Monthly Economic Brief - July 2022
Asia
China
Despite its better than expected June data, China’s growth outlook in July remains weak, with GDP growth slowing sharply in Quarter 2 and expanding by a mere 0.4 percent down from 4.8 percent in Quarter 1. This occurred primarily due to a series of strict lockdowns that were implemented across the nation through April and May, which severely impacted economic activity in China’s major cities, with Shanghai taking a significant impact. Relaxing control measures by the end of May led to a rapid rebound of key economic indicators in June, however in July, there was a rise in new, observed COVID cases, which compounded with the downcycle of the property sector, and coupled with slowing global growth, means that it is likely that China’s economic recovery will face significant challenges.
Investment has continued to recover in June, but in an increasingly contrasting manner. The manufacturing and infrastructure sectors experienced robus investment growth in backing up strong policy support, while investment in the real estate sector contracted further, despite the relaxation of property restrictions. Despite expectations for increased policy support from the Chinese government, it is expected this trend will carry forward into the second half of 2022. Property investment growth is expected to be slow due to confidence weakness from prospective home buyers, a weak outlook for property prices and liquidity constraints amongst developers.
India
Towards the end of 2021, India faced an optimistic economic outlook as it prepared for robust economic recovery, with several forecasters, such as the International Monetary Fund, expecting growth to exceed 9% this fiscal year. However, this was partially disrupted as a wave of omicron infections occurred throughout the country, and then when Russia invaded Ukraine in February. Pre-existing challenges such as surging inflation, supply shortages and shifting geopolitical realities were aggravated due to those events, with no definite end in sight. Subsequent confluence of issues such as surging commodity prices and disruption in trade and financial transactions quickly deteriorated economic fundamentals that were trending a few months prior. As a result, the combination of these events has compelled diminishing growth expectations for the Indian economy. However, despite faltering expectations for growth, revival of certain sectors of the economy has been observed, increasing to pre pandemic levels.
Inflation, like many other countries, has been difficult on Indian consumers, with low-income households being disproportionately impacted. On the other hand, consumer confidence is improving with the easing of mobility restrictions. The top 10 income percentiles of the population are showing a growing appetite for spending, due to the impacts of COVID restrictions on traveling spending. An increase in flight spending and hotel reservations have been observed from the easing of travel restrictions, as the world adjusts to a life with COVID. The hospitality sector has been revived, with business travels and in-person client interactions assisting with the sector’s revival. Additionally, the number of foreign tourists visiting India almost doubled between January and April this year. In addition to increasing demand for services, the industry sector is also facing a revival, where demand for electricity in the first six months of the year has been higher than in the past three years. Furthermore, the number of vehicles registered has reached pre pandemic levels.
Another positive aspect concerns the increase in government capital spending despite the fact that it is cutting revenue expenses simultaneously. India’s gross tax collection has beaten all expectations, with total tax collection reaching an equivalent of $356.82 billion US dollars in the 2021-2022 fiscal year, surpassing the government’s revised target. The improvement of economic activity and better compliance efforts in taxation has greatly assisted in better revenues. High capital spending on infrastructure and asset-building projects is likely to boost growth multipliers in the medium term.
Exports in terms of their contribution to GDP, performed exceptionally well during the pandemic and bolstered recovery when all other growth engines were losing stream. It is predicted that the contribution of merchandise exports may waver as several of India’s trade partners witness economic slowdown. However, the opportunity to boost service exports on the back of the global digitisation wave is promising, and additionally, India’s manufacturing sector growth is also encouraging due to several multinational companies searching for resilience and cost-effectiveness within the Indian economy.
Japan
The Japanese economy has recovered from the impact of COVID-19’s easing of restrictions, despite factors such as a rise in commodity prices. Exports have continued to increase as a trend, however they have been affected by supply-side constraints, with industrial production being under strong downward pressure due to the effects of such constraints. There have been high corporate profits despite business sentiment being more or less unchanged. Business fixed investment has begun to increase, however weakness still remains in some industries.
The employment and income situation has improved slightly, yet again some weakness still remains. There has been a moderate increase in private consumption, especially for services consumption due to the waning effects of COVID-19. Despite this, housing investment has been flat and public investment has remained relatively weak. Financial conditions have been accommodative, although there remains weakness in firms’ financial positions in some segments. The year-on-year rate of change in the CPI (all items except for fresh food) has been at around 2 per cent, primarily due to rises in energy and food prices, while inflation expectations have simultaneously increased.
