What's going on in economics this week? The economists at Deloitte evaluate news and trends from across the world.
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Europe's inflation is picking up speed.
In the Eurozone, inflation accelerated further in October. Consumer prices rose 4.1 percent year on year, the largest rate since July 2008. Prices increased by 0.8 percent over the previous month, the largest monthly gain since March of this year. When volatile food and energy costs are factored out, core prices were up 2.0 percent year on year, the most since October 2008, and up 0.3 percent month on month. Thus, Core inflation has been consistent with the European Central Bank's (ECB) aim of 2.0% underlying inflation. Consumer prices in the bigger 27-member European Union (EU) were up 4.4 percent year on year and 0.9 percent month on month. The bigger EU's greater inflation was mostly owing to relatively high inflation in Poland, Hungary, the Czech Republic, Bulgaria, and the three Baltic states.
Consumer prices in Germany increased by 4.6 percent year on year, 3.2 percent in France, 3.2 percent in Italy, and 5.4 percent in Spain. Spain had the greatest number in the Eurozone. Surprisingly, despite relatively high inflation, Spain has witnessed very small salary gains, reflecting a falling percentage of the labour force subject to negotiated wage contracts. In Germany, unusually strong inflation is attributed in part to a comeback in the VAT rate following a reduction early in the epidemic. Although Eurozone inflation is rising, the fact that core inflation remains low implies that the ECB will not change its monetary policy in the foreseeable future.
Indeed, the euro has fallen in value as a result of statements by ECB President Lagarde signalling that monetary policy will remain unchanged despite an uptick in inflation. According to Lagarde, tightening monetary policy now will "cause more harm than good." Markets are already pricing in only a little hike in the ECB's policy rate next year. Lagarde maintains her belief that the recent increase in inflation is only temporary.
"When faced with passing or supply-driven inflation shocks," she stated, "we must not rush into premature tightening." Furthermore, the present rise in viral infections (see the following report) in Northern Europe raises the possibility of an economic downturn in early 2022.
Outgoing Bundesbank President Jens Weidmann, unsurprisingly, has attacked the ECB's stance. "Given the enormous uncertainty regarding the inflation outlook," he added, "monetary policy should not commit to its current relatively expansionary posture for an extended period of time." Meanwhile, the ECB's decision not to change monetary policy puts it at odds with many other central banks, including the US Federal Reserve, the Bank of England, and the Bank of Canada, all of which have shown a willingness to ease off the gas pedal.
Meanwhile, the UK, which is no longer a member of the EU, posted the highest inflation rate in a decade. Consumer prices rose 4.2 percent year on year in October, the biggest rate since November 2011. Furthermore, prices rose 1.1 percent from the prior month, the largest monthly increase since April 1993. Excluding volatile food and energy costs, core prices increased 3.4 percent year on year, the most since October 2011. Core prices increased by 0.7 percent over the previous month.
According to these numbers, underlying inflation is currently significantly beyond the Bank of England's objective of 2.0 percent. Although the Bank of England did not raise policy interest rates at its most recent meeting, there is now widespread agreement that it will do so at its next meeting. Recent labour market data show an acceleration in job growth as well as a significant increase in job mobility. The latter usually results in significantly better earnings.
Furthermore, data suggest a dramatic fall in labour force participation among very young and very old employees. This has resulted in a manpower scarcity and increased labour expenses. The inflation figures show that restaurant and hotel prices have risen sharply, most likely owing to increasing labour expenses. Furthermore, global supply chain disruption continues to have an impact on the economy. As in the United States, supply chain issues have restricted the supply of new automobiles, resulting in a significant spike in used car prices.
The virus continues to pose a threat to Europe.
The most serious threat to Europe's economic recovery is a rapid increase in infections, particularly in northern nations like as Germany, Austria, Slovakia, the Czech Republic, the Netherlands, and Belgium. Infection rates in southern nations like as France, Italy, Spain, and Portugal remain low. The key distinction between these two groups is immunisation rates, which are greater in the south. Furthermore, the northern nations are experiencing colder weather, which means that people are likely spending more time indoors, making it easier for the virus to spread from person to person.
