Global Weekly Economic Update | Deloitte Insights

In discussing the potential global economic impact of the Russian ... jobs were added in February, the highest number since July 2021. Article 08March2022 Weeklyglobaleconomicupdate What’shappeningthisweekineconomics?Deloitte’steamofeconomistsexaminesnewsandtrendsfromaroundtheworld. 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. 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Sharebyemail ✓Linkcopiedtoclipboard WeekofMarch7,2022 Russianroublecollapsesandfinancialsystemseizesup Theglobaleconomicimpact—sofar USmonetarypolicyandthecrisis AveryfavorableUSemploymentreportisignoredbyinvestors Learnmore Viewpreviousupdates VisittheDeloitteInsightseconomicscollection Russianroublecollapsesandfinancialsystemseizesup FollowingthedecisionbyWesternpowerstosanctiontheCentralBankofRussia(CBR),theRussianroublefellprecipitously.Inresponse,theCBRincreaseditsbenchmarkinterestratefrom9.5%to20%.CBRgovernorElviraNabiullinasaidthat“thecentralbanktodayincreaseditskeyrateto20%asnewsanctionstriggeredasignificantdeviationoftheroublerateandlimitedthecentralbank’soptionstouseitsgoldandforeignexchangereserves.Wehadtoincreaseratestocompensatecitizensforincreasedinflationaryrisks.”  Inaddition,theCBRsuspendedequitiestradingontheMoscowExchangeafterequitieshadalreadyfallensharply.TheRussiangovernmentimposedcapitalcontrols,meaningthatRussiansmaynotsendmoneyabroadandcannotserviceforeigncurrencydebts.Also,thegovernmentorderedRussianexporterstosell80%oftheforeigncurrencytheyhaveearnedthisyeartohelpsupporttherouble.Thiscouldhelptooffsettheshortageofforeigncurrencydrivenbythesanctioningofthecentralbank.S&PGlobalcutRussiansovereigndebttojunkstatus.   Asforthefinancialsanctions,therestrictionsplacedontheCBRarethemostimpactful—atleastintheshortrun.USTreasurysecretaryYellensaidthat“theunprecedentedactionwearetakingtodaywillsignificantlylimitRussia’sabilitytouseassetstofinanceitsdestabilizingactivitiesandtargetthefundsPutinandhisinnercircledependontoenablehisinvasionofUkraine.”Priortothesesanctions,therewasawidespreadviewthattheCBR’smassiveUS$630billionpoolofreserveswouldprotectRussia’seconomyfromothersanctionsandenableittofundthewaraswellascompensateforanylossofexportrevenue.ThisisnowindoubtgiventhatRussiawilllackaccesstoasizableshareofitsreserves.Moreover,theactofsanctioningtheCBRledRussianstoattempttoliquidatebankdeposits,therebyputtingtheentirebankingsystemunderstress,especiallyastheWesthasalsosanctionedseveralmajorRussianbanksandbannedthemfromtheSwiftfinancialmessagingsystem.Ontheotherhand,thesanctionsincludea“carve-out”thatenablesenergy-relatedtransactionswiththeCBR.ThisismeanttoavoidsharpswingsinenergypricesandallowoilandgastokeepflowingfromRussiatotherestoftheworld.   Theglobaleconomicimpact—sofar Globalinvestorfearsarerisingasevidencedbythesharpdeclineinbondyieldssincethewarbegan.TheyieldontheUSgovernment’s10-yearbondfellsharply.TheGermangovernment’s10-yearbondyieldfellbackintonegativeterritory.TherewerealsolargereductionsinbondyieldsforothercountriesincludingtheUnitedKingdom,France,Italy,andJapan.Intimesofuncertaintyandfear,investorsoftenseekthesafehavenofnonriskyassetssuchasbondsissuedbystablegovernmentsthathavestrongcentralbanksbehindthem.  Meanwhile,evenasbondyieldshavefallensharply,theinflationexpectationscomponentofbondyields(thebreakevenrate)hasrisenasinvestorsfearthatdisruptionofglobalenergymarketswillexacerbateandprolonginflation.Thus,real(inflation-adjusted)yieldshavefallenespeciallysharply.  Severalshippingcompanies,includingtheworld’stwolargest(MaerskandMSC),arehaltingallcargobookingstoandfromRussia,withshipmentsoffoodandmedicineexempted.TheshippingcompaniesareconcernedthattheymightrunafoulofsanctionsimposedbyWesterngovernments.ThiscomesinadditiontoaUKdecisiontobanallRussianshipsfromBritishports.Inaddition,EuropeanandRussianaircraftarebannedfromeachother’sairspaceasareUSandRussianaircraftandJapaneseandRussianaircraft.TheresultisthatplanestravelingbetweenEuropeandAsiamusttakelongerandmoreexpensiveroutes.Japan’stwobiggestairlineshaltedallflightsfromJapantoEurope.Notonlyisthisdisruptivetopassengertravel,italsoincreasesthecostandreducestheefficiencyoftransportinghigh-valuemerchandiseintheunderbellyofpassengerplanes.Plus,Russiancargoaircraftwillbedisrupted,likelyreducingglobalcapacity.  