Monthly Economic Brief - August 2022
Europe
The war between Russia and Ukraine is still presenting a negative effect on Europe’s economy due to the rising costs of energy and the resulting supply chain disruptions which are still causing inflation to soar therefore creating a cost-of-living crisis. The International Monetary Fund predicts a prominent recession in 2023 where economic growth of various countries and household savings accumulated during the pandemic are expected to decline. Additionally, the risk of recession is further increased due to the war in Ukraine and the proximity of European countries to the war zone and their reliance on natural gas from Russia.
A GDP increase of 0.7% has been predicted for the Eurozone in the second quarter when compared to the first quarter. Unemployment appears to be stable compared with July 2022 and is facing a positive outlook given that unemployment has been reduced from 6.8% in August 2021 to 6.0% in August 2022. Inflation has reached 9.1% in August 2022 which is an increase from the 8.9% value from July 2022 and a very high increase from 3.0% a year earlier in 2021.
The two main causes of inflation arise as a result of a strong mix of cost-push and demand- pull inflation. Demand side issues occur due to recovery of the pandemic, which has created a situation of pent-up demand building up over periods of lockdowns and led to savings being spent in a shorter time frame on fewer available goods and services due to slowdowns in production. As a result, the European Union has followed the trend of other major economies in shifting monetary policy significantly to increasing interest rates and tightening credit.
The high degree of uncertainty following Russia’s invasion of Ukraine along with high inflation has strained the consumer sector, which was supposed to have driven the recovery in 2022. Current consumer data suggests that stable labour markets and additional savings from the pandemic will likely not be enough to offset these negative influences. While this has not amounted to predictions of a serious recession for 2023, the complete cessation of Russian gas supplies however, could change that outlook.
Due to persistent uncertainty, the European Commission’s economic sentiment indicators have significantly been reduced and now stands below its long-term average. Industrial and services sector confidence has declined substantially despite the expectation that consumers will start to spend savings accumulated during the pandemic. One main reason for the decline in sentiment is due to a lack of consumer confidence, which has reached its lowest level on record in July.
Consumer confidence now stands at a lower level than during the first wave of COVID-19. Despite stablising incomes through a strong labour market and the additional accumulated savings from the pandemic contributing to strong balance sheets, consumers have been deterred from spending due to inflation and uncertainty.
Asia
China
China’s economy continued to stall in August due to the country’s strict zero-COVID policy and struggling property sector. Indeed, it is unlikely that the 5.5% target growth rate by the end of the year. Lockdowns across the country have reduced private consumption by inhibiting domestic mobility and diminishing consumer confidence as consumers fear the possibility of ‘snap’ lockdowns. Consumer demand is particularly weak in the luxury goods market and owners of luxury goods have been selling off second-hand products, leading to significant falls in price in the market.
Consumer and factory activity is lower than expected with retail sales rising only 2.7% YoY in July compared to a forecast 5% and industrial production rising 3.8% compared with a forecast 4.6%. The housing market continues to experience a slowdown with homebuilders selling just 106 mil sqm a month between April to June 2022 compared to 156 mil sqm a month in the same period last year. Further, youth unemployment reached a record high of 19.9%.
In response to waning consumer demand and slow activity in the property sector, the People’s Bank of China (PBC) cut the medium-term lending rate for one-year loans to the banking system by 10 basis points to 2.75%. This was contrary to expectations that the rate would remain unchanged. PBC also cut its 5-year loan prime rate from 4.45% to 4.3%. It is forecasted the further cuts to the 5-year LPR are likely at least once more this year. China’s response reflects an intention to stimulate the economy by easing monetary policy settings rather than control inflation. However, the government also announced tens of billions of dollars in stimulus measures to boost consumer confidence and the property sector.
India
India’s economy is growing at the fastest pace in a year with real GDP growing 13.5% YoY in Q2, up from 4.1% in Q1, driven by pent-up demand, particularly in contact-intensive sectors, as the country recovers from the Omicron wave and relaxes pandemic restrictions. However, it still fell short of the forecasted 15% growth rate. Private consumption grew 26%, whilst the manufacturing and construction sectors grew 4.8% and 16.8% respectively. Headline inflation reached 6.71% YoY in July, driven by increases in the price of fuel and light (11.76%), clothing and footwear (9.91%) and food and beverages (6.71%). In response to building inflationary pressures, the Reserve Bank of India lifted the repo rate by 50 basis points to 5.4%, with a view to achieving the targeted 4% while supporting growth. The bank forecasted inflation of 6.7% by the end of the year and real GDP growth of 7.2%.