Commodity prices, such as crude oil, natural gas, coal and grain (e.g. wheat) prices have remained high, reflecting increased supply concerns due to Russia’s invasion of Ukraine. Since Japan relies on imports for most of these commodities, price rises cause an outflow of income from Japan in the form of trading losses and has put downward pressure on households’ real income and corporate profits through rises in energy and food prices. With the government’s various measures mitigating the negative impact on income, self-sustaining increase in demand, including pent-up demand is projected to continue with the easing of COVID-19 and supply-side constraints. It is for this reason that the economy is likely to recover. Within the household sector, employee income is projected to continue increasingly moderately coupled with the rise in the number of non-regular employees associated with a recovery in the face-to-face services sector and due to an increase in wage growth that reflects improvement in labour market conditions.
South Korea
Economic growth of the South Korean economy unexpectedly rose in the second quarter as the easing of COVID-19 restrictions resulted in strong consumption, thus offsetting poor exports, and further supporting the case for further central bank interest rate hikes. Private consumption rose by 3%, the best result in a year, after a 0.5% decline in the first quarter as the government in April removed almost all COVID-19 social-distancing restrictions. This strong consumption arrives despite the Bank of Korea’s aggressive series of interest rate hikes since August last year. The economy has received an additional boost from increased government spending after the parliament approved a 62 trillion won ($47.33 billion USD) supplementary budget weeks after President Yoon Suk-yeol took office in early May.
Despite this, exports and corporate spending on production facilities slumped due to a slowing Chinese economy and due to the ramifications from the war in Ukraine, coupled with a global wave of monetary policy tightening to fight inflation.
Exports decreased by 3.1% in the April-June period from the preceding quarter, becoming the largest decline in two years. Capital investment has decreased for a fourth consecutive quarter by 1% following a 3.9% contraction in the January-March period. South Korea remains to be Asia’s fourth largest economy, and has grown 2.9% in the second quarter year-on-year, faster than expectations for a 2.5% growth but slower than 3% growth in the first quarter.
Australia / New Zealand
Australia continues to experience building inflationary pressures with headline inflation reaching 6.1% year-over-year (YOY) in the June quarter. This is largely driven by increases in the price of new dwellings (+5.6%) due to shortages of building supplies and labour, high freight costs and high levels of construction activity, while automotive fuel rose 4.2% due to sanctions on Russian oil and increasing global demand. The price of grocery products has also continued to rise with fruit and vegetables rising by 7.3% YOY and 5.8% since the March quarter. High inflation is likely to significantly impact low-income households over the next few months by squeezing household budgets. As such, the RBA has continued to support contractionary monetary policy settings, raising the official cash rate by 50 basis points from 0.85% to 1.35% following its July 5th meeting. Governor Phillip Lowe reiterated that more rate hikes were likely in the coming months with expectations that inflation would peak later this year at 7% before falling to target range in 2023. The recent rate hikes are putting further pressure on households by increasing borrowing costs such that an estimated 200,000 households are expected to find themselves in mortgage stress. While one-third of households have adequate buffers in place to ride the storm, many households struggle as wages fail to keep pace with inflation despite unemployment reaching a 48-year low at a rate of 3.5% in June. This is possibly because firms expect foreign labour to return to Australia and fill current skills shortages and because workers are not bargaining for higher wages as expected. However, in an effort to support real wages for low-income workers, the Fair Work Commission announced a minimum wage increase of 5.2% on July 1st, bringing the minimum wage from $20.23 to $21.38 per hour based on a 38-hour full-time work week. Wage growth is expected to pick up more quickly than previously anticipated as labour market conditions continue to tighten.
In New Zealand, the unemployment rate reached 3.3% YOY for the June quarter with inflation peaking at a 32-year high of 7.3% YOY in the June quarter, driven largely by increases in the price of construction and rentals for housing due to supply-chain issues, labour costs and strengthening demand.
Transport is also contributing to high inflation in light of global fuel shortages. Whilst the price of construction has risen, the house prices have dropped 5.5% from their peak in November 2021 with forecasts they will drop 11% by the end of this year. This follows a series of interest rate hikes and most recently a rate increase of 50 basis points to an official cash rate of 2.5% to curb inflation and support low unemployment, with expectations that it will peak at 4% by late 2023.
United States of America
It is forecasted that economic weakness will intensify and spread more broadly throughout the US economy in the second half of 2022, and expects a recession to begin before the end of the year. This prediction is associated with persistent inflation and rising aggressiveness by the Federal Reserve. It is predicted that 2022 Real GDP growth will arrive at 1.3% year-over-year and that 2023 growth will slow to 0.2 per cent year-over-year. Currently, it is not believed that the US is in recession, due to the strength of a number of sectors and the extremely tight labour market. However, a broad downturn in the economy is predicted, due to the greater than expected weakness observed in Quarter 2, 2022 GDP data. As a result, the Quarter 3, 2022 forecast has been downgraded from 0.5 per cent to zero per cent. This is associated with the expectation that consumption will continue to soften in the third quarter due to rapidly rising interest rates and elevated inflation. Furthermore, residential and nonresidential investment is expected to contract and private inventory expansion continues to slow.