In the northern nations mentioned above, infection rates are either equal to or significantly surpass the pre-winter high. However, hospitalisation and mortality rates remain well below their highest levels. This suggests that some of those becoming infected are vaccinated and so less susceptible to illness. It might also be attributed to a younger population of persons becoming infected, who are less likely to become ill.
In any case, governments are increasingly worried, both in terms of public health and economics. Austria's government declared that it will pursue legislation to make immunisation mandatory beginning February 1. This is already a problematic move. Furthermore, the government will implement a rigorous lockdown for the following three weeks. Unvaccinated persons will be restricted in where they can go after the lockdown is lifted.
Meanwhile, some governments in Northern Europe are adopting additional economic limitations. What is happening in Europe should serve as a warning to other nations, particularly the United States, where vaccination rates are substantially lower than in Europe.
Inflation and supply chain bottlenecks
The rise in inflation in the industrial world is strikingly comparable across major economies. Inflation has risen rapidly in the United States, Canada, the Eurozone, and the OECD as a whole. However, there is a little difference in inflation between the United States and the other countries. Inflation in the United States is presently around 2.0 percent higher than in the rest of the world. A new analysis by the Bank for International Settlements (BIS), the central bank's central banker, reveals that the general inflationary trend across several nations is mostly attributable to bottlenecks, or what is now known as supply chain disruption. Meanwhile, it has been suggested that the somewhat higher US inflation reflects the stronger fiscal stimulus provided by the US in the previous year. The latter caused a significant increase in US consumer demand. Excess demand most definitely contributed to greater inflation, but it was most likely not the primary explanation for the recent spike in inflation in the United States.
According to the BIS, "bottlenecks in the supply of commodities, intermediary items, and freight transportation have resulted in unpredictable pricing and delivery delays." These limitations have been more persistent than expected. According to the BIS, bottlenecks "have been exacerbated by supply chain actors' attempts to establish buffers in existing lean production networks — so-called bullwhip effects." In other words, individual enterprises' efforts to stockpile commodities in low supply have compounded shortages, causing more persistent price hikes.
On the plus side, according to the BIS, "the direct inflationary effect of bottlenecks will likely be minimal after relative prices have adjusted." However, if constraints remain long enough to cause an upward shift in wage growth and inflation expectations, lasting inflationary pressures may arise." In other words, the supply chain issue will most likely be resolved eventually. resulting in decreased inflation However, if the continuation of inflation raises inflation expectations, individuals are likely to act in ways that promote inflation, particularly employees demanding and firms paying higher salaries.
Although consumer price inflation remains high, certain commodity price rises have begun to reverse. Furthermore, the dramatic increase in the cost of shipping containers has already begun to reverse. Nonetheless, delivery backlogs remain high, while inventories remain extremely low. There is still more work to be done before the situation is remedied.
Meanwhile, in the high-inflation United States, there is growing concern about whether inflation may worsen. The vice chair and one other member of the Federal Reserve's governing board have openly proposed that the pace of asset purchases be sped up. Vice Chair Richard Clarida stated that the Fed's December meeting might include a discussion on this matter. At the most recent meeting, it was decided that tapering would commence, with asset purchases being reduced by US$15 billion each month until no fresh asset purchases are made. Around the middle of 2022. Fed Chair Powell stated that the Fed would not likely raise interest rates as long as asset purchases continue. The Fed did, however, imply that the rate of tapering may be altered based on facts. Clarida believes there is a bigger upside risk to inflation. "I'll be looking attentively at the data that we acquire between now and the December meeting, and it may well be appropriate to have a conversation about accelerating the rate at which we're lowering our balance sheet," he added specifically.
The Chinese economy is recovering moderately, but headwinds remain.
