REAL INDICATORS – La recession is knocking on the door. In the USA and Europe. It arrived without warning, not intercepted by the sophisticated antennas of forecasters and analysts. On the other hand, if "the markets have predicted nine of the last five recessions", according to Paul Samuelson's ironic quip, economists are wrong for excess of optimism: incurable idealists, they love stories with happy endings.
The only consolation is that while the 'black swan' of war screeching-throat-long, the line of the 'black swan' of the pandemic it looks more and more like a peep; but it has not disappeared, and is causing new interruptions in important nodes of the value chains.
Everyone would like to avoid a recession, just as one avoids leprosy or flees the hurricane on the horizon. But there aren't many escape routes, this time. Because this side of the Atlantic is caused by the increase in materials Prime , energy and non-energy, which are imported, so that this increase makes us poorer. While across the ocean looms as the inevitable collateral damage of financial restriction: the FED advocates a soft landing, but is ready to cause a violent one in order to stop inflation before it becomes incarnate in expectations and behaviors.
The only possibility, so that the economic cycle's turnaround does not materialise, is that the current recovery has such strength to withstand the two powerful headwinds of European war and financial restriction. How likely is it? What are the real chances of the camel going through the eye of a needle? The answer must be read in the bowels of the situation and structural changes.
Last month's statistics, both qualitative and quantitative, tell us that the increase in demand is very robust, so much so that many entrepreneurs say they don't remember such copious orders; with delivery times lengthening due to lack of primary or semi-finished inputs, due to Covid, war and shortages of production capacity (such as for microchips, which will be in short supply at least until the end of 2023).
In North America and Europe (including Italy) the demand is driven by five factors:
- la reopening of social activities (we light a candle at the Sacrum Vaccinum);
- i accumulated savings during the past two years, due to the impossibility of spending and government subsidies;
- The private business investment to adapt the plants to the higher expected demand, to the technological revolutions, to the shortening of the value chains and to the desire to have higher inventories (the just-in-case took the place of the just-in-time);
- The public investment in infrastructure to modernize the physical public capital, which had perished after the long diet of almost three decades (not only in Italy had expenditure net of depreciation become negative); although the vertiginous increase in the cost of raw materials will everywhere reduce the works that can be carried out with the allocated sums;
- The residential investment (including renovations), with families driven to spend on homes by low interest rates, the rise in real estate prices, the legislative provisions in favor of energy saving, and the need, imposed by the pandemic, to have larger and better equipped domestic spaces .
However, qualitative surveys say that orders increase less quickly (although there are still many in the portfolio) and the confidence in the future is decreasing (among Italian consumers it has collapsed to the levels of March 2020), although so far optimism has prevailed among businesses. But, unless reconciliation on the Ukrainian front is unlikely, the impact of war on the desire and on the possibilities to spend will be felt even more in the second part of spring and summer. In the pandemic, it was services that were mainly penalized, this time it is the manufacturing industry that suffers the most.
Se the cleaver of rising prices it affects families and businesses, on both sides of the Atlantic, there are between America and Europe three important differences. The first is that America is far from the theater of war. Second, and more importantly, the US economy is overheated. The third is that since 2018 the US has reached theenergy independence, whereby energy price increases reshuffle earnings between sectors and territories, but do not subtract income from the system. Economic overheating calls the FED to act as a firefighter, as was said before and will be said later.
Europe can do without Russian gas? Yes, if you are ready to sacrifice a few points of GDP. For Italy the Def contains a simulation with Russian gas blockade: 2022 growth drops from 3,1% to 0,6%, which implies a sharp fall this year, given that since 2021 we have inherited a 2,3% (0,6-2,3=-1,7, XNUMX% on average per year).
However, the issue is complex, given that gas supplied under long-term contracts requires the take-or-pay, and paradoxically the noble European renunciation would lead to having to pay the same, once the problem (which is not a real problem) of paying in rubles or dollars/euros has been resolved. But maybe there are force majeure clauses for not paying… In any case it is good to make rationing plans and select priorities.
The picture, to be complete, must embrace the dynamics of China. Where it is not easy to reconcile the "zero-contagion" strategy (new cases have broken through the 25 thousand a day, from a few hundred until the end of 2021) with the need to grow to achieve the "shared prosperity" announced by Xi Jinping. The drop below 50 in China's PMI indices in March is evidence of this difficulty.
It's hard to escape the impression that a gigantic and unintentional thing is going on experiment in the living body of the world economy: what happens when the obstacles (pandemic and war) to supply are accompanied by a demand fueled by the savings accumulated by Covid aid, and inflation from raw materials overflows into consumer prices, while in the background the drums of war roll and a Whole people become 'cannon fodder'? The scenarios are many and varied, but the negative ones unfortunately outnumber the positive ones.
INFLATION - The strength of demand has its flip side: increases in the cost of raw materials and other inputs come translated into sales prices, through the production price lists and down to the retail prices paid by consumers.
The annual increase of consumer prices rose to 7,5% inEurozone, mainly driven by the energy bill (+44,7%) and fresh food (+7,8%). But even net of energy and food it is high (+3,2%) to be socially acceptable and economically efficient (at that speed the price signals begin to confuse the choices). Besides, there are large gaps between countries: +5,1% in France, +7,0% in Italy, +7,6% in Germany and +9,8% in Spain, limiting ourselves to the largest. The gaps are a function of energy dependence on gas (minimum in France, thanks to nuclear power) and government policies (good in Italy, taking into account reckless past energy choices).
