The two main central banks, the Fed and the ECB, have had to face the facts: inflation will be more persistent than expected. They are therefore accelerating the return to normal. The first rate hike by the Fed is now expected in March, and it could even be as high as 50 basis points. The reduction of its balance sheet will come in a second phase. As for the ECB, a first step this year has become probable.
Inflation hits record highs
On both sides of the Atlantic, price increases have reached record levels. The annualised 7% in December 2021 had already been the highest in the US since the oil crisis of the 1970s. It is expected to have been exceeded again in January. In the euro area, the estimated 5.1% annualised increase in the first month of 2022 marks a new high since the creation of the monetary union in 1999.
Bottlenecks in the supply chain are struggling to resolve, particularly in the case of semiconductors. On the energy side, new geopolitical tensions in the midst of the economic recovery have led to price spikes. Despite efforts to move forward with the energy transition, these increases underline the persistent dependence on fossil fuels and their producing countries. In two months, the price of a barrel of crude oil has risen by 20 dollars to over 90 dollars. In the job market, another key element, sectors such as restaurants in the United States are struggling to recruit. The balance of power is in favour of employees, who are seeking higher wages.
An outdated central bank response?
The central banks’ response therefore seems logical. But former Swiss National Bank president Philipp Hildebrand believes it follows outdated textbooks. “We are in an era of supply constraints even though economies are below their potential,” he notes. The current inflation is not the result of excess demand, but of these supply problems. Central banks must not destroy activity by pressing the brakes on their policies. This is the risk if they do not take into account the specificities of current inflation.
Growth forecasts revised downwards
Due in part to the Omicron variant, growth is already fragile. In January, estimates were revised downwards. This means that the slowdown to 2021 will be more pronounced than previously expected. Goldman Sachs, for example, now expects annualised growth in the first quarter of 0.5% for the US, instead of 2%. The World Bank has also adopted a less ambitious forecast, with annual global GDP growth of 4.1% in 2022. The IMF, which corrected its estimate by half a percentage point to reflect deteriorations in the US and China, expects global growth of 4.4%.
PMIs closer to the 50-point mark
The purchasing managers’ indices are also pointing to weaker dynamics. In the US, the manufacturing PMI is at its lowest level since October 2020, at 55.5 points.
Production growth has been modest, and orders have not been at such a low level since September 2020. Services are even closer to the 50-point mark, between expansion and recession, at 51.2 points, which was last seen in July 2020. Pressure on production capacity has eased. On the positive side, companies have been able to pass price increases onto customers. Probably due to the need for the German industry to catch up, the Eurozone manufacturing PMI is clearly in the expansionary zone, at 58.7 points. This is even its best score over five months. It widens its gap with services, whose PMI fell by two points to 51.1. This level once again reflects the measures taken to limit infections with the Omicron variant. However, order books continued to grow.
Europe could surprise positively
The real economy thus has the potential to surprise positively against a macro context that seems rather dull: regaining pre-pandemic levels sometimes takes time. It is particularly Europe, where growth in 2021 has remained much more modest than in the US and could prove better than expected.
