Inflation triggers concerns over growth

9th May, 2022

Investor sentiment was undermined during April by concerns over inflation, fears relating to the war in Ukraine, and worries about the wider economic impact of Covid outbreaks in China. The International Monetary Fund (IMF) cut its forecast for global growth from 4.4% to 3.6% this year and from 3.8% to 3.6% next year.

Having expanded by 6.9% in the final quarter of 2021, the US economy posted an unexpected contraction during the first three months of 2022, shrinking at an annualised rate of 1.4%. Although consumer spending remained relatively robust, intensifying inflationary pressures are likely to put a brake on household spending. Elsewhere, the yield on the ten-year US Treasury bond rose to its highest level since November 2018, driven up the prospect of further monetary tightening.
The annualised rate of consumer price inflation in the US reached a new 40-year high during March. The consumer price index rose by 8.5%, representing its biggest annual increase since December 1981. While food prices climbed by 8.8% over the same period, energy prices soared by 32%. Meanwhile, producer prices in Germany posted an annualised increase of almost 31% during March, reflecting the impact of the war in Ukraine. Energy prices rose by 83.8% year on year, while natural gas prices skyrocketed by 144.8%. The Dow Jones Industrial Average Index fell by 4.9% during April, while the Dax Index declined by 2.2%
The yen fell to its weakest level against the US dollar for 20 years as the Bank of Japan (BoJ) reiterated its commitment to maintain its interest rate at ultra-low levels. Earlier in the month, BoJ Governor Kuroda stated: “it is necessary and appropriate for the Bank to continue with monetary easing and thereby firmly support the economy”. The BoJ’s quarterly “Tankan” survey of business sentiment registered a decline in optimism amongst large manufacturers, who have become increasingly concerned about the economic impact of Covid-related lockdowns in China. Over April, the Nikkei 225 Index fell by 3.5%.
As fresh lockdown measures took effect in China, retail sales fell at an annualised rate of 3.5% in March. Although the country’s economy grew by 4.8% year on year during the first quarter, this was well below the government-set target of 5.5%. The Shanghai Composite Index dropped by 6.3% over the month.

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