Economic Highlights

The Global Manufacturing PMI, which is aggregated from all the country data by JP Morgan, fell 0.7 points to an 18-month low of 53.0 in March. The Output, New Orders and Future Output components all decelerated (but remain in expansionary territory) and the New Export Orders series dropped below 50 into contractionary territory. Meanwhile, the Employment, Input Prices and Output Prices components all increased. Taken together, these results point to accelerating inflation and slowing economic activity. The Global Manufacturing PMI ultimately highlights that the Ukraine war and Chinese lockdowns are exacerbating already elevated inflationary pressures and are impacting on growth.

Consumer credit growth far surpassed consensus expectations of £0.8bn, rising by £1.9bn. This was disproportionately through additional borrowing on credit cards, which accounted for £1.5bn of the increase. This rise in February could be explained by households taking additional unsecured credit to maintain spending patterns, in light of the steep increase in prices. If this is the case, we might expect to see further rises in net consumer credit in the coming months, especially with the 54% rise in the Ofgem utility price stretching household budgets further. Investec Bank’s economics team’s measure of ‘excess savings’ from the pandemic fell modestly in February to £159bn, suggesting that households may also be dipping into their savings to fund the increase in prices. Another school of thought has it that such strong credit data reflects ebullient animal spirits and the release of pent-up demand as Omicron-related restrictions ease.

A shortfall in March’s payroll growth versus expectations was offset to a great degree by an upgrade to February’s number. In any case, the 431k rise in payrolls was seen as evidence of a still strong labour market, as was the reduction in the unemployment rate from 3.8% to 3.6%. We are now within a whisker of hitting the pre-pandemic unemployment rate of 3.5%. If that doesn’t constitute a return to full employment, it’s hard to know what might. The Retail, Hospitality and Leisure sectors were notable gainers as Omicron infection rates faded. Wage growth remains a crucial element of the inflation story, with concerns persisting that we might enter an upward wage/price spiral leading to a much longer period of high inflation. The signs were mixed, with those on both sides of the argument able to claim some sort of victory. Annual wage growth of 5.6% was a touch above expectations, but the monthly gain of 0.4% was below the figure of 0.5% to 0.6% seen through much of last year. Optimists suggest that tougher annual comparative data will now make it hard for wage growth to accelerate from here. We will need to see a couple more months’ data to be sure. Separately, the US ISM manufacturing index decreased by 1.5 pts to 57.1 against expectations of an increase. The composition was mixed, with employment up but production and new orders down. Production material lead times of 96 days were a day shorter than in February, but still close to all-time highs, while prices paid were higher. Not much there to suggest any great easing of margin pressures. And these numbers probably do not yet reflect the impact on supply chains of the latest lockdowns in China.

Eurozone CPI inflation surged from 5.9% year-on-year in February to a record high (during the euro era) of 7.5% in March versus an expectation of 6.7%. That headline inflation number was largely driven by a 44.7% increase in energy prices. The core CPI index which excludes energy, food, alcohol & tobacco rose by a much more muted 3.0% year-on-year (up from 2.7% previously). Other measures of domestic inflation such as wage growth and rent inflation remain modest and indicate that underlying price pressures are not as intense as elsewhere. In Germany – Europe’s largest economy – electricity, gas and fuel prices rose 39.5% year-on-year in March, reflecting the impact of the Ukraine war. Berlin’s decision to activate an emergency law that would ration gas supplies in the event Russian gas imports are cut off highlights that risks to inflation remain tilted to the upside over the near-term, but gas rationing would also reduce manufacturing output. The inflation releases highlight that the European Central Bank faces opposing forces in its conduct of monetary policy: surging inflation on the one hand; deteriorating near-term growth on the other. ECB President Christine Lagarde warned that “Europe is entering a difficult phase” and stated that “any adjustments to the key ECB interest rates … will be gradual.” Even so, the market is pricing in a total 0.5% rise in the deposit rate by the end of this year, which would take it back to exactly 0%.

The latest PMI data from China reflected the impact of increased Covid-related restrictions as well as the effects of the war in Ukraine. The headline manufacturing index fell from 50.2 to 49.5, suggesting overall contraction. The sub-components for production, new orders (both exports and imports), employment, inventories and suppliers’ delivery times were all below 50. Larger companies appear to be doing somewhat better than smaller ones. Input and output price indices were both well above 50, with some fuel and raw material indices above 70, reflecting a very difficult cost environment. Non-Manufacturing also fell into contractionary territory at 48.4 (vs 51.6), with the pinch mainly seen in sectors sensitive to Covid-19 restrictions such as transportation, hotels and catering. Hopefully, that is temporary. At least construction recovered from 57.6 to 58.1, mainly thanks to warmer weather, it seems.