Uncertainty is back in the macroeconomic analyses. Despite the reassuring re-election of Emmanuel Macron, which was widely anticipated before 24 April.
The elements on which these concerns are based are known and have hardly changed since the start of the war in Ukraine. But it is difficult to favour one scenario over another. Nobody knows how much longer this war will last. The approaching 9 May, when Russia celebrates the victory in World War II with military parades, a date on which President Putin is expected to present his people with tangible results, may give some indication. Some expect a quick end (how long will Russia be able to finance its attack despite sanctions, what are its combat resources?), others expect fighting to last until 2023. This will be crucial, especially for grain and vegetable oils, which for Ukraine accounts for a large share of global production.
In the area of fossil fuels, too, the forecasts are very diverse. They depend mainly on the sanctions over the Russian production. The war in Ukraine has certainly accelerated Europe’s efforts to reduce its dependence on Russian supplies, firstly of oil and then of gas. Based on the gas cuts decided against Poland and Bulgaria, Russia is not reluctant to promote this process.
Oil and gas remained below peak levels
Despite the sanctions, prices did not reach the highs of March. With the arrival of spring, heating needs have decreased. Alternatives to Russia remain more expensive, notably liquefied natural gas, and thus risk making inflation more persistent. But it is increasingly clear that the necessary capacity can be made available, if required. This reduced supply pressure limits the potential for exaggeration. The development of crude oil prices is similar to that of gas: although still above 100 dollars, the peaks of March have not been reached. Europe is moving closer to a decision to abandon Russian black gold. Germany is moving closer to a situation where it can do without Russian oil altogether.
ECB still won’t raise, Fed ready for 50 bps in May
This also changes the perception of inflation and even the policy of central banks. The ECB is still showing no sign of raising interest rates in response to record inflation, which rose by a further 10 basis points (bps) in April to 7.5% over 12 months. While energy remains by far the main driver, the rise on consumer staples side has become more pronounced. And let’s not forget the supply difficulties that are increasing due to the halt of the port of Shanghai for health reasons.
On the other side of the Atlantic, the estimates for April are not yet known. But questions about the state of mind of consumers are becoming all the more numerous as GDP in the first quarter fell by 1.4%. It should have risen by 1%. Consumer spending rose by 2.7%, at a lower rate than price increases. The Covid-19 has not said its last word either: a surge in Omicron cases has also weighed on GDP.
These negative surprises could mark the return of a paradigm already experienced during periods of rate hikes by the Fed. Disappointing indicators are therefore welcome, as they should limit the central bank’s room for manoeuvre in tightening monetary policy. Nevertheless, a 50 bp rate hike is still expected in May.
There is a growing risk that by being forced to fight commodity-driven and other inflation, the Fed could cause a prolonged recession. The growing policy difference between the Fed and the ECB has resulted in a euro that has not been this weak against the dollar since 2016.
Positive outlook for Industry in the US, for Services in Europe
The S&P US manufacturing PMI remains strong at 59.7 points (+0.9), above estimates. The industry managed to increase its production. This accentuates the difference with services, which fell to 54 points (-3.3). They suffer from a combination of recruitment difficulties, inflation and reluctant consumers. The manufacturing index for the Eurozone at 55.3 points (-1.2) shows that the Old Continent is clearly more affected by the war in Ukraine and the problems in Shanghai. Production has even decreased. The opposite is true for services, at 57.7 points (+2.1), which reflects the lifting of health restrictions across most of Europe.
