Global Weekly Economic Update | Deloitte Insights

What's happening this week in economics? ... Treasury Secretary, Professor Lawrence Summers, on the outlook for global growth and inflation. Article 07December2021 Weeklyglobaleconomicupdate What’shappeningthisweekineconomics?Deloitte’steamofeconomistsexaminesnewsandtrendsfromaroundtheworld. 07December2021 IraKalish UnitedStates × IraKalish ChiefGlobalEconomist,DeloitteToucheTohmatsu Dr.KalishistheChiefGlobalEconomistofDeloitteToucheTohmatsuLtd.Heisaspecialistinglobaleconomicissuesaswellastheeffectsofeconomic,demographic,andsocialtrendsontheglobalbusinessenvironment.HeadvisesDeloitteclientsaswellasDeloitte’sleadershiponeconomicissuesandtheirimpactonbusinessstrategy.Inaddition,hehasgivennumerouspresentationstocorporationsandtradeorganizationsontopicsrelatedtotheglobaleconomy.Heiswidelytraveledandhasgivenpresentationsin47countriesonsixcontinents.HehasbeenquotedbytheWallStreetJournal,TheEconomist,andTheFinancialTimes.Dr.Kalishholdsabachelor’sdegreeineconomicsfromVassarCollegeandaPhDininternationaleconomicsfromJohnsHopkinsUniversity. [email protected] × Sharearticlehighlights Seesomethinginteresting?Simplyselecttextandchoosehowtoshareit: Emailacustomizedlinkthatshowsyourhighlightedtext. Copyacustomizedlinkthatshowsyourhighlightedtext. Copyyourhighlightedtext. Sharebyemail ✓Linkcopiedtoclipboard Weeklyglobaleconomicupdate by IraKalish × Sharearticlehighlights Seesomethinginteresting?Simplyselecttextandchoosehowtoshareit: Emailacustomizedlinkthatshowsyourhighlightedtext. Copyacustomizedlinkthatshowsyourhighlightedtext. Copyyourhighlightedtext. Sharebyemail ✓Linkcopiedtoclipboard OnThursday,9December,Deloitte’sglobalCEO,PunitRenjen,willbeindiscussionwithformerUSTreasurySecretary,ProfessorLawrenceSummers,ontheoutlookforglobalgrowthandinflation.Thewebinarwilltakeplaceat16:00GMT(UK)/11:00EasternTime(US).Toattendorhaveaclientattend,pleaseregister here. WeekofDecember6,2021 FederalReservemoreconcernedaboutinflation,investorslessso AconfusingUSjobmarket Eurozoneinflationsurges,butECBnotworried PossiblesolutionstoJapan’sonerousdemographics Learnmore Viewpreviousupdates VisittheDeloitteInsightseconomicscollection FederalReservemoreconcernedaboutinflation,investorslessso Amidallthepublicdiscussionaboutrisinginflation,itisabitsurprisingthatinvestorexpectationsoffutureinflationhavebeenfalling.Specifically,thebreakevenratesforthefive-yearand10-yearbondshavefallensteadilysincemid-November.ThebreakevenrateisthedifferencebetweentheyieldonregularTreasurybondsandbondsprotectedfrominflation.Thedifferencedenotesinvestorexpectationsofaverageinflationinthefuture.Thefive-yearbreakevenhasfallenalmost40basispointssincemid-November.Inotherwords,thedeclinecannotsimplybeexplainedbytheFederalReserve’slatestsignalthatitwilladjustpolicyorbylastFriday’snewsabouttheomicronvariant.Rather,itlikelyreflectsanincreasingbeliefthattheFedwillnotallowinflationtobecomesustained;thattheoilpricesurgewillbetemporary(indeedoilpriceshavefallen);andthataslowerChineseeconomywilldrivedownsomecommodityprices. Also,althoughthefive-yearbreakevenisnowat2.8%,theso-called“five-yearfive-year”breakeven,whichmeasuresexpectedaverageinflationduringtheperiodbetweenfiveand10yearsfromnow,hasbeensteadyandremainsatabout2.2%.Inotherwords,investorsareconfidentthatfutureinflationwillbequitelow.Thus,fromaninvestorperspective,inflationisstillseenastransitory—eventhoughFedChairmanPowellsaidthatthewordtransitoryoughttoberetiredbecauseithasbeenmisinterpreted.Meanwhile,theyieldonthe10-yearbondisdownsharply,inlinewithdecliningexpectationsofinflation,hittingthelowestlevelsincemid-September.Thisindicatesthatmanyinvestorsexpectlowerinflationinthelong-runandarenotconcernedthatFedpurchasesofbondswillsooncease.Afterall,USTreasuryborrowingisexpectedtodeclineasfiscalstimulusends.Thus,therewillactuallybeadeclineinthesupplyofbondsavailabletoinvestors. Animportantfactorthatcouldsuppressinflationinthecomingweeksandmonthsisthefactthatoilpriceshavefallensharplyinrecentdays,hittingthelowestlevelsinceAugust.Thiswasdrivenbyanexpectationthattheomicronvariantoftheviruswillsignificantlysuppresstravel.Petrol(gasoline)pricesarelikelytofollow.ThiswillhelptodampeninflationandwillbepoliticallyfavorableforPresidentBiden.OnlyadrasticeffortbyOPECcouldquicklyreversethistrend.Fearsaboutomicronalsocausedasharpdropincoalprices. Meanwhile,inCongressionaltestimony,FederalReserveChairPowellindicatedthattheinflationenvironmentcouldleadtheFedtoacceleratethepaceoftaperingofassetpurchases.Specifically,Powellsaid,“Theeconomyisverystrongandinflationarypressuresarehigh,anditisthereforeappropriateinmyviewtoconsiderwrappingupthetaperofourassetpurchases,whichweactuallyannouncedattheNovembermeeting,perhapsafewmonthssooner.Iexpectthatwewilldiscussthatinourupcomingmeetinginacoupleofweeks.”TheFedhadpreviouslychosentoreduceassetpurchasesbyUS$15billionpermonthuntilnonewassetpurchasestakeplace.Evidently,theymightchoosetoincreasethemonthlytaper. Powellhasbeenastrongproponentoftheviewthatthecurrenthighinflationwillbetransitory.Thatis,hehasarguedthattheinflationislargelyduetosupplychaindisruption,whichwillabateovertime.Therefore,hehassuggestedthatinflationcouldreverttoanormallevelby2023.Thatsaid,inlastweek’stestimony,heacknowledgedthatinflation,whichinitiallywasconcentratedinarelativelysmallnumberofmerchandiseandservicecategories,isbecomingmorebroad-based.Consequently,thereisanincreasedriskof“persistentlyhigherinflation.”Asforthetransitoryargument,Powellsaid,“Thewordtransitoryhasdifferentmeaningstodifferentpeople.Tomanyitcarriesasenseofshort-lived.Wetendtouseittomeanthatitwon’tleaveapermanentmarkintheformofhigherinflation.Ithinkit’sprobablyagoodtimetoretirethatwordandtrytoexplainmoreclearlywhatwemean.” Powellcommittedtofightinginflation,whichhasbecomethebiggestconcernofconsumersaswellaspoliticians.Hesaid,“Weunderstandthathighinflationimposessignificantburdens,especiallyonthoselessabletomeetthehighercostsofessentialslikefood,housing,andtransportation.Wewilluseourtoolsbothtosupporttheeconomyandastronglabormarketandtopreventhigherinflationfrombecomingentrenched.”Meanwhile,Powellacknowledgedtheriskfromthenewomicronvariantofthevirusandsuggestedthatanotheroutbreakcouldexacerbateinflationbyfurtherdisruptingsupplychains.Hesaid,“TherecentriseinCOVID-19casesandtheemergenceoftheOmicronvariantposedownsideriskstoemploymentandeconomicactivityandincreaseduncertaintyforinflation.Greaterconcernsabouttheviruscouldreducepeople'swillingnesstoworkinperson,whichwouldslowprogressinthelabormarketandintensifysupply-chaindisruptions.”InresponsetoPowell’scomments,equitypricesfellandbondyieldsincreased. AconfusingUSjobmarket WhentheUSgovernmentreleasedtheemploymentreportforNovemberlastweek,someheadlinewritersfocusedonthebadnews.Yetthenewsfromthereportwasmixedand,tosomeextent,confusing.Ontheonehand,thesurveyofestablishmentsindicatedslowgrowthinemployment(whichwasthefocusforheadlinewriters).Ontheotherhand,thesurveyofhouseholdsindicatedveryrapidgrowthofemployment,increasinglaborforceparticipation,andasharpdeclineintheunemploymentrate.Thus,onecouldeitherarguethatthejobmarketisdeceleratingorthatitisaccelerating.Itishardtosay.Let’slookatthedata. TherearetwoemploymentreportsissuedbytheUSgovernment:Onebasedonasurveyofestablishments;theotherbasedonasurveyofhouseholds.TheestablishmentsurveywasdisappointinginNovember,indicatingthecreationofonly210,000newjobs—muchlessthanforecastersexpected,muchlessthanpredictedbyasurveyconductedbyADP,andmuchlessthanthe546,000jobscreatedinOctober.Whatwentwrong?Thevastmajorityofthesharpdecelerationofemploymentgrowthcanbeexplainedbyjustthreeindustries:automotivemanufacturing,retailing,andleisureandhospitality. First,whileoverallmanufacturingjobgrowthwasstrong,therewasadeclineinemploymentatautomotiveproducers,likelyduetocontinuedsupplychaindisruptionstemmingfromasemiconductorshortage.Second,retailemploymentfell,largelyduetoasharpdeclineinjobsatgeneralmerchandisestoresandatapparelstores.Thesenumbersareseasonallyadjusted.Thus,itcouldbethecaseexpansionofretailemploymentwasslowerthanusualfortheholidayseason.Perhapsthatreflectsmoreonlineshoppingorearlierholidayshopping.Third,employmentinleisureandhospitality,havinggrownrapidlyinOctober,barelygrewinNovember.Jobgrowthatbothrestaurantsandhotelswasfeeble.Itisnotyetclearifthiswasduetoreducedconsumerdemandorapersistentshortageoflabor—orboth.Inanyevent,itshouldbenotedthatmonthlymovementsinemploymentcanbevolatile,andthatonemonth’sdecelerationisnotnecessarilyindicativeofatrend. Meanwhile,theseparatesurveyofhouseholdstellsaverydifferentstory.Itsaysthatthenumberofpeoplechoosingtoparticipateinthelaborforceincreasedfarfasterthantheworkingagepopulation,therebyboostingtherateofparticipation.Inaddition,employmentgrewevenfaster,therebycausingtheunemploymentratetofallfrom4.6%inOctoberto4.2%inNovember.Thesurveyestimatesthecreationof1.1millionnewjobsinNovember.Thehouseholdsurveyincludesself-employment,whichmaypartlyexplaintherelativelyhighnumber. Inresponsetotheemploymentreport,investorspusheddownbondyieldstothelowestlevelsincemid-September.Itislikelythattheyviewedtheweakemploymentgrowthnumbersassuggestingthepossibilityofslowergrowth.This,combinedwithcontinueduncertaintyabouttheomicronvariant,islikelycausingashiftinmarketsentiment. Meanwhile,thepresidentoftheFederalReserveBankofCleveland,LorettaMester,saidthatasignificantoutbreakoftheomicronvariantcouldfuelmuchhigherandpersistentinflation.Shesaid,“Ifitturnsouttobeabadvariantitcouldexacerbatetheupwardpricepressureswe’veseenfromthesupply-chainproblems.”Shealsosuggestedthatanewoutbreakmightprolongsuppressedparticipationinthelabormarket.Thus,althoughomicroncouldderailtheeconomicrecoverybyboostingsocialdistancing,itcouldalsocauseanaccelerationininflationbydisruptingsupplychainsandlabormarkets.Itisnotclearthatinvestorshaveabsorbedthisargumentintotheirexpectationsofinflation. Eurozoneinflationsurges,butECBnotworried Inflationinthe19-memberEurozonecontinuestoaccelerate.TheEuropeanUnionreportsthat,inNovember,consumerpriceswereup4.9%fromayearearlier,thehighestreadingsinceJuly1991.Priceswereup0.5%fromthepreviousmonth.TheNovemberannualfigureisalsofarabovethe2.2%rateseenasrecentlyasJuly2021.Inlargepart,thesurgeininflationisduetothestunning27.4%increaseinenergyprices.Whenvolatilefoodandenergypricesareexcluded,corepriceswereupamoremodest2.6%inNovemberversusayearearlier,anduponly0.1%fromthepreviousmonth. Inflationvariedbycountry.Fromayearearlier,consumerpriceswereup6.0%inGermany,3.4%inFrance,4.0%inItaly,5.6%inSpain,5.6%intheNetherlands,7.1%inBelgium,5.4%inIreland,2.7%inPortugal,and4.3%inGreece.Inaddition,priceswereupespeciallysharplyintheBalticswithinflationof8.4%inEstonia,7.4%inLatvia,and9.3%inLithuania. ThenewinflationdatawillsurelyputpressureontheEuropeanCentralBank(ECB)toremovemonetarystimulussoonerthanplanned.IncomingGermanFinanceMinisterChristianLindnersaidthat“inflationgivesrisetolegitimateconcerns.”However,theECBleadershipcontinuestosaythatthehighinflationislikelyduetoone-offfactors,includingsupplychaindisruption,theriseintheGermanVAT,andthespikeinenergyprices.Still,ECBVicePresidentGuindossaidthat“bottlenecksmaylastlongerthanexpected”in2022.ThepatternofinflationintheEurozoneissimilartothatintheUnitedStates,althoughatasomewhatlowerlevel.Inbothlocations,goodsinflationexceedsserviceinflation,reflectingashiftindemandthatbusinessesarestrugglingtoaccommodate.Thissuggeststhatsupplychainproblemsaretheprincipalcauseofhigherinflation. ECBPresidentChristineLagardesaid,“Iseeaninflationprofilethatlookslikeahump.Andahumpeventuallydeclines.”Consequently,shesaidthatitisveryunlikelythattheECBwillraiseinterestratesanytimesoon. Also,withrespecttotheomicronvariant,Lagardesaidthatthereisuncertaintythatwillonlyberesolvedoncethescientistshavemoreinformation.Untilthathappens,shesaid,“Weneedtoveryclearlyindicatethatwestandready[toact]inbothdirections.”Thatis,ifomicroncausestheeconomytoslowsubstantially,theECBmightneedtoextendmonetarystimulus.Or,ifomicronseriousdisruptssupplychains,theECBmighthavetotightenmonetarypolicy.UnlikeintheUnitedStates,currentEurozoneinflationismostlyaboutenergyprices.CoreinflationintheEurozoneremainsquitelow.Lagardesaysthat,bytheendof2022,sheexpectsenergypricestodecline“significantly.”  PossiblesolutionstoJapan’sonerousdemographics Lastyear,Japan’sworkingagepopulationwas13.9%smallerthanatthepeakin1995.Itisnowonderthattheeconomyhasgrownslowly.Infact,theworkingagepopulationisnowsmallerthanin1975.Thanks,inpart,togovernmenteffortstoencouragefemalelaborforceparticipation,thelaborforcehasbeenincreasinginthelastdecadeasmorewomenareworking.Inaddition,morepeopleareretiringlaterandremaininginthelaborforceatanolderage.Thesetrends,alongwithanincreaseinimmigration,havehelpedtooffsettheimpactofadecliningworkingagepopulation. Theotherwaytooffsettheimpactistoboostproductivity.Inthepastdecade,productivitydidgrowatahealthypace.Thisreflectedmoreinvestmentinlabor-savingandlabor-augmentingtechnologies,offshoringoflowerproductivitytasks,andmoreefficientusageofexistingworkers.Still,despitetheincrease,thelevelofproductivity(outputperhourworked)remainslowerinJapanthaninmostdevelopedeconomies.Inotherwords,thereisconsiderableroomforimprovement.Industriesthatareexposedtoglobalcompetition,suchasautomobilesandelectronics,tendtobeveryproductive.Butmanydomesticindustriesarenot,oftenrestrainedbyanti-competitiveregulations.FormerPrimeMinisterAbesoughttolightenregulationsaspartofhis“Abenomics”program,butprogresswasslow.AbehadlikelyhopedthatJapan’sentryintotheTrans-PacificPartnership—byexposingmoreofJapan’seconomytoglobalcompetition—wouldspurpoliticalsupportforderegulationandimprovementsinefficiency.Butthishopefadedwhen,in2017,theUnitedStateswithdrewfromtheagreement. Topicsinthisarticle Leadership, Privatecompany, Economics, AsiaPacific(APAC), EuropeMiddleEastAfrica(EMEA)Economics, EuropeMiddleEastAfrica(EMEA), BoardofDirectors, Weeklyglobaleconomicupdate, Strategy, AmericasEconomics, AsiaPacific(APAC)Economics DeloitteGlobalEconomistNetwork TheDeloitteGlobalEconomistNetworkisadiversegroupofeconomiststhatproducerelevant,interestingandthought-provokingcontentforexternalandinternalaudiences.TheNetwork’sindustryandeconomicsexpertiseallowsustobringsophisticatedanalysistocomplexindustry-basedquestions.Publicationsrangefromin-depthreportsandthoughtleadershipexaminingcriticalissuestoexecutivebriefsaimedatkeepingDeloitte’stopmanagementandpartnersabreastoftopicalissues. 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