In April, the direct contribution of energy could decrease, but the indirect one will increase, due to the transfer along the production chains of the previous increases. For now, in Europe the wage dynamics remain low, and only if these remained so could inflation be thought to fall slowly, even if it does not fall below the ECB's target threshold, on average for the year, before 2024. But it is a "big if".
In USAinstead, the price-wage spiral is now full-blown and the labor market is much tighter than the unemployment rate suggests. There are 1,7 vacancies per unemployed person and claims for unemployment benefits are at their lowest since 1968. In this context, there was the first case of "unionization" in Amazon.
Wages grow by 6,6% median year, net of the change in the composition of the employed, i.e. the fact that new jobs are created in sectors with lower hourly wages (catering, entertainment, hotels). Before the pandemic they rose to around 4%. However, real wages go down, because the increase in the cost of living was 7,9% in February (and it will be above 8% in March), and 6,4% net of energy and food, confirming that these are large and widespread increases.
On the other hand, the raw material cost is expected to remain in tension, both for war events (Russia and Ukraine are major suppliers of the main commodities) and for the fight against climate change (if everyone runs to replace fossil fuels with renewable sources, the greenflation) and because the supply bottlenecks mentioned above, combined with strong monetary and fiscal stimuli to demand, give a loud slap at prices (whackflation) which leaves the five fingers and produces a reaction (turning the other cheek is not fashionable).
Little can be done for the offer, if not investments, which, however, immediately increase the pressure of demand on the offer itself and with multiplicative effects, but on spending, policy makers can and how, with what follows. All the more so since, according to the companies themselves (PMI survey), more price increases are arriving everywhere.
RATES AND CURRENCIES – Un Martian economist anyone looking at the current rates – of interest and inflation – on the third planet of the solar system would have to scratch his head. Even on Mars they teach that rates should rise when inflation climbs. And what would he see, comparing i taxi-guide of central banks and the dynamics of consumer prices?
Let's limit ourselves to the Old World and the New World: United States, inflation at 7,9%, guide rate 0,25%-0,50%; Eurozone: inflation at 7,5% and zero guide rate on main transactions and negative (-0,50%) on deposits.
It's true, there Fed announced one tight series of other increases, after the mini rate (25 basis points) in March, which will be able to bring the rate above 2% at the end of the year; and the ECB, while not going so far, makes it clear that some increase is not far off. In any event, both sides of the Atlantic declare that the other levers of monetary policy – thequantitative expansion of the coin – they go to move towards the restriction: In America, reducing the mammoth assets of the Fed (8,7 trillion dollars) by strokes of 95 billion a month (it will be achieved by not selling securities but limiting oneself to not renewing those maturing); and in Europe, soon bringing securities purchases to zero (but not yet reducing the outstanding stock).
But theMartian economist he still doesn't understand. With inflation so high, shouldn't rates rise much more? And he struggles to seek explanations. Perhaps the inflation to be taken into consideration is not the overall one, but the one excluding energy and food (core), which, at least in Europe, is significantly lower. Maybe you should look atexpected inflation from here to 1, 2, 3 years which, according to the surveys, is less than the current one. Maybe the Central banks are search because they think the economy is going to suffer for the reasons mentioned above: inflation will come down because it curbs demand, and therefore there is no need to rage with rate hikes. Perhaps, with a war going on, it's best to just bleat and avoid roaring...
Each of these explanations has some validity. But here we must remember – given that we have spoken of the risk of recession – that risk is different from uncertainty, as Frank Knight explained already a century ago. In other words: a poker player can calculate the odds of winning if he is holding pocket kings. But, when it comes to 'black swans', we don't know the potential distribution of the outcomes: there are too many jokers in the deck... Both the Fed and the ECB are therefore right to announce a lot and to act gradually, emphasizing that the pace of the restrictions will be data dependent.
I market rates they didn't wait for key rate decisions, e are increased on their behalf. As can be seen from the graph, rates on ten-year bonds rose by around 40 basis points compared to the end of February btp e Waist, and much more (70 points) for i T Bond (inflation is higher and the Fed more aggressive). For thirty-year mortgage rates in the USA, the increase was even higher, and today they are close to 5%. That said, i real rates – and the Martian economist continues to marvel – they are negative, even using inflation core; in Italy they rose to just above zero, given that we boast – so to speak – lower inflation.
This means that the level of real rates supports the economy, which needs support in Europe. Stocks moodiness indicates that the other leg of monetary conditions – the cost of equity capital - it's going up, while the third leg – the cultural, – reports instead a loosening, with the weakness of the euro.
The American economy, as mentioned above, is pulling despite everything, and the muscles are also seen in the exchange rate dollar, which has recently strengthened even compared to the chinese coin. Meanwhile, the Australian dollar it increasingly deserves the name of 'safe haven'.
in stock markets, uncertainty reigns in Knight's sense. Never drawers should rest assured and look beyond these difficult times. Furthermore, i German savers (and others) will be happy to know that their money now pays something, and that the capital invested in bonds is no longer extortionate by negative nominal rates. Of course, that 'something' is itself extorted by inflation. But you can't have everything in life...
