How fast is the eurozone recovering from the impact of high gas prices?
The recovery of the eurozone economy from last year’s energy price shock is expected to be confirmed this week with the release of gross domestic product figures showing a return to positive growth in the first quarter.
A continued decline in energy prices — natural gas futures are down 45 per cent since the end of December — has given a boost to economic activity as worries about potential fuel shortages and a recession have receded.
Economists polled by Reuters expect first-quarter GDP in the single currency bloc to rise 0.2 per cent from the previous quarter and 1.3 per cent from a year ago. That compares with zero growth in the fourth quarter.
Reinhard Cluse, an economist at Swiss bank UBS, said: “The incoming hard data — in particular industrial production and construction — have clearly reinforced upside risk for the first quarter”.
Eurozone industrial production rose 1 per cent month-on-month in January and 1.5 per cent in February as an easing of supply bottlenecks lifted factory output, particularly at carmakers. Construction also rebounded with growth of 3.8 per cent in January and 2.3 per cent in February. One weak spot is retail spending, which fell 0.8 per cent in February, wiping out January’s gain.
But trade provided “a significant boost” to eurozone GDP this year, according to Melanie Debono, an economist at research group Pantheon Macroeconomics. Exports were helped by China’s lifting of zero-Covid policies, while imports fell due to lower energy prices. The bloc’s trade deficit fell from over €13bn in December to almost zero in February. Martin Arnold
Will US growth have slowed in the first quarter?
The US economy is expected to have expanded in the first quarter but at a slower pace than the fourth quarter of last year, as the Federal Reserve’s aggressive campaign to tighten monetary policy takes its toll.
Economists polled by Reuters have forecast that gross domestic product will have increased 2 per cent in the first quarter of 2023, down from an increase of 2.6 per cent in the fourth quarter. Citi analysts argue that rising home sales will have bolstered the headline number for the first time since the end of 2021.
The slower growth comes as interest rates stand at their highest level in 15 years — in a range of 4.75-5 per cent. Higher interest rates crimp lending to businesses and individuals, slowing the economy along the way.
The first quarter also contained the banking turmoil following the collapse of two regional US lenders, SVB and Signature Bank. Though that is expected to have curtailed lending, particularly in commercial real estate, those effects may not be evident in first quarter data.
The Fed continues to argue that a “soft landing” of the economy is possible, and so it could lower inflation back to its 2 per cent target without pushing the country into recession. Market participants are less convinced and are pricing in interest rate cuts as soon as the end of this year, implying a recession to come in the second half. Kate Duguid
Will the BoJ ease yield curve control?
Markets are preparing for Kazuo Ueda’s inaugural policy meeting as governor of the Bank of Japan, at a time when multi-decade high inflation is making the BoJ’s ultra loose monetary stance harder to maintain.
Investors had been speculating for weeks that the arrival of the 71-year-old academic, who took the helm on April 10, could spark the scrapping of the BoJ’s yield curve control, a policy which has been in place since 2016 to hold rates on the benchmark 10-year JGB at or around zero.
Analysts at Japanese bank Nomura think the BoJ will wait until June before it starts to curb yield curve control. Japanese inflation excluding volatile food and energy prices hit 3.8 per cent in March — its highest level since 1981 — but wage growth has been more subdued.
“It is unlikely that the Bank of Japan will change policy next week because it’s been saying it needs wage inflation to end yield curve control,” said Jordan Rochester, a foreign exchange strategist at Nomura.
In his first press conference Ueda said it was “appropriate to maintain the yield curve control for now” because of the current economic, price and financial conditions.”
Instead, Ueda could use the meeting on Thursday and Friday to change the BoJ’s forward guidance for monetary policy away from the impact of the Covid-19 pandemic towards the outlook for inflation, which could sow the seeds for tighter policy.
But traders do not rule out the possibility of the world’s third-largest economy taking the market by surprise next week, as it did in December when the target range for yield curve control was doubled to plus or minus 0.5 per cent. Mary McDougall
Source: Economy - ft.com