Economic indications point to a minor increase in China's economic activity in October, following a dip in growth in September. Retail sales and industrial production both increased faster than in September. Fixed asset investment, on the other hand, appears to have halted, and home price inflation has decreased. As a result, China continues to confront significant challenges. Let's look at the specifics.
Retail sales in China increased 4.9 percent year on year in October, up from 4.4 percent in September. Some expenditure categories had very rapid increases. Telecom expenditure, for example, increased 34.8 percent, jewellery 12.6 percent, home appliances 9.5 percent, and cosmetics 7.2 percent. Spending on oil products increased by 29.3 percent, owing in part to the steep spike in global oil prices. Meanwhile, expenditure on textiles fell by 3.3 percent, while spending on autos fell by 11.5 percent.
In October, Chinese industrial production increased by 3.5 percent year on year. This was an increase over the previous month's 3.1 percent gain. Manufacturing increased by a moderate 2.5 percent. Nonetheless, the mining component increased by 6%, while the utilities component (electricity, power, gas, and water) increased by 11.1 percent. The last two data imply that China increased coal output in order to offer more energy during a period of scarcity and rationing. Although manufacturing increased slowly, two sub-sectors performed exceptionally well. High-tech product output increased by 14.7 percent, while new energy vehicle manufacturing increased by 127.9 percent.
Fixed asset investment climbed 6.1 percent year on year in the first ten months of 2021. This was a slowdown from the 7.3 percent increase seen in the first nine months of the year. Investment in both the private (up 8.5 percent) and public sectors (up 4.1 percent) slowed from the previous month.
Finally, the slowing of the residential property industry had an impact on home values. The average new house price in China's 70 major cities increased by 3.4 percent year on year in October. This was the weakest rate of growth since January 2016. In fact, prices were down 0.2 percent from the prior month. Notably, price rises in China's major cities were more than the national average. Prices increased by 4.9 percent in Beijing, 3.8 percent in Shanghai, 8.0 percent in Chongqing, 7.9 percent in Guangzhou, and 3.4 percent in Shenzhen, for example. The financial difficulties at large developers such as Evergrande have shook China's housing market.
The government appears to be eager to manufacture a reduction in the size of a sector that is bloated and supported by excessive debt.
While China's internal demand looks to be stabilising as the energy deficit eases and virus-related problems subside, the country's strong export growth may halt. This is because robust worldwide demand for Chinese-made durable consumer goods, which is already at an all-time high, is likely to fall in the coming months. As a result, demand for Chinese exports is anticipated to fall. This might assist to ease supply chain interruption and save transportation costs.
In the long run, China will face a demographic crisis.
China boasts a population of almost 1.4 billion people, but that may not be enough. There was a period when China's officials were concerned about overpopulation and established limits on the number of children that couples might have. That is not the case any longer. Leaders are now concerned that, due to a low birth rate, China would face an increasing share of elderly people with fewer younger people to assist them. Since 2012, the working-age population has been declining. Although the government has relaxed birth limits, couples are nevertheless having fewer children. In 2016, there were 17.9 million births in China. By 2020, that figure had dropped to 12 million.
the lowest level since 1961, when births plummeted owing to starvation induced by the Great Leap Forward. There has been 25.5 million births as recently as 1987.
If birth rates stay low, China's entire population will begin to drop shortly. The government is encouraging individuals to have more children. Even if this is successful, the impact on the labour force will not be realised for another 20 years. Meanwhile, a shrinking work force means that, all else being equal, economic growth will slow even further.
Apart from increasing birth rates, there are a few other things that may be done to alleviate the issue. These include more immigration, allowing individuals to retire later in life, encouraging more women to work, and investing more in labor-saving and labor-augmenting technologies to boost productivity development. The private sector has reaped the lion's share of productivity improvements during the last few decades. Nonetheless, the government is increasing its support for the public sector. As a result, the growth prognosis may be difficult.
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