- United States: the increase in energy and commodity prices, which is pushing inflation higher, is negatively impacting the US consumer, both in terms of confidence and spending. At the same time, companies’ capex intentions remain high, suggesting that while US consumption may be decelerating, capex should remain resilient to the Ukraine war confidence hit. We expect GDP to keep decelerating towards potential, while headline inflation will grind higher for the next few months before resuming a downward path, while remaining well above the Fed target in terms of both headline and core for the year on the whole.
- Eurozone: as the increase in energy and commodity prices, which already took place in autumn and winter, continues to impact European households and businesses as the Ukraine war continues, we expect European countries’ domestic demand to suffer a significant hit. The EA economy was giving signs of improving until February, but the war has now put the recovery on hold; on the inflation front, in fact, we expect inflation to rise higher still for a few months and then to decelerate, assuming weaker energy and commodity price dynamics in the second half of the year.
- United Kingdom: high energy prices and faltering confidence have brought our forecast for inflation higher and for growth lower, as higher energy and commodity prices dent purchasing power and margins. On top of this, higher food prices will dent lower-income consumers in a more unequal way. Given the weaker growth outlook, concerns about a tight labour market becoming tighter may be easing, with possibly lower employment growth and less wage pressure. This in turn will underpin the squeeze in real income in front of persistent high inflation.
- Japan: the economy will continue to suffer from higher imported energy prices and supply chain disruptions. That said, as new Covid cases drop, the government lifted social distancing restrictions in mid-March and started to open its borders to a limited number of visitors. Private consumption is likely to recover at a faster pace, leading the overall economy in 2022. As for inflation, we expect the headline CPI to climb more decisively in Q2 and temporarily shoot above 2%, driven by energy components. However, core CPI will remain below 1%, with limited pass-through from oil prices.
- Fed: The March FOMC meeting was hawkish on many fronts. The Fed wants get to a neutral policy stance as rapidly as possible, in order to move to more restrictive levels if that is what is required to restore price stability. Chair Powell was clear on its determination to do whatever it takes to bring inflation down. The Summary of Economic Projections is now showing a median terminal rate at 2.75%, which is above the neutral level of 2.5%. Furthermore, Powell recently reiterated his commitment to use all the tools available to achieve price stability, including 50bp moves during the coming meetings, which means that the neutral level of 2.5% could be reached in late 2022 or early 2023.
- ECB: The ECB surprised the consensus in announcing that it could end its net asset purchases in Q3, also with a more pronounced tapering in Q2, At the same time, guidance on interest rates, which the Bank now plans to increase “some time” after the end of net asset purchases rather than “shortly after”, suggests that it wants to keep more flexibility on the timing of rate hikes. The ECB is determined to deliver on its price stability mandate, but it acknowledged the high level of uncertainty and the path of monetary policy will therefore be even more data-dependent.
- BoJ: BoJ left its policies unchanged again in March. Governor Kuroda stated clearly that the expected cost-pushed jump in headline inflation to 2% from April would not be enough for BoJ to tighten its monetary policy, especially amid heightened uncertainty over Ukraine. BoJ is also offering unlimited bond buying to defend its yield target, amid rising UST yields. Until end-2021, Japan’s GDP was still below pre-Covid levels, and we don’t expect the output gap to close before late 2024, which will keep underlying inflation at bay and hold BoJ away from tapering.
- BoE: With a large majority of 8 to 1 members, the BoE increased its Bank Rate by 25bps to 0.75% in March, its third consecutive policy meeting hike, which brought the policy rate back to pre-pandemic levels. We expect the BoE to raise rates to 1.0% at the next meeting, in order to begin active QT. At the same time, the recent, more dovish tone suggests that the Monetary Policy Committee expects a more delicate balancing act in trade-off between high inflation and risks to growth. Thereafter a pause may come after the next hike.