The year 2022, marked by many paradigm shifts, did not end on a positive note. Important central bank meetings did not lead to any marked respite in the efforts to contain inflation. Forecasts of maximum levels for key interest rates had to be revised upwards.
The Fed in particular has confirmed its change of approach, which represents one of the major surprises of 2022. From now on, the risk of the economy falling into negative growth will no longer automatically lead to an easing of its monetary policy. Its chairman Jerome Powell can justify this all the more easily as the spiral of rising prices does not only concern energy. The follow on effects, with wages supported by a still tense situation on the labor market, are well present. The unemployment rate remains stuck at a low level, at 3.7%. The resilience of the unemployment rate has even eased fears of a recession. On the other hand, the Fed’s room for maneuver is greater.
Inflation still above 10%
The ECB also runs the risk of plunging the eurozone economy into recession. Inflationary pressure has eased somewhat from its peak of 10.1% in November. However, it is still well above the central bank’s long-term target. This leaves President Christine Lagarde with little choice but to continue raising rates. Italy, which is used to fighting cyclical difficulties with currency devaluations, even if it means fuelling inflation, has already begun to challenge a policy that points to further tightening in 2023. The link between price appreciation and economic growth seems even stronger in the euro zone than in the United States. This is because the other driver of inflation in the US, the price-wage spiral, has not taken hold in Europe. Although the ECB is also concerned about this phenomenon, wage increases are still lower than price increases for the time being.
In its latest forecast, the ECB raised its estimates for inflation and lowered those for GDP growth. However, lower demand could also bring inflation back to a reasonable level more quickly. For 2023, finding the right balance therefore looks tricky, and the level of interest rates that will have to be reached to keep inflation under control difficult to predict.
Winter weather in the spotlight
The evolution of the war in Ukraine may play a role as well as the weather. The collapse of gas prices at the end of December due to warmer temperatures demonstrates the importance of the latter. The level reached at the end of the year – during the cold season – is equivalent to that before the outbreak of the war. Oil, on the other hand, did not follow the same trend. At the end of December, the price of a barrel of crude oil rose above 80 dollars, partly because of discussions about the minimum price at which Russia must sell its black gold.
US PMIs particularly weak
Among the leading indicators, the PMIs are far from being in good shape. The US services PMI shows one of the sharpest contractions since 2009, at just 44.4 points. For industry too, the fall in new orders led to one of the lowest scores, at 46.2 points. On the positive side, the situation in the supply chain is easing, and cost increases were the lowest since July 2020. As a result, confidence has improved. The same factors supporting the industry can also be seen in Europe. There, they led to a score still below 50 points, but above expectations, at 47.8 points (+0.7). The services sector is even clearly approaching the threshold between contraction and expansion, at 49.1 points. While financial services weighed it down, stronger activity in tourism in particular led to an improvement in the score of 0.6 points.