Thepriceofoilsoaredsincethewarbegan.TherehavebeennoWesternsanctionsontheRussianenergysector.However,privatesectorplayersmadedecisionsthatledtoasignificantreductioninRussianoilshipments,therebycontributingtotheriseinoilprices.Specifically,itwasreportedthatrefineries,banks,andshippingcompaniesarereluctanttoparticipateintheRussianoilmarketforfearofrunningafoulofsanctionsonRussianbanks.Thus,marketparticipantsareessentiallyengaginginself-sanctioning.  Inaddition,itisreportedthatsomeshippersareavoidingtransportingoilfromportsintheBlackSeaorBalticSeabecausetheycannotobtainorwillnotpayforinsuranceagainstwar-relateddamages.Infact,severalcommercialshipshavebeendamagedfromthewar.Thecostofshippingandthecostofinsurancehaverisensharply,changingthecalculusforthoseactiveinthemarket.Theresulthasbeenasharpdeclineinactivityinthemarketandacommensurateriseinprices.Russia’sabilitytowithstandsanctionsrests,inpart,onthecontinuingsaleofoilandtheresultingforeigncurrencyrevenue.  Russiaisthethirdlargestoilproducerintheworldand,untilrecently,wasexportingroughly5millionbarrelsperdayofcrudeaswellas2.7millionbarrelsofrefinedproducts.Asignificantdisruption,ifsustained,wouldchangethetrajectoryofoilpricesunlessOPECchoosestoboostproduction.Sofarthishasnothappened.  WhiletherehasbeenspeculationthatoilpriceswillrisehigherasoilshipmentsfromRussiaarefurtherdisrupted,thereisaplausiblescenarioinwhich,overthecomingmonths,oilpricesreverttowheretheywereorgoevenlower.Thisscenarioisbasedontheassumptionthathigherpriceswillgenerateincreasedproduction.Thatis,OPECmemberscouldchoosetoproducemorethantheirquotas.Thishashappenedinthepast.TherewilllikelybemoreinvestmentincapacitybyshaleproducersintheUnitedStates(althoughtheshaleindustrycurrentlyfacesshortagesoflaborandkeysupplies).Moreover,ifglobaldemanddeceleratesslightlyasaresultofthewar,thentheneteffectcouldbetosuppressprices.Infact,arecentstudybythePetersonInstitutefindsthat,whenpetrostatesgotowar,thereisaninitialincreaseinoilprices,butitisusuallynotsustainedoveralongerperiodoftime.   Meanwhile,gasshipmentsthroughpipelineshavenotyetbeendisrupted.GasisanespeciallyimportantsourceofrevenuefortheRussianeconomyandgovernment.Despitealackofdisruption,thepriceofgassoldinEuropehasincreasedsharply,reflectingfearsofimminentdisruption,eitherbecauseofsanctions,counter-sanctions,orthewaritself.WithRussiasupplyingabout40%ofEUgas,theriseinpriceandtheriskofdisruptionarecreatingseriousconcerns.Germany’seconomyministersaidthatGermanymustbepreparedtoutilizecoal-firedpowerplants.Notably,theglobalpriceofcoalhassoared.  SomewesterncompaniesthatsellgoodsandservicesinRussiaareexiting.SomeWesterngoodswilllikelybereplacedbygoodsfromChinaorbydomesticproducers.Insomeinstances,therewilllikelybeshortagesofconsumergoods,andcertaintymuchhigher-pricedgoods.ForRussianconsumers,therewilllikelybeasizablelossofpurchasingpowerandchoice.   IndiscussingthepotentialglobaleconomicimpactoftheRussianinvasionofUkraine,someanalystsareharkingbacktowhathappenedin1973–74.Yet,isthisavalidcomparison?Atthattime,followingthestartoftheArab-IsraeliWar,OPECinitiatedanoilembargotopunishtheUnitedStatesforitsmilitarysupportforIsrael.Thepriceofoilquadrupled,inflationrosesharplyintheWest,centralbanksraisedinterestrates,andasignificantglobalrecessionensued.Moreover,pricecontrolsinsomecountriesmeantthatretailpricesofenergydidnotfullyadjust,therebycausingasignificantshortage.TheUnitedStateswitnessedlonglinesatgasolinestations.  Asofthiswriting,thepriceofoilisuproughly25%fromjustpriortotheinvasion.Moreover,thereal(inflation-adjusted)priceofoilremainslowerthanadecadeago.Oilshipmentshavenotbeenembargoed,buttherehasbeenasizabledeclineinshipmentsofRussianoilastradersavoidinteractingwiththeirRussiansuppliers.Yetshipmentsfromtherestoftheworldcontinue.Thus,evenacompletecollapseofRussianshipmentswillnotlikelyleadtothekindofcatastrophiceventseennearlyahalfcenturyago.Moreover,followingthe1970s’crisis,businesses,households,andgovernmentsbecamemuchmoreefficientintheiruseofenergy,compelledtodosobyhigherprices.  