While in the U.S., with an inflation rate of around 7%, there is much to be said for a tightening course by the U.S. Federal Reserve, in China the moderate inflation values give the central bank scope to support the economy with further monetary easing measures. Swiss Life Asset Managers remains more cautious than consensus on GDP growth forecasts for 2023.
In the short term, it appears that the Omikron scenario has somewhat dampened domestic economic momentum in Switzerland at the beginning of the year. Thus, the weekly economic activity index of the State Secretariat for Economic Affairs (Seco) recently pointed downward. According to economists at Swiss Life Asset Managers, this slowdown is probably due to a high number of quarantine orders; a further tightening of containment measures is no longer under discussion in Switzerland.
In your opinion, opportunities and risks for the economic outlook are roughly balanced in light of Europe's possible transition to an endemic situation. Suppliers to the German automotive industry are benefiting in the short term from the easing of supply bottlenecks, but in the medium term the strong Swiss franc is likely to have a negative impact. Against the euro, the franc is currently trading at a six-year high.
With favorable pandemic conditions in Europe, increased travel abroad and shopping tourism are likely to slow further recovery of domestic demand, experts say. Under these circumstances, and given the weakening support of monetary and fiscal policy on global economic momentum, the optimism of many forecasting institutes regarding the outlook for GDP growth beyond the current year is surprising. "Our forecast of 1.4% GDP growth for 2023 is the most cautious of all the estimates considered by Consensus Economics," they emphasize.
Similarly to import and producer prices, the economists at Swiss Life AM believe that the rise in consumer prices has also passed its cyclical peak. After an annual inflation rate of 1.5% in the last two months of 2021, they expect January 2022 to fall to 1.3%. In the short term, renewed increases in fossil fuel prices pose a forecasting risk.
Forecast comparison
There is much to be said for a tightening cycle in the U.S
The U.S. labor market made a stellar recovery in 2021. The unemployment rate at the beginning of 2021 was 6.7% and fell to 3 by the end of the year.9%. The last time the U.S. unemployment rate fell below 4% – in May 2018 – U.S. key interest rates approached 2% with inflation at 2.8%.
Today, the Fed is still busy winding down bond purchases, even though inflation is already at 7%. "Not surprisingly, pressure for interest rate hikes is mounting, and we expect four rate hikes of 25 basis points each this year, in line with financial markets," Swiss Life AM economists said. The prospect of rising interest rates has already caused nervousness in the markets, exacerbated by geopolitical tensions. This makes it clear that the cycle of interest rate increases will not be a walk in the park and will bring with it certain economic skid marks, especially since the U.S. economy got off to a weak start in the new year due to the omicron wave. Nevertheless, there is much to suggest a tightening stance: "First, financial conditions were record loose at the beginning of the year. Second, weaker demand is definitely intentional. The large inflation difference between the USA and Europe with tradable goods shows that the US inflation is not only due to supply bottlenecks, but also to a demand overhang."
Inflation reached 7% in December, with goods prices remaining key drivers. Prices of used cars, for example, continued to rise and are now 52% higher than in January 2020. Inflation in services was again surprisingly low. "We still expect the inflation dynamic to shift from energy and goods prices to services in 2022, but on balance monthly price increases will ease somewhat," the experts are convinced.
Noticeable decline in inflation rate in the euro zone
In their view, as the omicron wave begins to subside, service sectors across Europe that have been particularly affected by containment measures can look forward to a normalization of the situation in the summer months. However, suppliers in the accommodation sector in particular would remain affected by a labor shortage. In industry, the development is dependent on a continued easing of the global supply problems, which have recently begun to emerge in the semiconductor sector.
Suppliers throughout Europe benefited from the short-term catch-up potential of the German auto industry. In the medium term, the upswing in Europe is losing momentum due to the negative fiscal impulse and the tighter monetary policy in the USA and some emerging countries. This cyclical headwind is compounded by geopolitical uncertainties. At present, the Ukraine conflict is having an impact on consumers and companies in Europe, above all in the form of higher energy prices. However, any further escalation would greatly increase economic uncertainty.
