Easter inflation bounce won’t end slowdown fears
A rise in headline inflation in April should have given comfort to the European Central Bank, but the pick-up was due to a rise in package holiday and airline fare prices at Easter and is set to fall back as the year progresses.
Data from the European Statistics Agency issued yesterday showed the headline inflation rate picked up to 1.7pc from 1.4pc in May and at first brush appeared to chime with some bullish economic reports that had suggested the global economy had regained its mojo.
Coming hard on the heels of news that Italy had emerged from recession in the first quarter of the year and that growth in the bloc as a whole came in at 0.4pc quarter on quarter, the impression among many economists and money managers was that the panic had been overdone.
Economists at consultancy Capital Economics forecast inflation would fall back to 1pc this year and stay there as exports, household consumption and investment remain subdued.
It may be time too to prick some of the optimism that has surrounded the world economy after blockbuster annual growth of 3.2pc in the United States for the first quarter and data from China that put growth in the same quarter at 6.4pc.
Those numbers suggested to some that fears of a slowdown were overdone and investors piled yet more money into stock markets, pushing US indices to record highs.
Federal Reserve Chairman Jerome Powell reinforced the upbeat view of the economy at the central bank’s policy meeting earlier this week when it left interest rates unchanged.
The analysis from Fed policymakers was that economic growth, a strong labour market and an eventual rise in inflation were still “the most likely outcomes” as the US expansion nears its 10-year mark, closing on an all time record.
The analysis from Fed policymakers was that economic growth, a strong labour market and an eventual rise in inflation were still “the most likely outcomes” as the US expansion nears its 10-year mark, closing on an all-time record.
That will surely please President Donald Trump, whose re-election campaign depends on a growing economy and buoyant stock market, even though his call for a one percentage point cut in interest rates was ignored by the Fed.
Governor Powell played down the Fed’s failure to raise inflation, which fell to 1.6pc in March, down from February’s 1.7pc and well below the bank’s target of 2pc.
He even described the decline in inflation as being just “transitory”, and while the Fed’s inflation record has been better than that of the European Central Bank, it has been here before and failed to spot a sharp sustained fall in inflation in September 2017 caused by falling phone contract prices.
That policy torpor may turn out to be a big misreading of the economy, according to Steve Blitz, chief US economist at TS Lombard.
“Our reading of recent economic data suggests that the time to be pre-emptive should be now. A slowdown strong enough to pull inflation lower is in the making,” he said.
The latest Institute of Supply Management (ISM) survey of manufacturers last week showed manufacturing hit a two-and-a-half-year low in April and fewer and fewer companies in the sector were seeing inflation.
“In sum, the Fed has moved to the sidelines and out of the policy spotlight. Our read of the data is that by late summer, inflation will be low enough for long enough to pull the Fed back into the game and cut rates,” Mr Blitz said. Survey data such as the ISM series and purchasing manager indexes (PMI) provide a much more up-to-date assessment of the economy than some of the big headline numbers like gross domestic product and employment.
A similar picture has emerged in Europe where the Composite PMI declined for the second month in a row, while the Services PMI – which had been performing well up to now – fell in April and a steep fall in industry confidence pulled the eurozone Economic Sentiment Indicator lower in April.
If the world economy does start slowing rapidly, the effects will be felt here thanks to our high dependence on exports. The Department of Finance has based its forecast of 3.9pc growth on an expectation of 1.2pc growth in the eurozone and 2.3pc in the US for this year.
Recent survey data here has also raised some concerns over the outlook for economic growth with the AIB Ireland Services PMI released yesterday showing that growth in the sector had slowed to a three-month low. Job growth was down and in a parallel with the United States, cost inflation fell to its slowest in over a year.
“Taken together with Wednesday’s Manufacturing PMI report, these releases point to slightly weaker expansion at the start of Q2,” said Philip O’Sullivan, chief economist for Ireland at Investec.
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