Today,theworldusesfarlessoilperdollarofrealGDPthaninthe1970s.Plus,weuseamorediverserangeofenergysources,andsowearenotasreliantonoil.Thus,theeconomicimpactofagivenriseinthepriceofoilisfarlesstodaythaninthe1970s.ThisisespeciallytruefortheUnitedStateswhereoilconsumptionisroughlyequaltooilproduction.Thus,anincreasedpriceofoilintheUnitedStatesiseconomicallyneutral,althoughtheimpactisnegativeforconsumerswhilepositiveforenergyproducers.  Thewarhasledtoaverysharpincreaseinthepricesofmanynonenergycommodities,especiallyfood.UkrainewasalwaysseenasthebreadbasketoftheoldSovietUnionandisamajorexporterofwheatandcorn.Moreover,UkraineandRussiatogetheraccountfor30%oftheworld’stradedwheat.Itisreportedthattradeinwheathaslargelystopped,inpartduetotraderfearsofrunningafoulofsanctions.Thereisfearthatthewarwillcauseasustaineddisruptionoftradeinagriculturalproducts.Forlower-incomecountries,thiscouldbedevastatingandcouldseriouslyexacerbatehunger.Also,RussiaandBelarusaremajorexportersoffertilizerthatisusedforproductionofmultiplecrops.Thepricesofpotashandphosphatehaverisensharply.Thus,theglobalagriculturalsectorcouldbesignificantlyaffectedbythiswar.Meanwhile,pricesofneonandpalladiumrosesharply.RussiaandUkraineaccountforalargeshareofglobalproductionofthesecommoditiesthatareheavilyusedbytheinformationtechnologyandautomotivesectors.  RecentfavorableEuropeandataonretailsales,unemployment,andactivityinservicesandmanufacturingcouldbethecalmbeforethestorm.Formuchofthepastyear,commentaryonEurope’seconomycenteredontheriskfromnewoutbreaksofthevirus.Thatriskremainsbutappearstobelessonthemindsofpunditsandpolicymakers.Europemighthaveachievedacertaindegreeofherdimmunity,thusrenderingfutureoutbreakslessimpactful.Rather,themainrisknowcentersaroundthewarinUkraine.AlreadytheEuropeanpriceofnaturalgashasrisenabouteightfoldfromayearearlier.Inaddition,oilpricesareupsharply.Thesefactsalonethreatentounderminerecoveryandexacerbateinflation,thusplacingtheEuropeanCentralBank(ECB)andtheBankofEngland(EoB)inadifficultposition.If,goingforward,thereisfurtherdisruptionoftradeinenergy,especiallynaturalgas,Europecouldfaceasignificantdecelerationingrowth.Afterall,Russiaaccountsfor40%ofEUgasimports,25%ofoilimports,and47%ofimportedsolidfuels.IfthereweretobeacompleteshutdownofRussiangas,therewouldlikelybebottlenecksinseveralEuropeancountries,stemmingfromdifficultiesindistributingalternativesourcesofenergy.  USmonetarypolicyandthecrisis Whatdorecenteventsimplyforthenear-termdirectionofmonetarypolicy?FuturesmarketsindicatethatmanyinvestorsnowexpectaslightmoderationinthepaceofmonetarypolicytighteningbytheFederalReserve,theBoE,andtheECB.Thatis,investorsstillexpectthetrajectoryofbenchmarkinterestratestobeup,butataslightlyslowerplace.Evidently,investorsthinkthatthecrisiswillhaveanegativeimpactoneconomicgrowthintheWest,therebyimplyinglessinflationarypressure.Ontheotherhand,higherenergypricesandmoredisruptiontosupplychainswouldimplyhigherinflation.Thus,forcentralbanks,itwillbeachallengingbalancingact.  FederalReservechairJeromePowellspokelastweekaboutmonetarypolicyinthewakeofthewar.Investorswereeagertolearnifthewarwouldchangethetrajectoryofmonetarypolicy.Powell,however,suggestedthatnotmuchhaschanged—atleastnotyet.WithrespecttothewidelyheldexpectationthattheFedwillstartraisinginterestratesthismonth,Powellsaidthat“I’minclinedtoproposeandsupporta25basispointratehike.Thebottomlineisthatwewillproceed,butwewillproceedcarefullyaswelearnmoreabouttheimplicationsoftheUkrainewarfortheeconomy.”Headdedthat“totheextentinflationcomesinhigherorismorepersistent, thenwewouldbepreparedtomovemoreaggressivelybyraisingthefederalfundsratebymorethan25basispoints.”Thus,heleftadegreeofuncertaintyastowhethertherewillbea50basispointhikeassomepunditshavepredicted.  