Rising interest rates, the post-pandemic normalisation of government spending, high energy costs and general price increases are starting to weigh on growth. The weakness in activity is not confined to the manufacturing sector, which is additionally affected by the shortage of various materials and components. It is also affecting services activities despite final lockdown measures being lifted.
In June, the purchasing managers’ activity indicators fell sharply in the United States and Europe, in both the manufacturing and services sectors. China was the only country to post a rebound in its activity indicators, following the reopening of its main metropolises, including Shanghai. However, the continuation of its zero-tolerance strategy for new Covid-19 infections could trigger a return to strict lockdown measures at the slightest sign of excessive spread of the virus. In Japan, economic growth continues to depend on higher exports: on the one hand these are benefiting from the yen’s ongoing weakness, but on the other hand they are likely to be affected by a gradual diminution of global demand.
No sign of inflation settling down
High inflationary pressures show little sign of easing. In the United States, headline inflation rose from to 8.6% in May, its highest level since December 1981. In the eurozone, inflation is continuing to climb to new record levels since the introduction of the single currency. From May to June, headline inflation also increased to 8.6%.
Record rise in the US fed funds rate
With inflation figures showing no sign of abating, the Federal Reserve’s monetary policy committee (the FOMC) accelerated the tightening process at its June meeting with a 75 basis point hike in interest rates, the biggest jump since November 1994. Chairman Jerome Powell did not settle the debate as to whether the rate hike at the next meeting at the end of July is likely to be half or three-quarters of a point. While the top monetary official intends to guide the US economy to a soft landing rather than a recession, he says the fight against inflation is ‘unconditional’, with the restoration of price stability the current priority. As expected, the European Central Bank left its key interest rates unchanged at its June meeting. It reiterated that it will end net purchases under its asset purchase programme by the end of June with a view to starting to raise interest rates at the Governing Council meeting on 21 July.
Government bond yields continue to rise
On the bond markets, with no sign of inflationary pressures easing, government bond yields rose sharply in the first half of June. In the second half of the month, this trend was reversed as fears of recession gained the upper hand, fuelled by increasing signs of economic slowdown. Over the month, the benchmark 10-year yield continued to rise in the US, in Germany, in France, in Italy and in Spain.
Sharply declining stock markets
Equity markets fell sharply in June, posting one of the worst first-half performances in stock market history. Persistent inflation, interest rate hikes and the economic slowdown are weighing on equity prices. The MSCI All Country World Index Net Total Return expressed in euros fell by 6.2% in June and is down 13.2% for the first half of the year, despite the beneficial effect of the strong dollar. In terms of sectors, healthcare and consumer staples were the most resilient in June, while energy corrected sharply, albeit remaining the only sector recording considerable gains since the start of the year.