Economic Outlook – 1 May 2022


• First quarter GDP was the disappointing marquee release this week, but there were plenty of silver linings. The consensus was for weak, but still positive, growth. Instead, the U.S. economy retreated by 1.4% annualized, after booming 6.9% in the fourth quarter of 2021. The unexpected retrenchment was largely due to a widening trade deficit, with slowing inventory accumulation and fading stimulus spending chipping in (Chart 1). The headline decline masked underlying strength in consumer spending and business investment, which posted solid gains of 2.7% and 9.2% respectively in the quarter.

• Business investment has good momentum heading into Q2, with durable goods orders up 0.8% MoM in March, after a 1.7% decline in February. The increase was driven by autos, computers and other electronics. The measure has risen in five of the last six months. The report also showed that a closely watched proxy for business investment – new orders for nondefense capital goods excluding aircraft – rose by 1% MoM, pointing to resilience in the business sector.

• On the housing front, data from the S&P CoreLogic Case-Shiller Index showed that home price growth remained robust in February. Prices posted a 19.8% YoY gain, up from 19.1% in January. This was the highest growth rate since August and reflects extremely low levels of inventory relative to demand. As mortgage rates continue to climb, however, purchasing power will dim, resulting in lowered demand which should restore greater equilibrium to the market. Both goods imports and exports rose in March 2022, however the increase in imports was much larger, resulting in a record high merchandise trade deficit of $125.3 billion.

• There are already some indications of this as sales of newly built single-family homes fell in March for the third consecutive month. New home sales were down 8.6% MoM. There was also a decline in contracts signed to purchase homes. Pending home sales headed lower for the fifth consecutive month. The metric fell 1.2% MoM in March, pushing signed contracts to the lowest level since May 2020. As prices and interest rates head higher, and a solid supply of homes under construction are completed, the current imbalance between housing supply and demand should start to close.

• There was little sign of improvement in the trade deficit through the quarter, as the monthly deficit hit a new record in March. A surge in imports dwarfed export gains. The goods trade gap rose by 17.8% MoM to $125.3 billion. While strong demand from businesses and consumers lead to a surge in imports, rising prices also contributed to the sizeable increase in the deficit. Front-loading of imports due to geopolitical and supply-chain uncertainty saw sizeable increases in the import of consumer goods (13.6%) and motor vehicles (12%).

• Both nominal personal income and spending rose in March by 0.5% and 1.1% MoM. Accounting for prices, real spending rose 0.2% on the month. The Fed’s preferred inflation gauge, the core personal consumption expenditure deflator, rose 5.2% YoY, a slight deceleration from February. Add it all up, and with inflation still elevated, and strong momentum in consumer spending and business investment, the Fed is expected to look past the headline decline in GDP, and press full steam ahead with policy normalization, with a 50 basis point hike next week

• The US dollar strengthened broadly this week, with the euro dropping below $1.05 and USD/JPY rising above 130 (a two-decade high). The yen weakened sharply after the Bank of Japan made no changes to its super-loose monetary policy at its rate-setting meeting this week

• The major indexes endured a fourth consecutive week of losses, as growth fears were compounded by some disappointing earnings results from, which has a heavy weighting in many prominent indexes. The S&P 500 Index moved further into correction territory, down roughly 14% from its recent peak, while the technology-heavy Nasdaq Composite and small-cap Russell 2000 Index fell further into bear markets, down roughly 24% from their highs. Energy stocks outperformed within the S&P 500 after Russia announced that it was cutting off natural gas exports to Poland and Bulgaria


• Business minister Kwasi Kwarteng has written to the North Sea oil and gas industry asking it to set out a clear plan to reinvest its profits into British energy projects, the government said. Energy prices have hit record highs this year and big profits for energy producers have led to repeated calls from the opposition Labour Party for a windfall tax on producers of North Sea oil and gas to fund help for people struggling with energy bills. Earlier this month, the government set out plans to scale up domestic sources of affordable, clean and secure energy and a new licensing round for North Sea oil and gas. “In return for the UK government’s ongoing support for the sector, the Prime Minister, the Chancellor (finance minister) and I want to see a very clear plan from the oil and gas industry to reinvest profits in the North Sea,” Kwarteng wrote in his letter to the industry. “At our next meeting in coming weeks, I would like you to set out how you will reinvest profits, double down on investments in the clean energy transition and importantly accelerate and maximise domestic oil and gas production.” Kwarteng, speaking about the plans on Sunday, said it remained his view that a windfall tax would obstruct investment, but added that the government almost never ruled out future tax changes, which were up to finance minister Rishi Sunak. Earlier this week Sunak said he might consider a windfall tax if investment did not rise

