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EcoWeek

    EcoWeek of 27 June 2022
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    A lasting, unwarranted widening of sovereign spreads in the euro area would represent an excessive tightening of financial conditions and weigh on activity and demand. It would run into conflict with the objectives of the ECB in the context of its monetary policy normalisation. Spreads are influenced by various fundamental variables that are directly or indirectly related to debt sustainability issues. These tend to be slow-moving. Sovereign spreads also depend on the level of risk aversion, a variable that fluctuates a lot and which is influenced by global factors. This complicates the assessment of whether an observed spread widening is warranted or not.
    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.
    EcoWeek of 19 June 2022
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    In recent weeks, the prospect of several ECB rate hikes has caused an increase in Bund yields and, unexpectedly, several sovereign spreads. Beyond a certain point, higher spreads may become unwarranted. Under such circumstances, the ECB might consider stepping in to avoid that its policy transmission would be impacted. Determining whether sovereign spreads have increased too much is a real challenge. Historically, based on a 20-week moving window, the relationship (beta) between the BTP-Bund spread and Bund yields fluctuates a lot, so this calls for taking a longer perspective. Using data since 2013, the current spread is in line with an estimate based on current Bund yields. Clearly,  other economic variables should be added to the analysis. It shows the complexity of the task should the ECB commit to address unwarranted spread widening.
    The significant contraction of the blue area relative to the dotted area illustrates the magnitude of the shock faced by the Chinese economy since March 2022. The resurgence of the Covid epidemic has led to the introduction of mobility restrictions in many provinces, with the most stringent lockdowns affecting major industrial and port regions, notably Shanghai. Restrictions have depressed household demand and dampened activity in factories, disturbed the transportation and export of goods, and led to supply-chain disruptions in China and abroad.
    The strength of the employment data reflects a degree of resilience in the Spanish economy in the face of the multiple shocks. According to the Spanish Employment Office (SEPE) an additional 33,366 active workers (+0.2% m/m) were registered in the social security system in May, the thirteenth consecutive month of growth. The government is expecting a further increase in June. Meanwhile, unemployment fell by 41,069 in May, to its lowest level since 2008. This decline was driven by a further drop in youth unemployment (25 and under), of 21,974.
    Unsurprisingly, the 16 June meeting of the Bank of England’s Monetary Policy Committee (MPC) led to a further increase in its policy rate, the fifth consecutive 25 basis point increase, taking it to 1.25%. This tightening of monetary policy, relatively modest when compared to the Fed’s 75bp hike, aims to control inflation, which is continuing to rise steeply (2.5% m/m NSA in April, giving a year-on-year figure of 9%), without putting excessive constraints on an economy already hit by the inflation shock.
    EcoWeek of 12 June 2022
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    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 negative prospects for the second quarter of 2022 are no longer a risk as suggested by business surveys, they are now taking concrete shape in Germany. After the very sharp worsening in the trade balance in March (a 4% decline in exports in volume terms and a symmetrical 4.1% increase in imports), it barely improved in April and remains at an extremely low level. According to the Kiel Institute’s real-time forecasts, exports probably fell in May (-1.7% m/m) but will see a slight recovery in June (0.6% m/m). Over the second quarter as a whole, Germany’s trade balance could shrink to its lowest level since Q2 2001. 
    The latest economic data from INSEE have provided detail on the timing and scale of the purchasing power shock to household consumption, with three figures standing out: the 1.8% q/q fall in the purchasing power of gross disposable income over the first quarter; the revised fall of 1.5% q/q in household consumption (from -1.3% in the initial estimate); and the downgrade in GDP growth to -0.2% q/q, from 0% in the initial estimate.   
    The deterioration of the business climate surveys continued in May, particularly in the manufacturing sector, even though industrial production held up until April. Output rose 1.6% m/m, to its highest level since December 2007. However, the manufacturing PMI dropped 2.6 points to 51.9 in May, its sixth consecutive monthly fall. The sharp fall in this indicator shows up clearly in our barometer. 
    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.