Powellsaidthatinflationistoohighandthat,unlikepreviously,itisnotjustaproblemofgoodsprices.HesaidthatservicepriceinflationistoohighandthattheFediscommittedtobringingitdowntoasatisfactorylevel.Healsosaidthatheisnotworriedabouttheimplicationsofmultipleratehikesforeconomicgrowth,sayingthatasoftlandingremainspossible.Still,heleftopenthepossibilitythatmonetarypolicycouldcurtailtherateofeconomicgrowth.Finally,withrespecttothewarinUkraine,hesaidthattheFedwillneedtobe“nimble,”recognizingthattheeconomicimpactofthewarwillunfoldinwaysthatcannotbepredicted.  GiventheevidentshiftbyPowelltowardamoreaggressivetighteningofmonetarypolicy,giventhecontractionoffiscalpolicyasthegovernmentborrowsmuchlessthisyear,andgiventhescopefordisruptionfromthewar,thepreponderanceofrisktotheUSeconomyappearstobeonthenegativeside. AveryfavorableUSemploymentreportisignoredbyinvestors TheUSgovernmentreleasedastellaremploymentreportforFebruary.Everythingwentright.Jobgrowthwasstrong,participationinthelabormarketincreased,andtheunemploymentratecamedown.Moreover,wageinflationdecelerated.Onecouldn’taskforabetterreport.However,investorsmostlyignoredthereportastheywerefarmorefocusedoneventsinUkraine.Normally,anemploymentreportlikethisonewouldhaveledtoanincreaseinbondyields.Instead,theRussianattackonEurope’slargestnuclearpowerplantunnervedinvestorsandothers,andbondyieldsfellsharplyinaclearflighttosafety.Equitypricesfellandoilpricessurged.Herearesomedetailsabouttheemploymentreports: TheUSgovernmentreleasestworeports:onebasedonasurveyofestablishments;theotherbasedonasurveyofhouseholds.Theestablishmentsurveyfoundthat678,000jobswereaddedinFebruary,thehighestnumbersinceJuly2021.Thisleftemployment2.1millionbelowtheprepandemiclevelfromexactlytwoyearsagoinFebruary2020,or1.4%belowtheprepandemicpeak.  Therewasstronggrowthinmanysectors.Constructionemploymentwasup60,000,includinga24,300increaseforresidentialcontractors.Manufacturingwasup36,000,despitean18,000declineintheautomotivesector.Retailwasup36,900asconsumersreturnedtostoreswhileomicronfaded.Therewasanespeciallylargeincreaseof12,100forbuildingmaterialsstores,whichservedtheneedsofallthosenewlyemployedcontractors.Transportationandwarehousingwereup47,600aspeoplestartedtomoveaboutagain.Thefinancialservicesindustrywasupastunning35,000,withalmosthalfthatincreaseduetotherealestateindustry.Ourownprofessionalservicesindustrywasup95,000.Theeducation/healthsectorwasup112,000.Finally,theleisureandhospitalitysector,whichhadaccountedforthelion’sshareofjobgrowthinrecentmonths,grewstronglybutwasresponsibleforasmallershareofthetotal.Theindustryproduced179,000newjobsincluding123,700forrestaurantsandbarsand27,500forhotels.  Theestablishmentsurveyalsoincludesdataonaveragehourlywagesbyindustry.Notably,theaveragehourlywageforprivatesectorworkerswasunchangedfromJanuarytoFebruaryandup5.1%fromayearearlier.Thiswasdownfrom5.5%inJanuaryandroughlysimilartogrowthsinceOctober.Inotherwords,wageinflationappearstohavestabilizedratherthanacceleratedinthepastfourmonths.Thissuggeststhattheshortageoflabormightbeabatingduetoanincreaseinparticipationandanincreaseinemployment.Wagesinmanufacturingwereupamodest4.2%fromayearearlier.Professionalservicewageswereup7.1%.Inleisureandhospitality,wagescontinuedtosoar,rising13.6%fromayearearlier—althoughthiswasmuchlessthaninthepreviousmonthwhenwageswereupmorethan18%.  Theseparatesurveyofhouseholds,whichalsoincludesself-employment,foundthattheworking-agepopulationrose122,000inFebruary,participationinthelabormarketrose304,000,andemploymentrose548,000.Theresultwasthattheparticipationrateincreasedfrom62.2%inJanuaryto62.3%inFebruary.Theunemploymentratefellfrom4%inJanuaryto3.8%inFebruary.Thislevelisgenerallyseenasfullemployment.Thesharpriseinemployment,therefore,reflectstheentryofnewpeopleintotheworkforce.Evidently,manypeoplewhodroppedoutduringthepandemicarecomingback,increasinglyconfidentthatthevirusisreceding.Thisishelpingtodampenwageincreasesand,therefore,avertawage-pricespiralthatwouldexacerbatealready-highinflation. WeekofFeb28,2022 TheWestimposesnewsanctionsonRussia