This week we got more evidence that the gloss might be coming off the economic recovery from the coronavirus. Following on from disappointing growth figures last week, this week there were reports of sharply slowing retail sales and a plunge in consumer confidence. This is perhaps unsurprising when the price of daily essentials is increasing and household budgets are under pressure. This should be very worrying for both the Bank of England and the government, as consumer spending was expected to be the main driver of economic growth this year.
Elsewhere there are more signs that the continued fight against Covid in China is causing serious disruption. While last week there were numerous reports of a record number of cargo ships queuing up outside Chinese ports, this week there has been research suggesting lorries unable to enter cities and make their deliveries are dumping food and supplies on the sides of highways. While it will take a couple of months for the full effect of Chinese lockdowns to impact global economies, the disruption could be severe.
GLOBAL: OUTLOOK FOR GROWTH FADES AS HEADWINDS INCREASE
The World Bank and International Monetary Fund cut their estimates for global growth in 2022 as Russia’s invasion of Ukraine and China’s Covid lockdowns add further strains to supply chains and increase concerns about inflation. The World Bank reduced its forecast to 3.2% from 4.1% while the IMF cut its forecast to 3.6% from 4.4%. The IMF expects UK growth to fall to 1.2% in 2023, the lowest among G7 nations.
On Thursday, central bankers addressed these concerns at an IMF panel where US Fed Chairman Jerome Powell indicated the Fed is preparing to raise interest rates by half a percentage point to tackle high levels of inflation. BoE governor Andrew Bailey and ECB president Christine Lagarde took a more moderate view as they expressed greater concerns about the risks of an economic recession if interest rates are raised too quickly. Lagarde said the ECB’s more cautious approach is due to Europe facing increasing risks to growth and that price pressures largely stem from supply-related constraints.
UK: CONSUMERS FEEL THE EFFECT OF RISING COSTS
UK consumer spending slowed sharply in March as retail sales volumes fell by 1.5% and continued the decline seen in February. Online sales have seen the biggest drop as they fell 7.9% in March but many physical retailers also reported a drop in sales. Food sales have also continued to decline. Consumer confidence has also fallen steeply. The monthly GFK Consumer Confidence Index fell to -38, close to a record low and matching the level last seen in the global financial crisis in 2008, driven by concerns about personal finances and a pessimistic outlook for the economy.
The UK’s Purchasing Managers’ Index still indicates business expansion as recovering from Covid continues, but the index has been dropping this year as services activity slows down. The decline in retail activity contributed to sterling’s decline against the dollar and euro as faltering consumer spending raises doubts about whether the Bank of England will continue to raise interest rates as aggressively as expected.
EQUITIES: NETFLIX HITS THE BUFFERS AS SUBSCRIBERS FALL
Shares in Netflix tumbled this week as the streaming platform revealed subscriber numbers fell in the first quarter of this year. The service lost 200,000 subscribers and warned that it could lose up to 2 million in the second quarter as the rising cost of living and fierce competition make it harder to keep existing customers and attract new ones. The end of a decade of rapid growth, supercharged by Covid restrictions, saw its shares fall 38% on Wednesday as it proposed a cut-price advertising-backed service to attract new customers. Its shares are down 68% since their peak in November.
US tech stocks have had mixed fortunes in recent months. The tech-focused Nasdaq index has lagged the broader S&P 500 over the last 12 months as stocks like Netflix and Zoom have struggled to hold on to pandemic-era growth. Even established tech giants like Amazon have seen their share prices lag, although stocks like Apple and Tesla appear able to use their pricing power to protect profits even as supply chain disruption pushes up costs.