The weakening of economic growth over the court of 2022, along with persistently high inflation are consistent with a stagflationary environment. While supply-side constraints are eased and a more aggressive monetary policy will help lessen inflation over the coming quarters, rising interest rates will tip the US economy into a broad-based recession before the end of the year. This contraction will significantly impact tight labour markets and cause a higher unemployment rate. While there is a forecasted recession on its way, it is expected to be relatively short and somewhat mild, and the US economy is likely to emerge from the slowdown in 2023 while still grappling with inflation. This period is expected to exhibit stagflationary characteristics, however not as severe as those presently observed.
Europe
July has been an eventful month for Europe and the rest of the world. Europe leads in imposing an insurance ban that prevents companies in the EU from writing new insurance for any vessels transporting Russian oil anywhere. The EU's insurance ban was introduced on June 4th and remains in place. Existing contracts will remain valid until December 5th, after that all such companies will be banned. Despite the ban on maritime services such as insurance, the EU appeared to take a soft approach on curbing the use of Russian oil globally. New EU sanctions imposed permit the lifting of Russian oil by European companies. It is now legal to buy Russian oil to ship to countries outside the EU.
Russian invasion and sanction imposed casted doubts over Moscow’s willingness to keep gas flowing to Europe. Households’ energy costs have risen up to 40% over the last 12 months, food costs have increased by 10 per cent. The locals are not going for holidays at all. People struggled to pay for food, utilities, petrol for their cars.
Confidence figures released by the European Commission’s statistics bureau shows consumers are less willing to make big purchases since the start of the pandemic. However, this will unlikely stop the European Central Bank (ECB) from raising its interest rates. The benchmark deposit rate has increased by 50 basis points to zero since late July. Eurozone inflation rate had risen to a record high of 8.9 per cent since the start of the year till July, according to figures released by Eurostat. Surge in food and energy costs was up 4 per cent, twice more than what ECB expected.
Summer in Europe lasted from June to August. Summer tourism brightens the eurozone economy despite the shadow casted by the cost of living. Hospitality and tourism had been the most severely affected industry since the start of COVID. But now with the tourism boom in the Eurozone, hospitality has picked up since April and many hotels remained fully booked till October. Boom in tourism is aided by its currency fall against the dollar. Currency shrinks raised signals to economists raising concerns of a recession over the second half of this year.
Despite a strong quarter, many economists believe that Europe will fall into recession soon. In the month of July, Euro currency had grown 0.7 per cent between the first two quarters, a stronger result from the 0.1 percent that was forecasted. France, Italy and Spain also posted better numbers as pandemic-weary travelers, especially the Americans packed the countries. Growth in Europe has been driven by tourism.
As the weather cools, European businesses and consumers will face more pressure. The war in Ukraine has led to many manufacturing plants now facing supply chain disruptions, despite barely recovering from the pandemic. Germany’s manufacturing-dependent economy had remained stagnant in the second quarter, highlighting the severity of economies that are less dependent on tourism. Despite the good news that tourism and hospitality brought, it does not tell us much about the underlying health of the economy.
Russia - Ukraine War
Who is losing the economic war – Ukraine, the West or Russia? It is with little doubt that Ukraine took the hardest hit. Despite its vow to meet the full obligations of what the war costs, the country’s budget deficit is now running at 5 billion dollars a month. Ukraine’s public finance could be printing money to fill the gap. Billions are needed in Western aid to reverse the country’s raging inflation and economic disorder. Prime minister Denys Shmyhal predicted that post-war reconstruction in Ukraine could cost up to 750 billions – this is five times as much as the recovery of the Western Europe after the second world war.
Despite strong sanctions imposed by the West to weaken the Russian war effort, the Kremlin is putting a long haul to the Russian economy. However, to what extent can Europe goes, to stop Putin’s war? Europe is still paying billions of euros to Russia for energy supplies. When summer ends and winters draw closer, Europe will face dreadful consequences if they cannot find an alternative energy source.
Grain agreement was in place to allow exports to resume from Ukrainian ports to avert a global food crisis when Russia decided to hit the port with two cruise missiles. If this hard-won deal fails, an additional 47 million people will face acute hunger. Russia’s Black Sea blockade has taken a severe blow to the global food supply chain, already strained by the pandemic disruptions and poor harvest.
Prior to the war, Ukraine was the world fifth largest exporter in wheat. Curbs on Ukrainian exports left 22 millions tons of wheat and corn to rot in silos, leading to food shortage and prices rising, impacting hard on the economies of the developing countries. Even with the mediation and sanctions of Western countries, little can they do to deter Russia from attacking Ukrainian ports involved in grains exports. There is no assurance from Russia that they will stick to the commitments of not attacking the vessels that carries grain from Ukrainian ports.