South Korea
South Korea’s economy expanded 2.9 % YoY in Q2 and 0.7% quarter-on-quarter in the three months to June 2022 due to strong private consumption, particularly of semi-durable goods and services, amid easing COVID restrictions. Headline inflation rose 6.3% YoY in July, the fastest pace since November 1998, due to soaring energy and food prices. Forecasts have inflation remaining between 5% and 6%. In response to building inflationary pressures, the Bank of Korea raised interest rates by 25 basis points to 2.5% in August, in line with expectations, and has indicated further rate hikes are needed. South Korea has recorded a fifth consecutive current account deficit in August as exports for semiconductors dropped following weak demand and lower prices and goods imports rose by more than 28% due to high energy prices. Whilst the economy is largely characterised by slow growth, high inflation, and trade deficits, the labour market remains tight with unemployment standing still in July at 2.9%.
Australia
The RBA is looking to increase the cash rate from 1.85 per cent in early August to 2.35 per cent in September. Demand in the Australian economy remains strong despite the increment of the cash rate. Business conditions appeared robust, price pressures were evident and demands for labours remain strong. The number of jobs fell by 40,900, this could be blamed on the increase of labour costs as wages rose by 0.7 per cent over the quarter and 2.6 per cent over the year.
Former Prime Minister, Mr Scott Morrison made the headlines when his self-appointment into five ministries was discovered. Mr Morrison had rejected calls to resign but had not decided if he will recontest in the next election. Although no law states Mr Morrison cannot appoint himself into the ministries, it raises questions to the Australian public – is it ethical to self-appoint? The government has an obligation to make this kind of information public.
Australia received a grade F in biodiversity by WWF Australia. The report contains more than 270 threatened species in Australia, the highest among the developed countries. While Australia chose to focus on its economic development, it had failed to consider the externalities it brought to the environment and its biodiversity. Australia had not done enough to halt the decline of many endangered species, hundreds of animals, and plant species. Perhaps while we are concerned about the economic development, the GDP, and the unemployment rates, we should also consider the sustainability of our economic and government policy, because the current approach does not seem to be enough.
New Zealand
New Zealand inflation has reached 32 year new height at 7.3 per cent. Along with the new peak, food prices had also inflated as high as 10.4 per cent for fruits and vegetables, 7.7 per cent for meat, poultry, and fish and 6.6 percent for restaurant meals and ready-to-order food, according to a report from the Statistics New Zealand. Food prices have increased an average of 2.1 percent every month. The impact of rising mortgage rates will continue through next year, along with the increase in household living costs as the wage growth could not keep up in the short term. The labour market has proven to be a double edged sword. While strong wage growth outpaces inflation and increases the purchasing power of the consumers, it could also become a challenge to employers to find and keep people.
ASB Chief economist Nick Tuffley predicted that inflation has most likely peaked this year, but it could take as long as 2 – 3 years before it drops back below 3 per cent. The current cash rate is 3 percent and the Reserve Bank New Zealand has forecasted its cash rate to reach 4.1 per cent by mid-2023. When the fixed rate mortgage term rolls over in the next 12 months, the country will progressively feel the full impact of mortgage servicing pressure.
United States of America
The U.S is heading toward a sustained period of below-trend growth with a whopping 8.5 per cent inflation rate in the previous month. Despite the slight decline of the inflation rate in the U.S from 9.1% in June, manufacturers felt the pinch in the rising cost of their raw materials along with labour costs. ‘Shrinkflation’ accelerated across the globe as manufacturers quietly shrink package sizes. A pint of Haagen-Dazs ice cream has gone from 16 oz to 14 oz, although its price remains the same. Other big brands that had ‘shrink’ their product size include Kraft American Cheese, Domino’s Pizza as well as Pepsi, Mac Donald, Cadbury milk bar, Target etc. Companies that refused to absorb the pain of inflation and passed it on to their consumers.
According to the report released by JOLTS (Job Openings and Labour Turnover Survey) released in mid-August, the number of job openings has reached an all-time high of 11.2 million. There are nearly two job openings for every unemployed worker in the U.S. However, Chair Powell explained that growth in the U.S has started to show signs of slowing down, coming off a high growth period after the pandemic reopens in 2021. Fed officials warned that the labour market should slow down to avoid causing a recession.
US regulators reached a landmark deal with China – U.S regulators will be allowed access to audit Chinese companies that are listed on the U.S exchange. This deal could halt the threatened delisting of more than 200 stocks listed on Wall Street. China has a longstanding policy that does not allow foreign regulators to inspect Chinese company audits, citing the desire to protect its state secret, a value of $1.4 trillion worth of shares.
How to survive this winter? Three more coal generators in the U.S had joined the growing list of plants whose retirement date has been postponed. After nearly 40 years of protesting against the Diablo Canyon nuclear power plant, the California legislature had voted to renew the lease and keep the plant open for five more years. The decision to postpone the retirement of the nuclear plant did not come as a surprise. The state power supply will hit a critical low if Diablo Canyon retires now without any alternative energy replacement. Diablo Canyon is responsible for 9 percent of California’s energy generation and 17 percent of its electricity from carbon-free sources. The recent heat wave in the summer has added to the demand of gas-fired power plants to increase the output for air-conditioning. This year, the drought in California has caused most of the water level that feeds California’s hydroelectric dams to be near depleted.