to deliver price stability is unconditional. It gives a new meaning to ‘whatever it takes’. Faced with uncertainty about the persistence of elevated inflation, the Federal Reserve and the ECB will increase their policy rates to bring inflation under control, whatever the short-run cost to the economy, because not doing enough now would entail an even bigger economic cost subsequently. Equity markets declined and bond yields moved higher. Tighter financial conditions will help the monetary tightening in achieving the desired slowdown in growth
The global number of new Covid-19 cases has continued to decrease for the third consecutive week. 5.5 million new cases were recorded between 18 and 24 August, down 6% on the previous week. This drop was seen across all regions, with Africa down 21%, North and South America down 18%, Europe down 8% and Asia down 5% (chart 1). However, these figures should be treated with caution as a number of countries have made changes to their Covid-19 testing strategies, resulting in lower overall numbers of tests performed and consequently lower numbers of cases detected. At the same time, vaccination campaigns continue to progress, albeit at a much slower pace. To date, 68% of the world's population has received at least one dose of a vaccine (chart 2).
Although supply timescales are still historically long, the PMI index which assesses them has gradually improved since last autumn. According to the PMI sector survey, this reduction in delivery times can also be seen in most industries, particularly in the automotive, electronic equipment and agri-food sectors. As a result of these reductions, the backlogs of work indicator recorded its biggest fall in over two years. The aggregate value chain pressures index, which is published by the Federal Reserve of New York, confirms these positive developments. It has fallen to its lowest level since March 2021. These gradual but continuous improvements should help to ease some of the inflationary pressures currently weighing on the manufactured goods sector in particular.
The world recorded 6.9 million new confirmed COVID-19 cases between 13 and 20 July, 9% more than in the previous week. This was a fifth consecutive week of rising case numbers. Asia saw the largest weekly growth. At the same time, footfall in shopping and leisure facilities in France, Belgium and Germany remains at its pre-COVID-19 level, while in Italy it is no longer very far off. However, footfall is still below the pre-pandemic level in the US, UK, Spain and Japan.
Between 5 and 12 July, 6.2 million new cases of Covid-19 were reported around the world, a 15% increase compared with the previous week and the fourth consecutive week of rising infections. Case numbers rose in all regions. Europe saw the largest increase (figure 1): infections rose by 20% to 3 million, representing 48% of the global total.
The downward trend of the global manufacturing PMI continued in June. The index dropped in the US and declined in the euro area to respectively 52.7 and 52.1, which brings us close to the crucial 50 mark. The various euro area countries for which data are available all recorded lower numbers. Data were also weaker in the UK and Japan. Australia, Mexico and, in particular, China saw an improvement.
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.
It is important to keep talking about climate change and the energy transition because it builds awareness of the issues, helps us better understand what needs to be done, and makes the necessary measures easier to accept. So, let’s keep talking about climate with this update on some of the major European advances that were made over the past few days.
The level of activity in the US and the euro area is very high but growth has already slowed down significantly and quarter over quarter growth should remain low for the remainder of the year. Worries about the cyclical outlook are on the rise due to a combination of elevated inflation, geopolitical uncertainty and monetary policy tightening. Survey data on input prices and delivery times have eased but the levels are still very high. Wage growth remains strong in the US and is picking up in the euro area, creating concern that inflation would decline more slowly than expected. In addition, assessing the true state of demand has become very difficult.
Although some signs of improvement are visible on certain trade routes—notably between China and the West Coast of the US—the overall situation is still far from a return to normal. The lockdown in Shanghai will continue to have significant repercussions for the operation of ports in China and elsewhere in Asia throughout the second half of 2022.
In the face of the sharp rise in energy prices, governments of the main eurozone economies took measures to ease the pain for households. If the decline in their purchasing power should be limited in 2022, it should not be fully eliminated.
The global economy has been hit by multiple shocks this year: new Covid-19 cases in China, the war in Ukraine, rising interest rates. Financial market behaviour and the US Survey of Professional Forecasters point to mounting concerns about the risk of a recession. These worries come with a cost to the economy and may cause growth to slow down further. Some degree of concern is welcome because it enhances the effectiveness of a restrictive monetary policy. There is a tipping point however, beyond which slowdown fears become self-fulfilling. Addressing these would be difficult if by then inflation has not yet converged sufficiently to target.
The Covid-19 pandemic continues to slow around the world. According to the latest figures from Johns Hopkins University, 3.3 million new cases were recorded around the world in the week of 1 to 7 June, a 4% drop on the previous week. On a regional level, the epidemic continues to ease in Africa (-24%) and Asia (-18%), whilst the number of new cases in Europe has stabilised after two months of substantial falls. New case numbers in South America continued to rise strongly (21%), whilst North America also posted a small increase. Meanwhile, 67% of the world’s population has now received at least one dose of a Covid-19 vaccine.
In this series of podcasts, William De Vijlder, Group Chief Economist of BNP Paribas, discusses the issue of stagflation, a term that has been increasingly used in the media in recent months. Stagflation, a multi-year phenomenon combining rising unemployment and high inflation, brings us back to the dark days of the 1970s and 1980s, when inflation levels were unprecedented and mass unemployment began. In the current economic environment, which bears the brunt of the shocks of the COVID-19 pandemic and the war in Ukraine, inflation is exceptionally high. Should we fear the return of stagflation? What is the central banks' room for manoeuvre to address the issue of a high and persistent inflation without damaging growth? And what can fiscal policy do to cushion economic shocks?