On the Same Theme

International trade: a few signs that tensions are easing 6/27/2022
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.
OECD weekly indicator suggests slowing activity in advanced economies 6/12/2022
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.
PMI: resilience of employment data but new export orders continue to deteriorate 6/6/2022
The global manufacturing PMI continues its sideways movement since March, when it had declined due to the war in Ukraine. May saw a weakening in the US and the euro area, where in particular Italy recorded a considerable decline. In Australia the PMI recorded a big drop. China saw a rebound following the easing of mobility restrictions. In India the PMI has been stable at a high level for several months and Vietnam saw a sizeable improvement in May. The services PMI was down in the US and the euro area, where in particular Germany was confronted with weaker data, although still well above the 50 mark. In the UK, the index recorded a huge drop. Japan is benefiting from better data and in India the already elevated index moved higher again in May.
Covid-19 pandemic: the situation continues to improve in most regions of the world 6/6/2022
The epidemiological situation arising from the Covid-19 pandemic continues to improve in most regions of the world. For the first time since mid-November 2021, the number of new cases has dropped below the symbolic level of 3.5 million per week (7-day moving average). Over the same period, visits to retail and leisure facilities held at pre-pandemic levels in Belgium, Germany and France, and are approaching normal levels in Italy. Retail and leisure mobility still falls short of pre-pandemic levels in the other countries (United States, Spain, the UK and Japan).
Inflation: shifting focus, shifting concerns 5/29/2022
Historically, there is a close relationship in the US and the euro area between, on the one hand, a measure of price pressures based on survey data on manufacturing delivery times and input prices, and, on the other hand, core inflation. The recent flash purchasing managers’ indices show that price pressures may be peaking, thereby providing hope that inflation will follow in the not-too-distant future. This will focus the attention to the speed of decline in inflation. A very slow process would be highly discomforting, raising fears that ever-higher interest rates would end up causing a recession. Everybody wants slower growth to bring inflation under control, but nobody wants the growth engine to stall.
Economic uncertainty edging higher 5/29/2022
Our different uncertainty gauges are complementary, in terms of scope and methodology. US economic policy uncertainty based on media coverage has eased slightly after a significant increase, reflecting concern about the impact of aggressive monetary policy tightening. In the US, business uncertainty about sales revenue growth has been stable but uncertainty about employment growth has rebounded somewhat, probably reflecting ongoing difficulties in filling vacancies. The European Commission’s uncertainty index, after having jumped following the war in Ukraine, has stabilised.
International trade: slowdown confirmed 5/29/2022
Global PMI numbers point to a significant slowdown in global economic activity. The new export orders sub-index dropped to 48.1 in March, below the threshold for expansion, and was unchanged in April. More specifically, new export orders for Taiwan recorded a heavy fall (down 17.2% m/m), the biggest drop for fourteen months. Although a pullback was expected, following a strong rise in March (21.6%), the scale of the decline was surprising.
Covid-19 pandemic: the situation in Europe continues to improve rapidly 5/22/2022
According to the latest data from Johns Hopkins University, more than 4 million new cases were recorded around the world between 12 and 18 May, an increase of 5% on the previous week. This represents the first weekly increase since the beginning of February. Looked at on a regional level, the situation in Europe improved significantly (-20%), and that in Africa stabilised. However, case numbers continued to climb in North and South America (17%). Asia saw the first increase after two months of virtually continuous falls. Meanwhile, 66% of the world’s population has now received at least one dose of a Covid-19 vaccine.
Back to pre-pandemic levels in (almost) all developed economies 5/15/2022
The downward trend in the weekly number of new cases of Covid-19 continued in most regions of the world. For the first time since mid-November 2021, the number of new cases for the week fell below the symbolic level of 4 million on average for a moving seven-day period. Some 3.6 million new cases were recorded between 5 and 11 May, a fall of 11% on the previous week. On a regional basis, case numbers continued to fall drastically in Europe (-20%) and Asia (-17%), but rose in Africa (42%), North America (24%) and South America (10%). The sharp rise in Africa in recent weeks is linked to soaring cases in South Africa. Meanwhile, 66% of the world’s population has now received at least one dose of a Covid-19 vaccine. Over the same period, visits to retail and leisure facilities remained strong in the developed economies.
Central banks: the need and courage to act 5/9/2022
Elevated inflation, if left unaddressed, could cause a de-anchoring of inflation expectations, an increase in risk premia, greater price distortion and hence longer-term costs for the economy. Although at first glance, central banks face a dilemma - hiking interest rates to lower inflation at the risk of causing an increase in unemployment or focusing on the labour market and accepting the risk that inflation stays high for longer -, they can only choose between acting swiftly or face an even bigger challenge later to bring inflation back under control. Recent statements by officials of the Federal Reserve, the ECB and the Bank of England acknowledge the need to act but their decisions and guidance are very different and reflect the differences in the macro environment.     

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