News of the week summary - 02/04/2023
Eurozone core inflation hits record high
Although headline inflation was at 6.9% in March - meaning prices were 6.9% higher than in March 2022 - down from 8.5% in February, core inflation kept rising slowly but steadily, and has reached 5.7%.
Headline inflation aims to measure the “total” inflation of an economy based on a defined basket of goods. Core inflation excludes certain commodities such as food and energy, because their prices are very volatile, so core inflation is a better measure of long-term trends. Central bankers tend to focus more on core inflation to determine policies.
The rise in core inflation could lead to further interest increases by the ECB, despite strains in the financial sector. The ECB has pointed to profits as one of the main causes of rising prices. According to the Central Bank, in the last 6 months of 2022, they accounted for a larger share of the rise in prices of goods and services than did wages.
Nonetheless, the coming rate increases could be
lower than expected, as European banks cut lending amid financial turmoil. Even
before the SVB and Credit Suisse crisis, the increase in lending to households
and business by Eurozone banks slowed in February. Some economists believe the
tensions in the financial sector could further reduce lending, as banks face
harsher funding costs, and the threats of a withdrawal of deposits (they will
thus keep more liquidity to meet potential withdrawals requests).
World
bank warns of lost decade for global economy
The World Bank warns the world faces a “lost decade” for global growth. The lender expects GDP potential growth rate to fall to its lowest level in three decades, at a 2.2% rate on average between 2022 and 2030 (compared to 3.5% for the first decade of the 21st century, and 2.6% between 2011 and 2021). Potential GDP estimates the GDP if labor and capital were used at their maximum sustainable rates (that means without triggering inflation).
The World Bank cites three main factors: the ageing of the workforce, weakening investment, and slowing productivity. About half of the expected slowdown in global growth is due to demographic factors. The bank has warned a major financial crisis leading to a recession in the biggest economies could further dampen potential GDP estimates.
The Washington-based institution expects global GDP to grow at a rate of 1.7% this year. It has lowered its first estimation because of the risk lingering inflation poses to the economy. The World bank also stated that disruptions caused by the pandemic (such as school closures), and restrictive trade measures push down global growth. It recommends implementing measures to boost labor force participation, notably among discouraged workers (those who have stopped searching for a job because they feel they will not get one anyway) and women.
China’s
Consumers Extend Economic Rebound From Pandemic
Following the easing of Covid-19 restrictions, activity in China’s service sector is very high, as Chinese consumers return to stores and restaurants. This is a promising sign for the global economy, which will rely on Chinese consumption to support growth, amid rising interest rates and high prices in the West.
It is unsure this bump in consumption can keep
on in the long-term. Chinese have accumulated lots of savings during the pandemic,
but incomes have only slowly risen, and the job market looks weak. It is
unlikely consumption can replace exports and public investments as the engines
of Chinese growth. The government has set a growth target of around 5% for 2023,
which most economists expect it to achieve.