Investment Institute
Viewpoint Chief Economist

It's starting

  • 27 June 2022 (7 min read)

Key Points

  • Cracks appearing in the resilience of the economy – precisely when central banks were getting impatient
  • We revisit our macro scenarios at mid-year.

The economy’s impressive resilience so far across the Atlantic has been a key ingredient in the central banks’ willingness to toughen up their stance to fight the inflation spike. If the usual “self-stabilizing forces” – e.g., a deceleration in consumption brought about by rising prices – do not show up, then the Fed and the ECB feel even more the need to bring forward their rate hikes. However, it is precisely at the moment this new resolve is communicated that signs of deceleration are appearing. The lower-than-expected PMI readings for June in both the US and the Euro area, together with a less concerning second estimate of US consumers’ inflation forecasts in the Michigan survey for June have triggered a – rare – downward revision in the market’s expectations for the Fed Funds trajectory. Besides, with no further Covid flare-up in China for now, the global economy may avoid another source of supply-side inflationary pressure through the price of manufactured goods. Finally, oil prices have moderated.

Key releases are coming out this week to gauge the speed of the correction in growth, but as we revisit at mid-year our forecasts, a painful but manageable landing is our baseline. We expect lower GDP growth in the US and the Euro area than the two central banks, but it’s precisely the reason why we think they won’t tighten as much as what they are communicating, which may offer some relief to the markets by the turn of the year. Still, we need to keep an eye on an alternative “persistent inflation” scenario which would force more monetary policy action. We don’t think it could take the same form across the Atlantic. In the US, inflation may be difficult to tame because wage growth remains too strong. The inflation drift would then come mainly from “core”, which would make the Fed’s job simple, albeit painful. In Europe, another exogenous shock such as a further sharp rise in gas prices – which have already moved up last week in reaction to Russia’s move on supply – is a more natural candidate. The ECB would probably continue hiking moderately to anchor inflation expectations, but we would expect some tension between governments and the central bank, while the probability to be forced to deploy an “anti-fragmentation” tool would be high – although the governments’ capacity to deliver on even light conditionality would be lower.

Download the Insight
Download report (512.21 KB)

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Viewpoint Chief Economist

Beware of Contagion

  • by Gilles Moëc
  • 26 September 2022 (5 min read)
Viewpoint Chief Economist

QT on the European Radar

  • by Gilles Moëc
  • 12 September 2022 (5 min read)
Viewpoint Chief Economist

Policy Mixology: Finding the Right Dosage

  • by Gilles Moëc
  • 05 September 2022 (5 min read)

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.