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)
After several months of improvement, global supply-chain disruptions appear to have bottomed out, and some signs of deterioration are emerging again. The synthetic indicator of the Federal Reserve of New York (FRNY; chart 3), which measures these tensions, rose slightly in June, for the first time in 2023, as did the PMI delivery times index, which is part of the FRNY aggregate indicator.
In July, there was still divergence between the main OECD economies. Economic surveys showed signs of a more marked slowdown in Europe than in the United States, where various indicators (non-manufacturing ISM, household surveys) even improved.
GDP growth, inflation, interest and exchange rates
Even though economic growth in early 2023 was better than forecast for emerging countries, the slowdown scenario is seemingly coming to pass for the rest of the year. In 2024, the strength of the recovery will hinge on the geopolitical climate and on how far monetary policy is eased in the US and the euro zone. It will also hinge on the investment outlook for emerging countries. The UNCTAD’s annual report gives cause for optimism around the investment outlook, except for low-income economies.
The global composite PMI index stood at 52.7 in June, the lowest in four months, reflecting slowing global growth at end Q2 2023. However, the index remains comfortably within the range of expansion, buoyed by the services sector. On the other hand, the manufacturing PMI contracted sharply in June (48.8 compared to 49.6 in May).
For economists and central bank watchers, the ECB conference in Sintra (Portugal) and the Federal Reserve conference in August in Jackson Hole are the highlights of the summer season. As always, the presentations and panels at the Sintra conference were very stimulating but also sobering. Disinflation is too slow, there are upside risks to inflation compared to the pre-pandemic era, policy rates will have to remain elevated and economic forecasting is more challenging than ever.
Shelter is the main item in the Consumer Price Index (CPI) in the United States, accounting for 34.4% of the total basket. Its growth has accelerated sharply since 2021 and the post-pandemic economic recovery: the y/y rate strengthened from 1.5% in February 2021 to a peak of 8.2% in March 2023 and has decreased very slightly since, down to 8.0% in May. The large contribution of the shelter component keeps US inflation high. Excluding this component, the core inflation reading for May dropped from 5.3% to 3.4%. Moreover, the current gap between the standard core measure – i.e. excluding energy and food – and the core measure that also excludes shelter has been the widest since the early 1980s
In the major OECD economies, the slow pace of disinflation is expected to continue, while the slow slowdown in growth will eventually lead, because of the monetary tightening (particularly rapid and significant), to a recession in the United States and stagnation in eurozone GDP. Various supportive factors should limit the extent of the reversal, but the ensuing recovery would be equally limited. The slow convergence of inflation towards its 2% target would force central banks to maintain a restrictive policy despite the start of rate cuts in the first half of 2024.
Uncertainty about US economic policy, based on media coverage, fell in June after a rebound in May. The European Commission’s economic uncertainty index fell in June, continuing its decline since October 2022, as uncertainty in the various sectors of activity decreased, except in industry, where the index remained stable.
Which country is the most exposed to recession? Is it the United States or the eurozone? The first answer that comes to mind is: the eurozone. It has, indeed, “technically”, already slipped into a recession in view of the double fall in GDP in Q4 2022 and in Q1 2023. But, for now, this recession looks to be only “technical”: indeed, the contraction in GDP is small and not widespread across all growth components or among eurozone members.
