Global update

Fed Building

Inflation triggers concerns over growth

Investor sentiment was undermined during April by concerns over inflation, fears relating to the war in Ukraine, and worries about the wider economic impact of Covid outbreaks in China. The International Monetary Fund (IMF) cut its forecast for global growth from 4.4% to 3.6% this year and from 3.8% to 3.6% next year.

US GDP shrinks

Having expanded by 6.9% in the final quarter of 2021, the US economy posted an unexpected contraction during the first three months of 2022, shrinking at an annualised rate of 1.4%. Although consumer spending remained relatively robust, intensifying inflationary pressures are likely to put a brake on household spending. Elsewhere, the yield on the ten-year US Treasury bond rose to its highest level since November 2018, driven up the prospect of further monetary tightening.

Inflation-induced headaches

The annualised rate of consumer price inflation in the US reached a new 40-year high during March. The consumer price index rose by 8.5%, representing its biggest annual increase since December 1981. While food prices climbed by 8.8% over the same period, energy prices soared by 32%. Meanwhile, producer prices in Germany posted an annualised increase of almost 31% during March, reflecting the impact of the war in Ukraine. Energy prices rose by 83.8% year on year, while natural gas prices skyrocketed by 144.8%. The Dow Jones Industrial Average Index fell by 4.9% during April, while the Dax Index declined by 2.2%.

Yen weakness

The yen fell to its weakest level against the US dollar for 20 years as the Bank of Japan (BoJ) reiterated its commitment to maintain its interest rate at ultra-low levels. Earlier in the month, BoJ Governor Kuroda stated: “it is necessary and appropriate for the Bank to continue with monetary easing and thereby firmly support the economy”. The BoJ’s quarterly “Tankan” survey of business sentiment registered a decline in optimism amongst large manufacturers, who have become increasingly concerned about the economic impact of Covid-related lockdowns in China. Over April, the Nikkei 225 Index fell by 3.5%.

China’s growth falters

As fresh lockdown measures took effect in China, retail sales fell at an annualised rate of 3.5% in March. Although the country’s economy grew by 4.8% year on year during the first quarter, this was well below the government-set target of 5.5%. The Shanghai Composite Index dropped by 6.3% over the month.

Fed continues to tighten

Having raised the federal funds rate by 0.25 percentage points in March – its first rate increase for two years – the US Federal Reserve (Fed) intensified its tightening action at its April meeting, raising its key interest rate by 0.5 percentage points to a target range of 0.75% to 1%. The move was designed to address the ongoing issue of surging inflation: the annualised rate of US consumer price inflation soared to 8.5% in March, hitting a level last seen over 40 years ago in December 1981, whereas the Fed’s target inflation rate stands at 2%. Further rate increases remain on the cards during the rest of 2022: the Fed expects the federal funds rate to hit almost 2% by the end of the year.

The nine-strong Federal Open Market Committee (FOMC) voted unanimously for the increase. The Fed will also begin to reduce the size of its US$9 trillion balance sheet from 1 June, cutting it at a monthly rate of US$47.5 billion for three months, after which it will increase to US$95 billion.

Fed Chair Jerome Powell acknowledged the “hardship” caused by the rising cost of living and said that the central bank was “moving expeditiously to bring it back down”. The US economy unexpectedly shrank by 1.4% year on year during the first quarter, but Chair Powell rejected the prospect of recession, highlighting continued strength in the country’s labour market, alongside robust business investment and consumer spending.