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Major Economies - May 2022

Major Economies - May 2022

United Kingdom
Growth was seemingly solid in Q1, as the progressive removal of virtually all Covid-19 restrictions supported the services sector. The economy clocked back-to-back monthly growth in January and February, while the labor market strengthened in Q1, with job vacancies at a record high and brisk employment growth in the quarter as a whole. Less positively, surging domestic inflation and a darkening international panorama are dragging on activity heading into Q2. In April, the Composite PMI dropped, and consumer sentiment tumbled to an over-decade low, boding poorly for private spending. The measures taken so far by the government— including a fuel duty cut and tax rebates—are insufficient to offset the hit to households’ purchasing power from higher inflation. In politics, Prime Minister Boris Johnson was recently fined over breaking lockdown rules. However, he is likely to remain in his post.

This year, growth will slow substantially due to intense inflation and tighter monetary policy. Protracted conflict in Ukraine and further Covid-19 variants pose downside risks, while possible further fiscal support is an upside risk. While trade tensions with the EU—particularly over Northern Ireland—have taken a backseat due to the war, they still cloud the outlook. FocusEconomics panelists expect the economy to expand 3.8% in 2022, which is down 0.2 percentage points from last month’s forecast, and 1.7% in 2023. 

Inflation increased to 7.0% in March, above February’s 6.2% and the Bank of England’s 2.0% target, and higher than market expectations. March’s result was the highest inflation rate since March 1992. Looking forward, inflation is set to rise further in the coming months due to the large re-rating of the energy price cap from April, as well as high energy and food prices. FocusEconomics Consensus Forecast panelists expect inflation to average 7.1% in 2022, which is up 0.8 percentage points from last month’s forecast, and 3.5% in 2023. 

On 17 March, the Bank of England (BoE) increased the bank rate from 0.50% to 0.75%, marking the third successive rate hike. The Bank’s decision was driven by the desire to rein in surging inflation. While the Bank’s forward guidance was more dovish than at the previous meeting, further rate hikes are still expected later this year in order to quell inflation. FocusEconomics Consensus Forecast panelists see the bank rate ending 2022 at 1.32% and 2023 at 1.63%. 

The pound traded at USD 1.26 per GBP on 29 April, depreciating 4.4% month on month, amid concerns over global growth and expectations of aggressive Fed tightening. Our panelists see the pound strengthening slightly against the dollar by the end of this year, although the hawkish Fed and tensions with the EU continue to pose downside risks. The Consensus is for the pound to end 2022 at USD 1.34 per GBP and 2023 at USD 1.38 per GBP.

United States
The economy contracted slightly in Q1 according to preliminary data. Declines in federal, state and local government spending were partly to blame, with federal spending dampened by the winding-down of government support programs and lower defense expenditure. Lower private inventory investment and booming imports also weighed on the GDP reading. However, underlying dynamics were more encouraging: A red-hot labor market kept consumer spending growing briskly despite surging inflation and Omicron infections, while fixed investment growth sped up. Turning to the second quarter, GDP is expected to bounce back as the contribution of net trade improves. However, domestic demand is likely easing amid skyrocketing inflation and higher interest rates. Indeed, the S&P Global Composite PMI dipped to a three-month low in April on a softer services sector. Consumer confidence also ticked down in the month. 

Growth is projected to slow in 2022 due to surging inflation and much tighter monetary policy. That said, low unemployment should support private consumption, investment should stay fairly healthy, and the energy sector will be boosted by the Ukraine war. Uncertainty over new Covid-19 variants, an intensification of the war, and tensions with China are risks. FocusEconomics panelists see GDP growing 3.2% in 2022, which is down 0.2 percentage points from the previous month’s forecast. In 2023, our panel sees the economy expanding 2.2%. 

Inflation rose to 8.6% in March from February’s 7.9%, marking the highest reading in decades and way beyond the Fed’s 2.0% target. Price pressures in recent months have been spurred by tight labor market conditions and pricier food and energy. Inflation is expected to remain well above target in the coming quarters amid ongoing high commodity prices and supply constraints. FocusEconomics panelists see inflation averaging 7.1% in 2022, which is up 0.8 percentage points from last month. In 2023, our panel expects inflation to average 3.1%. 

At its 15–16 March meeting, the Fed raised the target range from 0.00%– 0.25% to 0.25%–0.50%, in a bid to tame price pressures. The move was in line with market expectations. Our panelists expect aggressive monetary tightening over the coming months, starting at the next meeting in early May, as the Fed tries to get a grip on inflation and inflation expectations. Our panelists project the federal funds rate to end 2022 at 2.27% and 2023 at 2.73%. • On 29 April, the dollar index traded at 98.8, up 2.3% month on month on a hawkish Fed and concerns over the global economic outlook as China’s economy entered a lockdown-induced downturn. Looking ahead, geopolitical tensions, the health of the global economy and the trajectory of U.S. rates will be key determinants of the dollar’s strength.  

Thank you Focus Economics

This post first appeared on Chaganomics, please read the originial post: here

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Major Economies - May 2022