ThelatestonUSconsumerbehavior Europe’seconomyreboundsinFebruary Emergingmarketsandthedifficultiestheyface TheWestimposesnewsanctionsonRussia ItisdifficulttowriteaboutthewarinUkrainewithoutthetextquicklybecomingobsolete.Lastweek,firstafterRussiaplacedtroopsineasternprovincesofUkraine,andthenafterRussiainvadedUkraine,WesterncountriesannouncedaseriesofsanctionsonRussia.Initially,theUnitedStates,theUnitedKingdom,theEuropeanUnion,andCanadaimposedsuchsanctionsasbanningsecondarytradeinRussiangovernmentbonds,banninginteractionwithkeyRussianbanks,banningexportsofcriticaltechnologytoRussia,andfreezingtheassetsandbanningtravelforeliteRussians.Inaddition,GermanyhaltedtheNordStream2gaspipeline. Russia’sdefenseagainstsanctionswastherevenueitcontinuestoobtainthroughthesaleofoil,gas,andothercommodities;andmassiveforeigncurrencyreservesworthUS$630billionheldbyitscentralbank.  Givenuncertaintyastohowthewarwouldunfoldandwhatcounter-sanctionsRussiamightinitiate,financialmarketsreactedharshlytotheinvasion.Globalequitypricesfellsharply,especiallypricesonEuropeanexchanges.Bondyieldsfell,safecurrencies(suchastheUSdollarandJapaneseyen)roseinvalue,andthepricesofoilandnaturalgasincreased.ThepricesofothercommoditiesthatRussiaandUkraineexportincreasedaswell,includingwheatandcorn.Moreover,theRussianrubleandRussianequitiesfellsharply. Then,overtheweekend,theWesternpowersimposedmoreseveresanctions.Specifically,theysanctionedtheCentralBankofRussia(CBR),therebymakingitfarmoredifficultforRussia’scentralbanktoobtainaccesstomuchofitsforeignreserves.ThiswasdonebytheUnitedStates,theUnitedKingdom,Germany,France,Italy,theEuropeanCommission,andCanada.Russiaholdsasizableshareofitsforeigncurrencyreservesinothercountries.Muchofitsreservesareheldineuros,pounds,anddollars,butsomeareheldingoldandChineserenminbi.IfRussiacannotsellmuchofitsreserves,itcannotdefendagainstattacksontheruble,therebymakingtherublevulnerabletocollapse.Indeed,knowledgeofthisfactcouldgeneratearunonRussianbanks. FollowingtheweekenddecisionbyWesternpowerstosanctiontheCBR,theRussianrublefellprecipitously,droppingasmuchas40%againsttheUSdollarbeforebouncingbacktoalossofabout28%.Inresponse,theCBRincreaseditsbenchmarkinterestratefrom9.5%to20%.CBRgovernorElviraNabiullinasaidthat“thecentralbanktodayincreaseditskeyrateto20%asnewsanctionstriggeredasignificantdeviationoftherublerateandlimitedthecentralbank’soptionstouseitsgoldandforeignexchangereserves.Wehadtoincreaseratestocompensatecitizensforincreasedinflationaryrisks.”  Inaddition,theCBRsuspendedequitiestradingontheMoscowExchange.TheRussiangovernmentimposedcapitalcontrols,meaningthatRussiansmaynotsendmoneyabroadandcannotserviceforeigncurrencydebts.Also,thegovernmentorderedRussianexporterstosell80%oftheforeigncurrencytheyhaveearnedthisyearinordertohelpsupporttheruble.Thismighthelptooffsettheshortageofforeigncurrencydrivenbythesanctioningofthecentralbank.S&PGlobalcutRussiansovereigndebttojunkstatus. TherestrictionsplacedontheCBRarethemostimportant.USTreasurysecretaryYellensaidthat“theunprecedentedactionwearetakingtodaywillsignificantlylimitRussia’sabilitytouseassetstofinanceitsdestabilizingactivitiesandtargetthefundsPutinandhisinnercircledependontoenablehisinvasionofUkraine.”Priortothesesanctions,therewasawidespreadviewthattheCBR’smassivepoolofforeignreserves(US$630billion)wouldprotectRussia’seconomyfromothersanctionsandenableittofundthewaraswellascompensateforanylossofexportrevenue.ThisisnowindoubtgiventhatRussiawilllackaccesstoasizableshareofitsreserves.Moreover,theactofsanctioningtheCBRledRussianstoattempttoliquidatebankdeposits,therebyputtingtheentirebankingsystemunderstress.Ontheotherhand,thesanctionsincludea“carve-out”thatenablesenergy-relatedtransactionswiththeCBR.ThisismeanttoavoidsharpswingsinenergypricesandallowoilandgastokeepflowingfromRussiatotherestoftheworld.  TheothermajoractionthispastweekendwastolimittheabilityofseveralRussianbankstoutilizeSWIFT,afinancialmessagingsystematthecoreofinternationaltradeandcross-bordercurrencymovements.CBRgovernorNabiullinasaidthatRussiahasasystemtoreplaceSWIFTandthatallobligationsofRussianbankswillbefulfilled.  