The Fed has raised its key interest rate by a quarter point and is expected to raise it several more times this year. This decision would normally be in the news. This is the first increase since 2018. But the war in Ukraine is taking centre stage, especially in Europe.
The sanctions against Russia have caused further increases in oil and gas prices. A barrel of the Brent variety of oil approached the $140 mark earlier this month, its highest level in nearly 14 years. Crude only recovered to near $100 after the US announced that it would release one million barrels from its strategic reserves. As for gas, the TTF spot price hit a record high of EUR 345 per megawatt hour. Fears about a halt to Russian exports were very strong, reinforced also by discussions in the West about banning Russian fossil fuel imports.
Several metals rise to record prices
Some metals have also jumped to multi-year highs. Nickel, for example, rose to almost USD 50,000 per tonne, about three times its level of a year ago. Palladium, of which Russia is the world’s largest producer with a 40% share, even broke the USD 3,000 per ounce barrier for the first time, surpassing gold.
Inflation has not yet found its limits
Inflation, which is supposed to be temporary, is not coming down from its record levels. On the contrary, in the euro zone, it reached a new peak in March, at 7.5% (compared with 5.9% the previous month). Without energy, the increase would have been limited to 3.4%. In the United States, the 7.9% of February should also be surpassed in March, due to the rise in fossil fuel prices. The other driving forces have not weakened much: supply problems, strong demand and recruitment difficulties. Whether or not they act on interest rates, central banks do not seem to have much power to contain inflation. The next time the Fed decides to raise interest rates, it could do so by half a percentage point. These hikes are likely to leave their mark on the housing market. As for the ECB, it is being criticised for its willingness to keep the key rate at its current level.
Slower growth or recession?
Economic growth is thus expected to slow down compared to last year. The renowned economist Nouriel Roubini is still among the few to predict a stagflationary recession. But the downward revisions to forecasts continue. Half a percentage point of GDP growth is now an overly optimistic estimate of the cost of the war in Ukraine to the global economy. China’s fight against Covid-19, which still results in strict confinements in metropolises such as Shanghai or Shenzhen, risks weighing on both the country’s growth ($46 billion per month, according to the Chinese University of Hong Kong) and the global supply chain. Confidence measured by the PMI-Caixin index for industry showed a contraction in March.
Declines can be very sharp, also due to the effects of the pandemic: while US GDP grew by 7% in the last quarter of 2021 compared to the same period last year, the increase between January and March is expected to be only 1.7%. Job creation in March came in at the lower end of the range, despite the unemployment rate falling slightly to 3.6%. Consumer confidence according to the University of Michigan’s index is beginning to wane: for March it stood at 59.4 points, the lowest level since 2011. For the Eurozone, which measures quarter-on-quarter growth, GDP growth is expected to have fallen by 0.1 percentage points to +0.2% in the first quarter.
The less threatening pandemic as a counterweight
However, outside of China, fears over the Covid-19 issue are diminishing. This has pushed the US services PMI up to 58.9 points, the highest value since July 2021. In industry, too, the 58.8-point PMI shows the strongest growth for several months. The mood in Europe is less positive, due to the war in Ukraine. The services PMI is at 54.8 points (-0.7), and the manufacturing PMI at 56.5 points, its lowest level since the beginning of 2021. It should be noted, however, that all these scores remain above 50, and thus in the business expansion zone.
