The impact of the Covid-19 pandemic appears to be loosening its grip in the United States (US) which recorded relatively strong GDP growth and rising imports in 2021, but consumer demand in China has dampened due to recent localised outbreaks and lockdowns.
The Bureau for Economic Research’s weekly report on the domestic and global economy noted that the latest economic developments in the US had exceeded expectations, showing a quarter-on-quarter (q-o-q) improvement in GDP growth of 6.9% in the fourth quarter of 2021. This led to the US Federal Reserve keeping interest rate hikes on hold last week but confirming economists’ predictions that the upward interest rate cycle will start in March.
“Over the past weeks, markets have started to price in the possibility that the first hike may come as early as March. The Fed statement broadly confirmed this expectation, stating it will ‘soon be appropriate’ to raise the policy rate,” the BER said.
“In addition, the statement emphasised that net asset purchases will also end by early March. The Fed also stated that it would consider cutting back on its balance sheet once the rate hiking cycle has started.”
The BER noted that the Federal Reserve chairperson, Jerome Powell, had “struck a more hawkish note” during the media briefing following the announcement.
“Amongst other comments, he argued that compared to the previous Fed rate hiking cycle in 2015, the US labour market had been much stronger and inflation significantly higher. Markets interpreted these comments as suggesting that the pace of rate hikes could be faster than during 2015,” the BER said.
“On the real economy, the Fed said that the impact of Omicron will affect 2022Q1 GDP negatively, but that this “should drop off rapidly” from 2022Q2. The advanced estimate of 2021Q4 US GDP showed a rapid acceleration in economic growth. Annualised growth came in at 6.9% q-o-q in 2021Q4, up from 2.3% in 2021Q3 and well above expectations,” the BER noted.
Private inventory investment, exports and consumer spending were the main positive contributors, while government spending and imports weighed on GDP. GDP rose by 5.7% year-on-year in 2021 after a 3.4% Covid-induced contraction in 2020.
“The firm GDP print adds to the likelihood of a March rate hike in the US. Trade data released earlier in the week also reflected solid domestic demand. The US merchandise trade balance widened to a record deficit of $101 billion in December as imports rose,” the BER said.
Meanwhile, data released on China at the weekend indicated that the Caixin/Markit Producer Manufacturing Index (PMI) dropped to the lowest level since February 2020 when the economy was gripped by widespread, strict lockdown restrictions.
“Contrary to market expectations for an increase, the index fell to 49.1 in January, while the official NBS manufacturing PMI declined to 50.1. Generally, demand and activity slowed, but inflationary pressure ticked up somewhat,” the BER said.
The NBS non-manufacturing PMI also declined, dragged down by weaker services activity.
“The economy is under strain from localised Covid-19 outbreaks, resulting in strict lockdowns that have weighed on activity and consumer spending. Policymakers are expected to implement further stimulus measures in coming weeks after the central bank already started cutting the interest rate,” the BER noted.
