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.
It was a rare coincidence that last week, four major central banks – the Federal Reserve, the ECB, the Bank of England and the Bank of Japan – held their monetary policy meeting. Considering that they all target 2% inflation, their decisions shed light on the role of differences in terms of approach as well as in the economic environment and outlook. However, they share a preparedness to react when circumstances require. Given the mounting concern about the Omicron variant, more than ever, monetary policy is data-dependent.
In the week of 8 to 14 December, 4.31 million new Covid-19 cases were reported worldwide, a 5.1% increase compared to the previous week. The biggest weekly increase was in Africa (+111%). New cases also soared in North America, up 23%, due to the increase in contaminations following the Thanksgiving holidays (chart 4, black line). Over the same period, a decline in new cases was observed in South America (-7.4%), Asia (-5%) and Europe (-0.2%), but in Europe this comes after an exponential increase in previous weeks (chart 1). As to the spread of Covid-19 variants, several countries reported confirmed cases of Omicron recently, bringing the total to 67 countries.
The Covid-19 pandemic has laid bare weaknesses and vulnerabilities in global supply chains. It has increased calls for making global value chains (GVCs) more robust and resilient, and reducing the dependence on East and Southeast Asia. Enterprises are in the process of improving the resilience of their supply chains by improving the transparency of their value chains, and building more redundancy in supplier networks, and transportation and logistics systems. At the macro-level, both the United States and the European Union have been updating their industrial strategies to increase their autonomy in strategic sectors. However, we should not forget that GVCs in itself is not the problem
After last year’s sudden, deep and a-typical recession, caused by the Covid-19 pandemic, this year has also been a-typical in several respects. Supply bottlenecks and supply disruption have been dominant themes throughout the year, acting as a headwind to growth, both directly but also indirectly, by causing a pick-up in inflation to levels not seen in decades. Under the assumption that the pandemic is gradually becoming less of an issue thanks to the vaccination levels, 2022 should see a normalisation in terms of growth, inflation and monetary policy.
Our different uncertainty gauges are complementary, in terms of scope and methodology. Based on the latest readings, several uncertainty gauges show a slight increase. This reflects a combination of ongoing supply disruption and bottlenecks but also and in particular, renewed concern about the pandemic, considering the significant rise in several countries of infections with the Delta variant and concern about the Omicron variant.
Weekly numbers of new Covid-19 cases have continued to rise in most regions of the world. The biggest jump (81%) in weekly numbers was in Africa, particularly in southern Africa where the number of cases is soaring with the emergence of the Omicron variant. The continent was followed by North America (16%) and Europe (3%). Infection numbers in Asia fell by 6% and stabilised in South America. Meanwhile, 320 million booster doses were administered around the world, half of them in high-income countries. To date, 55.2% of the world’s population has now received at least one dose of a Covid-19 vaccine.
The Covid-19 crisis is still generating lively discussions on the future of globalisation of trade and finances, and global value chains. The share of foreign value added embedded in the exports of a country or region[1] is a good indicator of the level of involvement in global value chains. This share increased rapidly from the early 1990s until the global financial crisis of 2008, under the effect of trade liberalisation (cuts in tariffs and proliferation of free trade agreements) and falling transport costs. This increase was particularly significant in Asia, the emergence of China as the factory of the world leading to the imports of more intermediary goods mainly from Europe and North America
In his testimony to a commission of the US Senate, Jerome Powell has acknowledged that inflation is less transitory than considered hitherto, adding that, as a consequence, a faster tapering seems warranted. Despite this hawkish tone, the reaction of US Treasuries was muted. This may, amongst other things, reflect concern about how the pandemic might evolve. The new Omicron variant undeniably represents an uncertainty shock for households and companies. It comes on top of a negative supply shock that is already a clear headwind to demand. It clearly makes the task of central banks more complicated than ever when deciding how much of a monetary headwind they can create.
The global manufacturing PMI has been stable since the month of August although over the same period, the data have weakened in the US and the Eurozone, whilst staying well above the global level. Focusing on November, there was a significant improvement in France and Italy and even more so in Australia. The recent upward trend continues in Japan where the PMI is now solidly above the 50 level. The Czech Republic, South Africa and India saw particularly strong increases.
World trade tensions and supply chain frictions will continue to be major sources of uncertainty in 2022, given their impact on imports prices, and in turn, consumer prices. Based on simulations, UNCTAD estimates that an increase in maritime freight costs would drive up global import prices by 10.6% by the end of 2023, with a smaller but non-negligible impact on global consumer prices of 1.5%. There is also a risk that shortages of certain key components, notably semiconductors, persist for several more months.
According to the latest data from Johns Hopkins University, 3.97 million new Covid-19 cases were reported worldwide between 25 November and 1 December, a 3.2% increase over the previous week. Increases were reported in Europe (+5.9%), Asia (+3.1%), South America (+3%) and Africa (+9.9%), where the sudden upturn in new cases is linked to the discovery of the new Omicron variant in South Africa. The new variant has now spread to 21 countries around the globe. North America, in contrast, reported a 6.1% decline in new cases. To date, 8.07 billion doses of the vaccine have been administered globally, including 250 million booster shots, which brings to 55% the share of the global population that has received at least one dose of the Covid-19 vaccine.
The ECB insists on the need for patience before considering a policy tightening, despite current elevated levels of inflation. It believes that inflation will decline next year and that a wage-price spiral is unlikely to develop. Moreover, inflation expectations remain well anchored. Demand in the euro area is suffering from the headwind created by the jump in energy prices. Reacting to this type of inflation by tightening monetary policy would create the risk of reducing demand even more. To avoid such an outcome, it makes sense for the central bank to wait for more information to arrive, thereby adopting a risk management approach of monetary policy
Some 3.82 million new cases of Covid-19 were recorded around the world in the week of 18-24 November, an 11% increase on the previous week. Europe and North America saw the biggest weekly increases, at 16% and 13.4% respectively, with Europe accounting for 61% of the world’s new cases, or 2.32 million new infections. In other regions, falls in infection numbers were reported in Asia, South America and Africa.
The curve of new Covid-19 cases is holding to an upward trajectory in most regions of the world. As to retail and leisure footfall, it is still trending downwards in Germany and Italy, at a much faster pace than in France, Spain or the UK. Belgium stands apart because its retail and leisure footfall has been relatively stable during the recent period. This is also the case for the United States, while in Japan, the trend has begun to decline again after several months of positive momentum. It is worth noting, however, that footfall is holding at high levels despite the resurgence of the pandemic in most of the main advanced countries.
At the closing of the COP26 on 13 November, the participating countries renewed their pledge to limit global warming to 1.5°C from pre-industrial times. In the run-up and during the conference, many countries promised to achieve zero carbon emissions by around 2050, although without proposing concrete measures.The International Energy Agency has estimated that, to achieve this goal, investment in global energy systems has to be expanded from an average of USD 2 trillion over the last five years to almost USD 5 trillion annually by 2030 and to USD 4.5 trillion by 2050
The number of weekly new Covid-19 cases in Europe continued to rise for the seventh consecutive week, with 1.7 million new cases reported between 3 and 9 November. Retail and leisure footfall is on a slight downward trend in Germany and Italy, and to a lesser extent in France, Spain and the UK, a development that could be related to the health situation in Europe, especially in Germany.
