Markets Weekly podcast – 16 May 2022

Hello. It’s Monday, 16^th May, and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.

My name is Henk Potts, Market Strategist for Barclays Private Bank, and this week I’m taking a step back from the markets to focus on the broader economic outlook. I’ll concentrate on our latest growth and inflation forecast, the ongoing impact of the war in Ukraine, and China’s battle with Omicron. I’ll conclude by discussing what elevated levels of inflation mean for the path of monetary policy around the world.

What we do know is that global growth forecasts have been falling as the year’s progressed, the war in Ukraine has compounded the intensification of COVID restrictions in China, surging price pressures, and tightening financial conditions, to create almost a perfect storm of uncertainty. The accumulation of these dark clouds has encouraged us to lower our global growth forecast and raise our inflation projections.

So we’ve reduced our global growth forecast for this year to around 3.3%, so that’s a significant downgrade to the 4.4% estimate we proffered at the start of the year.

No surprise that our inflation projection has increased. At a global level we think inflation will average 5.9% this year, before easing back to 3% by the time that we go through 2023.

I don’t think we need to be actually overly disheartened by that 3.3% growth forecast. That still suggests trend growth over the course of this year and next. It’s also above the 2.7% annual growth that was achieved between 2000 and 2019.

What we do know is that Russia’s invasion of Ukraine has reverberated throughout the global economy and financial markets. Concerns over further disruption to energy markets have been growing, particularly after Russia stopped supplying gas to the likes of Poland and Bulgaria. Meanwhile, European officials have been considering a phased import ban on Russian oil.

Persistently higher commodity prices and potential rationing of energy would have serious implications for inflation forecasts, manufacturing output, and household consumption levels. The implementation of an energy embargo would put further downside pressure on our 2.4% European growth forecast for this year. It could even lead to the euro area going into recession.

The European Central Bank estimates that a 10% rationing of gas on the corporate sector would knock 0.7 percentage points off gross domestic product, so you can start to see the impact of that builds very quickly once you start to see some of those supplies of energy coming under pressure to the European Union.

Meanwhile, China’s battle against Omicron continues. The arrival of the highly infectious variant in the country, reduced efficacy of local vaccines, and inferior vaccination rates amongst its elderly population has reinvigorated the government’s determination to enforce its zero-COVID strategy.

Analysts now estimate that up to 370 million people are affected by partial or total lockdowns. While China’s strict lockdowns have saved lives, officially there’s only been 5,000 deaths from COVID-19 on the mainland.

We do know that’s come at an economic cost. So if you look at consumer spending it slumped, unemployment in the world’s second largest economy has also been rising. Retail sales, for example, contracted by 3.5% in March. That’s the first decline that we’ve seen since July 2020, and the lowest level since the start of the pandemic.

China’s unemployment rate has also been rising, as we’ve been talking about, hitting 5.8% last month. Remember, that’s up from 5.5% in February and its highest level since May 2020, and, given the fact that containment measures are expected to be in place for a prolonged period of time, we’ve cut our China GDP growth to 4.3% for this year, which we should remember is significantly below that official 5.5% target level.

Moving on to inflation, well, the upward pressure on prices has been broader and longer-lasting than envisaged at the start of the year. Food and energy prices have surged, supply-chain disruption has taken longer to resolve than expected. Tighter labour markets, meanwhile, have been pushing up wages. Recent data shows, actually, that services inflation, particularly in hospitality, has seen a sharper increase as economies reopen.

So if you look at Europe, the UK, and, of course, the United States they’ve all registered multi-decade highs for year-on-year inflation prints over the course of the past couple of months.

In terms of the outlook for inflation, well, forecasts suggest that price pressures may peak over the course of the next few months. The reality is headline inflation is still expected to remain above central banks’ target levels through the course of 2023 in many of the leading economies.

In order to curb those inflationary pressures, central bankers have been forced to embark upon a more aggressive policy tightening path, even if that comes at the cost of activity. So, as expected, the Federal Reserve we know raised rates by 50 basis points at the main meeting. That’s the biggest increase that we’ve seen in more than two decades.

Fed chair Jerome Powell helped market participants who were looking for clues as to the rate of future hikes by saying 50 basis point increases are likely the Committee’s baseline for the next couple of meetings. So we’ve adjusted our policy forecast to reflect that, and now anticipate half of 1% increases in June and July, followed by 25 basis point increments at each meeting through January 2023. This would put the terminal rate for the cycle in the United States at 2.75% to 3%.

In the UK, the Bank of England, as we know, have become increasingly concerned about the persistence of inflation. We expect further policy increases during the course of the coming months, therefore, forecast 25 basis point hikes both for the June and the August meetings.

The timing of rate hikes in Europe has become a harder call, it has to be said. The European Central Bank has indicated that its net-asset purchases, under the asset-purchase programme, will be concluded in the third quarter. This could pave the way for a rate hike in the second half of this year, and we know that policymakers are becoming far more vocal about that, but the exact timing of that first hike is still likely to be determined by the incoming data.

Any evidence of a wage-price spiral or a de-anchoring of inflation expectations could force the Governing Council into raising rates as early as, perhaps, September. That said, the risk of this still remains low and we still think a hike in 2023 still looks more likely, given the vast level of uncertainty that remains across the European economic picture.

I think while it feels very disconcerting to be bombarded by a seemingly endless barrage of negative headlines, it’s important to remember that policymakers still have plenty of optionality. If, as expected, inflation moderates into year-end, we can expect some of the intensity over the hiking narrative to ease as officials try to orchestrate a softer economic landing. Meanwhile, growth prospects, we think, should continue to be underpinned by solid labour markets, excess consumer savings, and the recovery that we’ve been seeing in terms of the service sector.

And with that quick snapshot of the big topics that have been dominating the markets from a macroeconomic perspective, I’d like to thank you once again for joining us. We will, of course, be back next week with our latest instalment, but for now may I wish you every success in the trading week ahead.