Stagflation stalks the global economy

Kia ora,

Welcome to Wednesday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the International edition from Interest.co.nz.

Today we lead with news that stagflation is stalking the global economy.

But first, the latest American consumer sentiment survey, this one from the Conference Board, declined marginally in May, but nothing like the University of Michigan one. The dip in this one was less than expected. Those surveyed seem happy with the 'present situation' but concerned about their 'expectations'. This survey seems more in keeping with the economic data we have seen recently.

And the latest Chicago PMI backs that up. It reports a better expansion in this industrial heartland - in fact quite a fast expansion in May. Both production and new orders jumped from April, but the cost pressure isn't waning yet. Inventories are very high as firms 'invest' to add resilience against supply-chain difficulties that aren't going away.

And the Dallas Fed's survey of Texan manufacturing paints a similar story. Their May report reveals expansions across the board. But they also report heightened concerns about the future in a more generalised way - even if firms had no evidence yet to support those concerns. It seems more 'politics' than a reading of their actual situation.

Canada reported a more modest GDP growth rate for Q1-2022 of +3.1% real. This would be regarded as quite good except in light of the recovery-growth posted in 2021.

Japan reported good retail sales growth in April, better than expected, but inflation may have played a part in these numbers. Still, it was their largest jump in almost a year. But they are bracing for new retail price hikes that become effective today. Higher retail sales due to inflation, yes, but that isn't being matched by rising incomes. Expect Japanese consumer sentiment - already low - to fall further.

And Japanese industrial production really struggled in April. Production fell and inventories rose which is a bit of a toxic mix. Supply-chain issues around component supplies from a lock-down Shanghai hurt more than expected, and we know they didn't get better in May, and prospects in June aren't great either. Their factories are going to be under the pump for a while yet. Good order levels mean nothing if you can't supply.

China's officials are noting that their May PMI's "rebounded" from April. But they are still contracting after the disaster that was April. And that is true for both their factory and service sectors. That makes it three consecutive months of decline. It will take a magical turnaround for them to book a 5.5% GDP growth in 2022 as they were targeting. It seems most unlikely at this point. Factory export orders are contracting as they have done every month for the past year.

The early data on May's house sales in China isn't encouraging, although that may pick up slightly in June as cities like Shanghai and Beijing ease their lockdown restrictions.

In an effort to boost consumer sentiment and spur economic activity, Beijing has halved the taxes on small low-emission passenger cars. They expect this could lead to an additional 2 mln such vehicles being sold.

India also reported their January-March quarterly economic performance, and it under-performed in a trend we have come to expect. Getting the blame there has been both the spread of the pandemic and high commodity prices.

The EU reported its overall inflation rate for May and it came in at 8.1%, with Germany higher at 8.7% on a harmonised basis, and France the lowest on 5.4%. Most nations came in at the German level rather than the French level.

It is not only looking like a sharp downturn in the residential construction industry in New Zealand, Australia has recorded a fall in building consents too - made to seem worse because a rise was expected, and that now means 23 of the past 25 months have booked retreats from the prior month, and year on year the April level is a whopping -36% lower.

And May hasn't been that great for the Sydney housing market. Prices fell -1% in the month from April, the largest monthly retreat since January 2019. Some analysts say it is now on track for a -10% fall in 2022. None of this will help how banks view the risks of lending to the Aussie construction sector in the current environment.

The UST 10yr yield will start today up a sharp +11 bps at 2.85% adjusting after Wall Street returned from holiday. 

The price of gold is down -US$9 today at US$1845/oz.

And oil prices are back down from this time yesterday, down -US$2 to just over US$114/bbl in the US, while the international Brent price is now just under US$116.50/bbl.

The Kiwi dollar will open today down -¼c at 65.2 USc. Against the Australian dollar we are down at 90.7 AUc. Against the euro we are little-changed at 60.7 euro cents. That all means our TWI-5 starts today at 71.9 and softer.

The bitcoin price has risen +4.2% since this time yesterday and is now at US$31,988. Volatility over the past 24 hours has been moderate at +/- 2.9%.

You can find links to the articles mentioned today in our show notes.

And get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston and we’ll do this again tomorrow.