Macro Insights Weekly: As growth slows, will inflation soften?
- The recent US GDP data release has prompted us to adjust the growth forecasts for 2022 and 2023
- We expect US real GDP growth to ease to 2% this year, and further slowing next year, to around 1¼%
- As growth slows, so would inflation, especially the part driven by demand
- We however worry that supply driven inflation will remain elevated through 2023
- But perhaps the Fed can take it easy once a demand-crunch induced slowdown takes hold
Commentary: As growth slows worldwide, will inflation soften?
For the US, it’s Fed tightening; for Europe, it’s energy insecurity stemming from the war in Ukraine; for China, it’s the continued struggle with the pandemic, the major economic areas are facing considerable headwind. The labour market is yet to suffer, but consumer and business confidence, dented particularly by high inflation, has been hurt noticeably. With no major fiscal support in the pipeline, and monetary policy likely to become less supportive, the waning consumption and investment outlook looks a tad ominous.
Granted, the US remains characterised by strong energy and labour demand, and a slowdown in the real estate market has yet to have a material impact. But perhaps the shoe is about to drop, especially since the costs of financing of mortgages, car loans, and credit card debt are going up rapidly. Consumers are running down their cash cushion, built during the pandemic, but that can only last so long. A technical rebound could be on the cards in the third quarter as inventories adjust, but overall, the US economy is heading downward.
The latest US GDP data release, with its downbeat tone, has prompted us to adjust the growth forecasts for 2022 and 2023. We now expect real GDP growth to ease to 2% this year, followed by further slowdown next year, to around 1¼%. We are still ruling out a recession but foresee unemployment bottoming out at 3½% and then head toward 4% next year. If inflation remains sticky, and Fed funds rates go toward 4%, bringing along a crash in asset markets, the recessionary and jobs picture will turn out to be much worse, we reckon.
Will softening of demand cause inflation to ease? It has got to, in our view. Already, the recent spate of weak economic data has had a sobering effect on prices, with pump price of petroleum in the US down about 13% over the past month. Agriculture commodity prices (especially wheat and soybean) have also eased a lot lately, reflecting weak demand and some favourable supply side developments. We remain concerned that supply side factors on food and fuel could turn adverse again, but we are confident that policy tightening will cause demand side inflation to dissipate.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.