In the second and last episode of the series on central banks and their fight against inflation, Andrew Craig and William de Vijlder are looking beyond the peak and discuss what will come next. Among the questions are: how long will central banks hold rates at these levels? How long will they plateau at these current levels? what come after that?
The third quarter 2023 ended with an eighth consecutive decline in the S AND P Global composite PMI. This is an increasingly tangible evidence of a slowdown in the world economy and this negative signal is reinforced by the level of the index now close to the 50-point threshold separating the expansion zone from the contraction zone (50.5 compared to 50.6 in August). While the manufacturing PMI picked up slightly to 49.1 (compared to 49.0 in August), but still indicating a contraction, the services PMI continued to deteriorate for the eighth consecutive month.
PIB growth, inflation, interest and exchange rates
Elevated inflation has forced central banks across the globe to tighten monetary policy aggressively. When we look at the United States and at the Eurozone, we observe nevertheless that many hard data show a high degree of resilience.
In the United States, core inflation dropped again in August, as did the pace of wage growth. In the eurozone, headline inflation has fallen slightly below core inflation since July. The situation in the United Kingdom remains the most worrying, but the latest developments have been relatively positive. In Japan, the new inflationary context is leading to a recalibration in market expectations.
World trade in goods (exports and imports combined) continued to fall during the first months of the summer, but the trend must be put into perspective: apart from a few sectors, and mainly the automotive sector, the pent-up demand following the pandemic seems to have almost completely vanished; the trend in trade activity is therefore returning to levels more consistent with the ones prevailing before the arrival of Covid-19.
GDP Growth, inflation, interest and exchange rates.
BNP Paribas Chief Economist William De Vijlder interviews Hélène Baudchon, Head of the OECD Economic Research team; Richard Malle, Global Head of Research at BNP Paribas Real Estate; and François Faure, Head of the Emerging Markets and Country Risk team. They take stock of the global economic situation against a backdrop of inflation, rising interest rates and monetary tightening by central banks. Are we coming to the end of this monetary tightening cycle? What are the impacts on economic growth and financial markets? Have official rates reached a peak in the eurozone or the United States? What influence has the rise in interest rates on the property market? What is happening in emerging countries? These questions will be addressed in three chapters. Enjoy your viewing!
In the world of central banking, nothing is what it seems. The ECB’s recent rate hike was considered dovish whereas the pause by the Federal Reserve received the label hawkish. These reactions show that, beyond the rate decision, the accompanying message also matters. That of the ECB was interpreted as signaling that the terminal rate had been reached. In the US, the latest rate projections of the FOMC members -the dot plot- point toward another hike before year end and a federal funds rate that would stay elevated for longer. This is unsurprising given the resilience of the US economy in reaction to the aggressive monetary tightening and the concern that bringing inflation back to the 2% target would take more time
In the Euro zone, the European Commission economic uncertainty index resumed its decline in August, continuing the trend started in autumn 2022. Uncertainty is declining in almost all sectors, but the construction sector where it has increased again.
GDP growth, inflation, interest and exchange rates.
In August and September, the economic indicators of the main OECD economies point to a downturn. Business climate surveys in the UK and the euro zone - and especially in Germany and France - point to an already marked weakening of the economy. In the United States, this is expected, particularly by households. We predict this will happen from Q4 onwards. Japan is the exception, with the Services PMI remaining high.
There is broad agreement amongst researchers that population ageing has a detrimental impact on economic growth through a reduction in the working-age population. There is less agreement on the impact on inflation, which amongst other things is influenced by age-dependent spending and savings behaviour. Wage developments will play a key role. A shrinking labour force could create structural labour market bottlenecks in certain sectors, trigger a ‘war for talent’ and force companies to pay higher wages and raise their selling prices. This would spill over to the rest of the economy
According to its final estimate, the S&P Global composite PMI index fell for the seventh month in a row in August, illustrating the loss of momentum in global growth in the middle of the 3rd quarter. The negative signal is reinforced by the level of the index, which reached just 50 (from 51.6 in July), the threshold between expansion and contraction.
GDP growth, inflation, interest rates and exchange rates
In his opening remarks at Jackson Hole on 25 August 2023, Jerome Powell provided a fairly detailed analysis of US inflation, focusing in particular on the three main components of core PCE* inflation to be monitored in order to track the disinflation process. The chart illustrating his comments is reproduced here. Two encouraging trends emerge – the sharp fall in core goods inflation and the beginning of the decline in housing services inflation – but also, and above all, a third concerning trend: the absence of a fall in non-housing services inflation
Stylised facts are recurring patterns between economic variables and between economic variables and financial markets. They are conditioned by the economic environment and shape expectations of households, companies and investors. They are also used when producing economic forecasts. In the current cycle, there is doubt whether certain stylised facts still apply. In the US, the economy is still growing despite a significant yield curve inversion and aggressive rate hikes. In the Eurozone, the labour market thus far has been resilient notwithstanding the actions of the ECB. Moreover, financial market investors are undeterred by the talk by economists about recession risks. Several factors help to put these, at first glance puzzling observations, into perspective
Recently, the word uncertainty has been frequently used by the Federal Reserve and the ECB in their communication. It is something they must take into account when taking policy decisions. Likewise, households, firms and investors face different types of uncertainty. That of not exactly knowing the current state of the economy, uncertainty about future economic policy and monetary policy in particular, uncertainty about the transmission of past shocks -including interest rate hikes- and the risk of events -geopolitical, climate-related, etc.- that would have economic repercussions. Every month, the European Commission asks firms and households how difficult or easy it is to make predictions about their future business or financial situation
Whether it comes from the European agency Copernicus or the American NOAA, the conclusion is the same: in July 2023, average temperatures measured on the surface of the globe broke an absolute record, both on land and at sea. Scientific data confirm, if confirmation were still needed, that climate change is here, that its effects are becoming more pronounced, and that it is sparing no one.
Record temperatures in China and the United States, unprecedented forest fires in Canada, historic droughts in Spain and Morocco...: summer 2023, which looks to be the hottest ever recorded, confirms, as if it were still necessary, that climate change is here, that its effects are increasing, and that it is not sparing anyone. Its origin lies in a phenomenon that has been known for a long time, since it was first identified in 1824 by the French mathematician Joseph Fourier: the greenhouse effect, caused by human activities releasing a quantity of gas of the same name into the atmosphere.This is a cumulative process which, unless we want to risk intolerable global warming, will have to stop
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)