"Most recently, four eurozone countries reported lower month-on-month inflation rates. Inflation remains particularly high in countries with a high weighting of fossil energy products in the consumer price index. However, unlike developments in the U.S. and the U.K., credit growth and wage trends still do not point to increased inflationary pressures. If energy prices remain unchanged, we expect the inflation rate to fall noticeably from the current 5% to 3% by mid-2022," forecast the economists at Swiss Life AM.
In the UK, the Bank of England (BoE) lived up to its reputation as a miracle bag with the surprising interest rate hike in mid-December. As in the USA, the labor market is healing faster than originally expected, and the pre-crisis level of the unemployment rate (3.8%) is within reach.
Despite the end of the "low interest rate party," the economic recovery in 2022 is likely to be robust, as the UK is a laggard – monthly GDP did not touch pre-crisis levels again until November 2021. As in Germany and France, there is a considerable gap between industrial production and the pre-crisis level (3% in November), particularly in the automotive sector, which is suffering from supply bottlenecks. In addition, the domestic tourism sector could benefit from relaxed entry requirements after the winter pandemic wave.
Inflation again surprised on the upside in December 2021, rising to 5.4%. Unlike on the continent, and similar to the U.S., higher goods prices, and especially used cars, played a major role in the recent rise in inflation. Inflation momentum is likely to remain high in 2022, as higher wholesale gas and electricity prices are only reflected in consumer prices with a lag due to regulation.moderate inflation levels in China give the central bank room to maneuver
Moderate inflation in China gives central bank room to maneuver
"Global trade has reached record levels over the past year. China's exports to the world climbed to more than 340 billion in December. USD, refuting the 'deglobalization myth' that prevailed at the beginning of the pandemic," experts said (cf. Chart). Strong global demand for goods had put pressure on supply chains in many countries due to bottlenecks in containers and ships. While renewed virus outbreaks and China's zero-covid strategy could weigh on supply chains in the short term, the situation should ease further in the second half of 2022.
China: Monthly exports
The Chinese economy grew more than expected in the final quarter of 2021, posting quarterly growth of 4.0% compared to previous year. Swiss Life AM revises its annual GDP forecast for 2022 down from 5.1% to 5.0% down. There are two factors that will slow down Chinese economic growth. First, economists believe China will stick to its zero-covid strategy. This, in turn, will continue to weigh on the service sector and consumption.
Secondly, the problems in the real estate market are expected to continue due to weak investor sentiment and lower demand. All real estate-related indicators such as home sales, home prices and new mortgage loans weakened in December. In response, China is stepping up its monetary easing measures, he said. As a result, Swiss Life AM expects a rather weak first quarter, followed by an upswing in the second quarter as the easing takes effect.
Overall inflation in China fell sharply in December from the previous month to 1.5% (November: 2.3%), primarily due to a decline in food prices. Unlike most other countries in the world, moderate inflation levels in China give the central bank scope to support the economy through further monetary easing measures.
Robust export demand in Japan
In Japan, the purchasing managers' index (PMI) for the service sector plunged in January from 52.1 on 46.6 points off. The bright spot remains the industrial sector, which posted the highest monthly increase in output in November 2021 (+7.0% compared with October) since the beginning of the data series recorded. According to the industrial PMI, both production and orders continued to rise in December and January. Export demand remains robust, with December 2021 export figures boosted in particular by demand from China and the U.S.
"Inflation in Japan is rising from low levels and is expected to be around 1 in April 2022.5% reach the peak in the cycle. We expect inflation rates to return to just above zero as early as 2023. Consequently, the Bank of Japan is under no pressure to turn the interest rate screw and has vehemently resisted recent rumors that a monetary policy turnaround is imminent," comment the experts at Swiss Life AM.