- The US is tracking essentially zero growth in 2Q
- Europe is slowing sharply due to energy insecurity and inflation
- Our Nowcasting model for China is tracking less than 1% growth in 2Q
- Slowing growth will bring easing inflation, scaling back expected rate hikes
- Easing pressure on energy and food prices will bring cheer to the EM
Signs are gathering around the world that sustained rise in interest rates is beginning to affect demand. In the US, Atlanta Fed’s Nowcasting is pointing to zero growth (quarter-on-quarter, seasonally adjusted, annualised) in 2Q, reflecting weakening of housing starts and exports. High inflation and strong USD are crimping investment and trade, two critical drivers of growth.
The slowdown extends beyond residential investment and trade. Consumer sentiment has worsened considerably over the spectre of inflation and high interest rates. Fiscal spending, a major source of support in 2020 and 2021, has faded entirely, with the US federal government’s fiscal deficit nearly zero in the first five months of 2022. Businesses, sensing a weakening of demand, are beginning to run down inventories as opposed to building them.
Outside of the US, the Euro area, despite no policy tightening from the ECB so far, is stumbling over high inflation, energy insecurity, and the war in Ukraine. Data surprises have turned negative sharply, and the possibility of the ECB hiking rates, barely in the horizon just a few months ago, has now risen dramatically.
China is having a torrid time taming the coronavirus pandemic, with mobility restrictions of varying degrees across the mainland. The country remains essentially shut to the outside world for movement of personnel, although trade figures reflect that goods are moving in a fairly orderly manner. Our Nowcasting model is tracking sub-1% real GDP growth in 2Q.
As we look past 2Q, it is not all doom and gloom. Slowing growth is cheering the markets, as that suggests less tightening work for the Fed in its quest to stabilise inflation. Softening of energy prices over the last few weeks can only help consumers worldwide. For emerging markets, pressure could be released from capital outflows and currency depreciation, not to mention the much-followed current account balance. With the market for food commodities also seeming to peak, some of key sources of market angst may begin to fade during 2H22.
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