Global Inflation Outlook in Q4 – Better or Worse?
As the end of the third quarter draws nearer, traders and investors are no doubt asking themselves whether the inflation outlook will be better or worse next quarter. Different pieces of the global inflation puzzle will influence developments as we head towards the end of a challenging year.
Growth and inflation rates in the UK went in the opposite direction after the economy contracted by 0.1 percent in Q2 compared to an expansion of 0.8 percent in Q1. The inflation rate hit a high of 9.4 percent in June but the labour market is holding strong and keeping stagflation at bay. It appears that consumers and businesses will continue to face tightening monetary policy in the form of higher interest rates in the fourth quarter.
The picture is different in the US, where inflation eased to 8.5 percent in July from 9.1 percent in June. Whereas the UK is on the verge of a technical recession, the US is already in recession. There’s one similarity between the UK and US labour markets, both of which performed well through the second and third quarters, all things considered. Another similarity is a hawkish central bank policy and rising interest rate environment that’s likely to prevail until the end of the year.
The EU’s economy appears to have fewer downside risks to GDP growth compared to the US and UK, but inflation hit 9.6 percent in July. The European Central Bank (ECB) is still the least hawkish of the three central banks, preferring to protect post-COVID growth and moving more slowly towards higher interest rates. Nonetheless, the ECB is likely set on its monetary tightening course in the fourth quarter and the bloc’s labour market is relatively robust, meaning the central bank may become more hawkish.
Whereas Europe, the US and the UK are well into their higher inflationary cycle, China is just beginning to experience inflation rates over the safety level of 2 percent. Inflation rose to 2.7 percent in July versus 2.5 percent in June, but the unemployment rate is relatively low at 5.5 percent. Growth is weak, having fallen from 4.8 percent in the first quarter to 0.4 percent in the second quarter. If China’s growth continues to decline amid rising inflation, it could pressure consumer spending and investment.
Looking at the big picture, it appears that inflationary headwinds will take more time to subside. Investment risk appetite is dampened during each round of interest rate hikes and takes some time to recover. In the currency markets, investor sentiment is likely to continue to be wary and centered around safe-haven trading of the USD and Yen until inflation poses less of a risk.
Last but not least, the role of geopolitics is strongly in play as the US heads towards elections and the conflict in Ukraine shows no signs of abating. Geopolitical risks add to the mixed economic outlook, meaning that investors and traders will have to stay alert to any worsening trends in the key benchmarks of inflation, growth and employment.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