ThelatestonUSconsumerbehavior Theomicronoutbreak,whichwasespeciallysevereinJanuary,wasexpectedtohaveadampeningeffectonconsumeractivityintheUnitedStates.However,thisdoesnotappeartohavebeenthecase.Lastweek,theUSgovernmentreleaseddataonpersonalincomeandconsumerexpenditures.Itrevealsthatincomefell,largelybecauseofthewithdrawalofgovernmentstimulus,andthatspendingcontinuedtoincreaseatastrongpaceasconsumerssavedasmallershareoftheirincome.Notably,spendingonserviceswasessentiallyflataspeopleavoidedsomeformsofsocialinteraction.Yet,spendingongoods,especiallydurablegoods,increasedsharply—amajorreversalfromrecentmonths.Thus,asomicronconvincedsomepeopletoavoidrestaurantsandairplanes,manychosetospendmoreongoodsfortheirhomes.Inaddition,thelatestreportshowed,notsurprisingly,thatinflationcontinuedtoaccelerateinJanuary.ThewarinUkrainecouldexacerbatethissituation.Herearethedetails: NominalpersonalincomewasmostlyflatinJanuary,withsignificantincreasesinwagesoffsetbyasharpdeclineingovernmentsupportasthechildtaxcreditexpired.Inreal(inflation-adjusted)terms,disposableincome(aftertaxes)fell0.5%fromDecembertoJanuary.However,Americanhouseholdsreducedpersonalsavingsfrom8.2%ofdisposableincomeinDecemberto6.4%inJanuary.Theresultwasthatspendingincreasedsignificantly.Real(inflation-adjusted)spendingwasup1.5%fromDecembertoJanuary,thelargestmonthlyincreasesinceMarch2021.However,realspendingisonly4.5%higherthantheprepandemiclevelfromtwoyearsago.  Theincreaseinspendingwasdisproportionateduetothestrengthofspendingondurablegoods.Realspendingondurableswasup8.5%fromDecembertoJanuary,thebiggestincreasesinceMarch2021.Realdurablesspendingisnow24.6%abovetheprepandemiclevelofFebruary2020.Thatalonegoesalongwayinexplainingthesurgeingoodsprices.However,realspendingondurablesisnow7.3%belowthepeakreachedinMarch2021.Thissignificantdeclineinspendingondurables,ifcontinued,bodeswellforreducinginflationarypressure—especiallyifsupplychainindicatorsimprove.Thedeclinesuggeststhatpent-updemandhaslargelybeensated,thatmanyconsumersfeelcomfortablegoingoutagain,andthatasharpriseinpricesisinhibitingspendingongoods.Still,theomicronoutbreakappearstohaveinterruptedthelonger-termtrendbyboostinggoodsspendingandsuppressingspendingonservices.Indeed,realspendingonserviceswasuponly0.1%inJanuarywhilespendingonnondurablegoodswasup1.9%.  Ontheinflationfront,thegovernmentreleasedtheFederalReserve’sfavoritemeasureofinflation,namely,thepersonalconsumptionexpendituredeflator(PCE-deflator).Thedeflatorwasup0.6%fromDecembertoJanuary,roughlythesameasinthepastfourmonths.Thedeflatorwasup6.1%fromayearearlier,thehighestsinceFebruary1982.Notably,pricesofdurablegoodswereup11.6%,nondurablesup7.2%,andservicesup4.6%.Thispatternisconsistentwiththeviewthatinflationhasbeenlargelydrivenbythesurgeindemandforgoodscombinedwithsupplychainconstraintsrelatedtothepandemic.  Goingforward,thewarinUkrainehasthepotentialtoexacerbateinflationarypressurebyboostingenergypricesanddisruptingsupplychainsforenergy,food,andcriticalminerals.Inaddition,theFederalReserveisespeciallyworriedthatexpectationsofsustainedinflationwilldriveawage-pricespiral.ThatisonereasontheFedisimplementingatighteningofmonetarypolicy.  Europe’seconomyreboundsinFebruary ItappearsthattheEuropeaneconomyreboundedreassuringlyinFebruaryaftersufferingsomenegativeconsequencesfromtheomicronoutbreak.ThelatestPurchasingManagers’Indices(PMIs)showastrongresurgenceofservicesactivityasomicronabates,therebysettingthestageforstrongergrowthinthemonthstocome.ThePMIsareforward-lookingindicatorsmeanttosignalthedirectionofactivityinthebroadservicesandmanufacturingsectors.Theyarebasedonsubindicessuchasoutput,neworders,exportorders,employment,pricing,pipelines,andsentiment.Areadingabove50indicatesgrowingactivity.Therefore,thehigherthenumber,thefasterthegrowth—andviceversa.ThePMIsarecompiledbyIHSMarkit,whichjustreleasedflash(preliminary)PMIsfortheEurozoneandtheUnitedKingdom.  