• Banks in Britain with no more than 15 billion pounds ($19 billion) in assets could benefit from lighter capital requirements given they would pose less of a risk to financial stability if they went bust, the Bank of England said on Friday. Britain’s departure from the European Union makes it possible for the country to tailor its bank capital rules. The Bank of England (BoE) published a consultation paper that began fleshing out its previously flagged plans for a “strong and simple” capital regime for smaller, less risky banks to avoid the complex rules applied across the board currently. The BoE’s Prudential Regulation Authority (PRA) said banks that want to benefit from the new regime must not have a trading book worth more than 44 million pounds, or be equivalent to 5% of the bank’s total assets. “The PRA does not consider significant foreign exchange or any commodity positions consistent with the aims of the simpler regime,” it said. The “simpler” banks must also use rules set out by regulators when it comes to calculating how much capital to hold and would not be allowed to use their own computer models


• Eurozone GDP growth QoQ slowed in line with expectations to 0.2 percent in the first quarter of this year, compared to 0.3 percent the previous quarter. Meanwhile, France’s GDP stagnated in during the first quarter, and Germany grew by 0.2 percent. Spain’s GDP in turn increased by 0.3 percent compared to the previous quarter. In contrast, Italy’s GDP fell by 0.3 percent compared to the previous quarter. Broadly speaking, consumption weakened, consistent with rising household costs, primarily via energy prices. Eurozone inflation in March rose marginally as expected at 7.5 percent YoY, compared to 7.4 percent the month before. Energy is expected to have the highest annual rate in April (38.0 percent, compared with 44.4 percent the month before), followed by food, alcohol & tobacco (6.4 percent, compared with 5.0 percent), non-energy industrial goods (3.8 percent, compared with 3.4 percent) and services (3.3 percent, compared with 2.7 percent. Meanwhile, core inflation rose above expectations to 3.5 percent this month, compared to 2.9 percent in the previous one. The HICP releases in April (March) for major eurozone countries were as follows: France 5.4 percent (5.1), Germany 7.6 percent (7.8), Italy 6.6 percent (6.8) and Spain 9 percent (8.3)
• Amid the highest inflation since the oil shocks of the 1970s, the European Central Bank hike rates as early as July. However, ECB President Christine Lagarde took pains this week to draw sharp distinctions between the likely actions of the ECB and those of the Fed. Inflation in the eurozone us not as broad-based as in the United States, she said, and concentrated largely in food and energy prices as a result of Russia’s invasion of Ukraine. Core inflation in Europe, though above target, is about half the US level, Lagarde observed, adding that European labor costs are growing more slowly than those in the US. The ECB chief acknowledged that there is a high probability of a rate hike in early Q3, though she cautioned that the pace of upcoming rate hikes will likely be more gradual than in the US

• Shares in Europe pulled back on concerns about slowing economic growth, high inflation, and tightening monetary policy. Encouraging quarterly earnings reports may have helped to moderate these losses. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.64% lower. Major market indexes were mixed. Germany’s DAX Index gave up 0.31%, while France’s CAC 40 Index slid 0.72%. Italy’s FTSE MIB Index was little changed


• Chinese markets ended on a mixed note amid reports that the country’s Politburo pledged to boost economic stimulus and called for the “healthy development” of the technology sector. The broad, capitalization-weighted Shanghai Composite Index fell 1.3%, and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, ended roughly flat, recouping earlier losses spurred by concerns about the government’s zero-tolerance approach to the coronavirus

• With COVID-19 lockdowns disrupting the economy, Chinese officials took a number of steps this week to shore up economic growth. President Xi Jinping called for a substantial boost in infrastructure construction while the People’s Bank of China said it will strengthen support for the real economy and push for a resolution of its crackdown on technology companies. On Thursday, the State Council said it would promote the growth of Internet platform companies to facilitate job creation while introducing temporary subsidies for workers who are ineligible for unemployment insurance. On Friday, the Politburo pledged further policy support, including tax and fee cuts and quicker implementation of existing policies to stabilize the economy and markets, promote consumption and boost employment. Economists increasingly expect that China will struggle to reach its target growth rate of 5.5% this year due to its zero-COVID policy. Unemployment in China rose to 5.8% in March, the highest level since early in the pandemic

• Shanghai’s monthlong lockdown continued to reverberate as many foreign residents have fled and factories struggled to reopen, though officials have started to allow people to leave their homes in a growing number of residential areas. Several manufacturers with China operations, including GE, South Korean chipmaker SK Hynix, and carmaker Mercedes Benz, warned of supply chain disruptions and an uncertain business outlook due to the restrictions

Sources: T. Rowe Price, MFS Investment Management, Reuters, TD Economics, M. Cassar Derjavets