Although we are continuing to see a flow of robust economic statistics, the outlook for global economic growth is deteriorating. The reduction in government spending from last year’s high levels and the general rise in prices – exacerbated by Russia’s invasion of Ukraine – are undermining the growth potential for the rest of the year.
The United States remains the most dynamic region, with household spending and business investment maintaining double-digit annual growth rates in nominal terms. In the eurozone, GDP growth estimates are being considerably revised down due to the heavy impact of soaring energy costs on household purchasing power and corporate profit margins. In China, the zero-tolerance policy to new coronavirus infections means that lockdown measures will be in place for some time, jeopardising the achievement of the official GDP full-year growth target of 5.5%. In Japan, the current account balance could deteriorate significantly due to the higher cost of energy imports, aggravated by the recent weakness of the yen.
New inflation records
Inflation statistics continue to deteriorate. In the United States, headline inflation rose to 7.9% in February, its highest level since January 1982. In the eurozone, inflation continues to rise, exceeding the record high since the introduction of the single currency that was reached last month. In March, headline inflation increased to 7.5%.
US Federal Reserve raises fed funds rate by 25 basis points
In line with expectations, the US Federal Reserve kicked off its monetary tightening cycle in March with an initial interest rate hike of 25 basis points. The monetary authorities also signalled their intention to start tapering balance sheet assets soon, possibly as early as the next meeting in May. In a speech to the National Association for Business Economics in the second half of the month, Federal Reserve Chairman Jerome Powell reiterated the Fed’s firm commitment to reducing the current excessively high inflationary pressures, which could lead to interest rate hikes in 50 basis point increments. In the eurozone, the ECB will accelerate the reduction of asset purchases with a view to terminating its asset purchase programme in the third quarter. ECB president Christine Lagarde has left the door open for the possibility of a first interest rate hike at the end of the year.
General rise in government bond yields
Increasing inflationary pressures have prompted a general rise in government bond yields on both sides of the Atlantic despite the safe-haven characteristics of government bonds in times of crisis. The benchmark 10-year government bond yield rose in the United States, in Germany, in France, in Italy and in Spain.
Equity markets rebounded in the second half of March
Equity markets rebounded in the second half of March following their decline in the first two months of the year. Share prices were boosted by hopes of diplomatic dialogue between Ukraine and Russia after the slower-than-expected advance of Russian troops into Ukrainian territory. Panic in the first half of March over Chinese equities, which risk being delisted from US stock exchanges if Beijing continues to deny the US authorities full access to accounting documents, weighed on the MSCI Emerging Markets Index. In terms of sectors, energy and healthcare were the best performers, while defensive consumer staples scarcely participated in the market rebound.