ThePMIforservicesintheEurozoneincreasedfrom51.1inJanuaryto55.8inFebruary,adramaticchangeandalevelindicativeofstronggrowth.Markitcommentedthat“aneasingofvirus-fightingrestrictionsledtoreneweddemandformanyconsumerservices,suchastravel,tourismandrecreation,andhelpedalleviatesupplybottlenecks.”Meanwhile,thePMIformanufacturingwasnearlyunchangedat58.4inFebruary,alevelindicatingextremelyrapidgrowth.Markitnotedthatoutputacceleratedduetoimprovedsupplyavailability.Inaddition,newordersgrewrapidly,signalingstrongunderlyingdemandandconfidence.Still,newordergrowthexceededincreasesinoutput,leadingtoasurgeinbacklogs.This,combinedwithrisingenergypricesandrisingwages,“addedtoinflationarypressures,resultinginthelargestriseinsellingpricesyetrecordedinaquarterofacenturyofsurveydatahistory.”Still,thereportsuggeststhattheEurozoneeconomyisreboundingnicelyfromtheomicroncrisis.  ThePMIsfortheUnitedKingdomalsosuggeststrength.TheservicesPMIincreasedsharplyfrom54.1inJanuaryto60.8inFebruary,alevelindicatingveryrapidgrowth.ThemanufacturingPMIremainedunchangedat57.3inFebruary,indicatingcontinuedrapidgrowth.ThesharpreboundintheservicesPMIreflectedasignificantrecoveryofconsumerspendingontravel,leisure,andentertainment.Notably,Markitsaidthat“productionvolumesinthemanufacturingsectorwerehelpedbyfewerrawmaterialshortagesandeasingglobalsupplychainpressures.”Inaddition,supplierdeliverytimesimprovedsignificantly.  DespiteimprovementsinUKsupplychains,thesurgeindemandwasoverwhelming,therebyleadingtoinflationarypressures.Markitcommentedthat“higherwages,energybillsandrawmaterialcostsallcontributedtorisingoperatingexpenses.TheoverallrateofinputcostinflationwasthesteepestsincelastNovemberandthesecondhighestsincetheindexbeganinJanuary1998.Thisresultedinanothersharpincreaseinaveragepriceschargedbyprivatesectorfirms.”   Emergingmarketsandthedifficultiestheyface  IanStewart,chiefeconomistofDeloitteNorthSouthEurope,providesananalysisofthechallengesfacedbyemergingmarkets. Onthefaceofit,emergingmarket(EM)economieshavecomethroughthepandemicingoodshape.ActivityinemergingeconomiesheldupbetterthaninEuropeandNorthAmericaandtheheadlinenumberssuggestthatthepandemichastakenalessertollthanitdidinmanyrichcountries. Scratchbeneaththesurfaceandadifferentstoryemerges.OutsideChinaandSoutheastAsia,thepandemichashitmanyEMshard.DatafromtheEconomistshowsthatofthe33nationswiththehighestexcessdeathsrates(deathsabovenormallevelsrelativetothesizeofthepopulation),30areemergingeconomies.Amonglargercountries,Russia,Mexico,Poland,Hungary,andSouthAfricarankashavingthehighestexcessdeathrates,roughlytwotothreetimesthoseseenintheUnitedKingdom.  Norhaseconomicactivityheldupaswellastheheadlinefiguressuggest.China’szero-tolerancepolicytowardthespreadofCOVID-19hashelpedsuppressthevirusandlimitdeaths,andconsequently,Chinawasoneofthefewsizeableeconomiesthatexpandedin2020.MostotherEMeconomiesshrankin2020,withcountriesthathavehigherdeathratestendingtoseethemostseveredownturns.MexicoandmanyemergingnationsinsouthandcentralAmericaandcentralandeasternEuropesawdeeprecessions. EMeconomiestendtohavemorefragilepublicfinancesandfinditharder,andmoreexpensive,toborrowoverseasthanrichernations.Socialsecuritysystemsarelessdeveloped,makingitmoredifficulttochannelhelptothosemostinneed.Emergingnationsspentataboutaquarteroftherateofrichcountriestosupporttheireconomiesin2020–21.BecausetheywereunabletosubsidizewagesandprotectjobsonthescaleseenintheWest,emergingeconomieshavesufferedhigherunemploymentrates.TheUnitedNationsreportsthattheglobal“extremepovertyrate”roseforthefirsttimeinover20yearsin2020. Theglobaleconomicrecoveryiscontinuing,butemergingnationsfacealongjourneybacktonormality.Morethantwoyearsintothepandemic,vaccinationlevelsoutsideChinaandmuchofSouthAmericalagbehindthoseintheWest.Africa’svaccinationrate,at12%,isboostedbySouthAfrica’srelativelyhighrateof29%;inmostAfricancountries,vaccinationlevelsareafractionofthe72%rateseenintheEuropeanUnion.  TheinflationthatiscurrentlywashingovertheeconomiesoftheWestisalsohittingmanyemergingeconomies.(Asiaistheexception,partlybecauselowercaserateshaveresultedinlesssevereswingsinsupplyanddemand.)FormostEMs,risingcommodityprices,globalsupplydisruptions,andhigherimportprices,triggeredbyweakercurrencies,havestokedinflation. Aftersufferingjoblossesandreducedincomeduetothepandemic,manyEMconsumersnowfacerisingpricesandafurthersqueezeonspendingpower.CentralbanksinanumberofEMeconomies,includingRussiaandBrazil,havehadtoraiseinterestratesinanefforttosupporttheircurrenciesanddampeninflationpressures. WiththeUSFederalReserveabouttostartraisingUSrates,EMeconomieswillhavelittlechoicebuttokeepraisingrates.AUShikingcycleisalsolikelytoputpressureonEMcurrencies,fuelinginflationandraisingthecostofservicingthelargeamountofEMdebt-denominatedindollars. So,it’slikelytogetharderformanyEMstoborrowoverseas.Indeed,withgovernmentdebtlevelsformostEMsupsharplysincethestartofthepandemic,debtreduction,reinforcedbythepressureofrisingrates,istheorderoftheday.ThisleavesEMswithlessscopetoboosttheireconomiesintheeventofnewCOVID-19outbreaks. ButwhataboutChina,thedominantEMnation,andtheeconomythathaspoweredglobalgrowthformuchofthelastquarterofacentury?Theglorydaysofblisteringdouble-digitChinesegrowthareathingofthepast.China’szero-toleranceCOVID-19policyandensuingmobilityrestrictionsareweighingonactivity.Furthermore,themoretransmissiblenatureofomicronposesaparticularchallengetoChina’szero-toleranceCOVID-19policyandtovaccineswhoseefficacyislowerthanthatofWesternequivalents.Long-termfactorsarealsoatwork.Ashrinkingworkforceisslowinggrowthwhileelevatedpropertypricesanddebtlevelshavecreatednewvulnerabilities.Meanwhile,thegovernment’s“commonprosperity”programdesignedtospreadthebenefitsofgrowthmorewidelyhasbroughtnewregulationsthathavewipedbillionsofdollarsoffthevalueoftechnology,education,andentertainmentfirms. Thebatonforthefastest-growingemergingcountryhaspassedfromChinatoIndia.ManyforecastersseeIndiagrowingbyapproximately9%thisyearandoutpacingChinesegrowthforeachofthenextfouryears.Yet,eveninIndiathepandemichasleftalegacyofelevatedyouthandruralunemploymentandweakenedconsumerspendingpower.LargethoughtheIndianpopulationandeconomyare,fasterIndiangrowthcannotmakeupforslowergrowthinChina,theworld’ssecondlargesteconomy. Emergingeconomiesplayedanoutsizedroleinpoweringtheworldeconomyoutofthefinancialcrisisinthepast.Between2008and2015,forexample,EMsaccountedforalmost90%ofthegrowthinnominalglobalGDP.Thepandemic,however,hasdealtEMsahardblow.Nevertheless,thegrowthinEMswillcontinuetooutpacethatindevelopedmarketeconomies,butthegapbetweengrowthrateswillbenarrowerthananytimethiscentury.TheInternationalMonetaryFundestimatesthatEMswillaccountforroughlyhalfofthegrowthinworldGDPbetween2019and2026—hugelysignificant,butfarlessthaninrecentyears. TheuniverseofnationsthatmakeupEMsislargeandvaried.So,too,arethecircumstancesofeachcountry.SomeEMeconomiessufferedlittlelastingdamagefromthepandemicandareprimedforgoodgrowth.Lookingaroundtheworld,itremainsthecasethatthefastestgrowthratesaretobefoundinEMs.Butoverall,andformostEMeconomies,thepandemicwillcastalongshadow. Acknowledgments Coverimageby:SylviaChang 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. Learnmore IraKalish ChiefGlobalEconomist,DeloitteToucheTohmatsu [email protected] Relatedcontent Exploremoreeconomicscontent Subscribe toreceivemorebusinessinsights,analysis,andperspectivesfromDeloitteInsights Subscribe Opens_in_a_new_window Weeklyglobaleconomicupdatehasbeensaved MyDeloitte × Weeklyglobaleconomicupdatehasbeenremoved Undo MyDeloitte × AnArticleTitledWeeklyglobaleconomicupdatealreadyexistsinSaveditems MyDeloitte × × Welcomeback Stillnotamember? JoinMyDeloitte Email* Invalidspecialcharactersfound Password* Keepmeloggedin Forgotpassword Tostayloggedin,changeyourfunctionalcookiesettings. OR SocialloginnotavailableonMicrosoftEdgebrowseratthistime. Linkyouraccounts YoupreviouslyjoinedMyDeloitteusingthesameemail.LoginherewithyourMyDeloittepasswordtolinkaccounts.||Deloitteusers:LoginhereonetimeonlywiththepasswordyouhavebeenusingforDbriefs/MyDeloitte. 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