Article by Chadwick Hagan

The Epoch Times

Will the European Union or certain countries in the EU ban meat production in order to meet emission regulations? In short, the answer is yes. There is a very real possibility in the near future that a member country (probably Sweden, Denmark, or the Netherlands) will impose a tax or an outright ban on meat production.

Why Sweden, Denmark, or the Netherlands? While this sounds absolutely crazy, part of the rationale is to avoid legal issues with the EU. A handful of European countries have legally binding net-zero plans for emissions and climate metrics, and the Netherlands, Sweden, and Denmark are small countries with large agricultural footprints. Small landmass with heavy agriculture industry makes for an easy target.

I wrote about such conflicting issues last month with the Netherlands closing down farms. The Dutch, like the Swedes and the Danes, are very serious about reducing emissions, as well as limiting meat consumption. The problem is they consume and produce lots of meat.

Read the full article at The Epoch Times

Predictions from Saxo Bank:

A country agrees to ban all meat production by 2030
In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.


Widespread price controls are introduced to cap official inflation
History tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.

UK holds UnBrexit referendum
Following a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.


USDJPY fixed to the USD at 200 as Japan overhauls financial system
Following the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.


Tax haven ban kills private equity
With the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.

Read more at Saxo Bank

HOW TO MAKE A MINT: THE CRYPTOGRAPHY OF ANONYMOUS ELECTRONIC CASH

Laurie Law, Susan Sabett, Jerry Solinas

National Security Agency Office of Information Security Research and Technology

Cryptology Division

18 June 1996

With the onset of the Information Age, our nation is becoming increasingly dependent upon network communications. Computer-based technology is significantly impacting our ability to access, store, and distribute information. Among the most important uses of this technology is electronic commerce: performing financial transactions via electronic information exchanged over telecommunications lines. A key requirement for electronic commerce is the development of secure and efficient electronic payment systems. The need for security is highlighted by the rise of the Internet, which promises to be a leading medium for future electronic commerce.

Electronic payment systems come in many forms including digital checks, debit cards, credit cards, and stored value cards. The usual security features for such systems are privacy (protection from eavesdropping), authenticity (provides user identification and message integrity), and nonrepudiation (prevention of later denying having performed a transaction) .

The type of electronic payment system focused on in this paper is electronic cash. As the name implies, electronic cash is an attempt to construct an electronic payment system modelled after our paper cash system. Paper cash has such features as being: portable (easily carried), recognizable (as legal tender) hence readily acceptable, transferable (without involvement of the financial network), untraceable (no record of where money is spent), anonymous (no record of who spent the money) and has the ability to make "change." The designers of electronic cash focused on preserving the features of untraceability and anonymity. Thus, electronic cash is defined to be an electronic payment system that provides, in addition to the above security features, the properties of user anonymity and payment untraceability..

In general, electronic cash schemes achieve these security goals via digital signatures. They can be considered the digital analog to a handwritten signature. Digital signatures are based on public key cryptography. In such a cryptosystem, each user has a secret key and a public key. The secret key is used to create a digital signature and the public key is needed to verify the digital signature. To tell who has signed the information (also called the message), one must be certain one knows who owns a given public key. This is the problem of key management, and its solution requires some kind of authentication infrastructure. In addition, the system must have adequate network and physical security to safeguard the secrecy of the secret keys.

This report has surveyed the academic literature for cryptographic techniques for implementing secure electronic cash systems. Several innovative payment schemes providing user anonymity and payment untraceability have been found. Although no particular payment system has been thoroughly analyzed, the cryptography itself appears to be sound and to deliver the promised anonymity.

These schemes are far less satisfactory, however, from a law enforcement point of view. In particular, the dangers of money laundering and counterfeiting are potentially far more serious than with paper cash. These problems exist in any electronic payment system, but they are made much worse by the presence of anonymity. Indeed, the widespread use of electronic cash would increase the vulnerability of the national financial system to Information Warfare attacks. We discuss measures to manage these risks; these steps, however, would have the effect of limiting the users' anonymity.

This report is organized in the following manner. Chapter 1 defines the basic concepts surrounding electronic payment systems and electronic cash. Chapter 2 provides the reader with a high level cryptographic description of electronic cash protocols in terms of basic authentication mechanisms. Chapter 3 technically describes specific implementations that have been proposed in the academic literature. In Chapter 4, the optional features of transferability and divisibility for off-line electronic cash are presented. Finally, in Chapter 5 the security issues associated with electronic cash are discussed.

To read the full transcript, click here. 

The S&P 500 jumped Thursday in one of the last trading sessions of the year but remained on track to close out its worst year since the 2008 financial crisis. broad-based stock index added 66.06 points, or 1.7%, to 3849.28The pulled backbroad-based stock index added 66.06 points, or 1.7%, to 3849.28, its largest one-day gain of the month. The technology-focused Nasdaq Composite gained 264.80 points, or 2.6%, to 10478.09. The Dow Jones Industrial Average added 345.09 points, or 1%, to 33220.80. U.S. stock benchmarks had pulled back Wednesday.The gains stretched across industries Thursday, with all 11 of the S&P 500's sectors advancing for the day. Tech stocks were among the best performers, with some recent stock-market losers outperforming the broader market.  Tesla shares, for example, shot up $9.11, or 8.1%, to $121.82. They remain down 65% for the year. Shares of Apple, Alphabet and Meta Platforms, which are headed for one of their worst years on record, also outperformed the broader market, adding at least 2.8% each. to end the yearWith just one trading session left in 2022, many investors are likely to end the year nursing heavy losses.

- Caitlin Ostroff and Gunjan Banerji from WSJ

December 27, 2022

FocusEconomics Consensus Forecast Major Economies - January 2023

Economic Outlook 

The economy will come close to stagnation next year on elevated interest rates and slowdowns abroad. Fairly stable government spending growth and strong oil exports should support activity somewhat. A prolonged housing market correction, sticky inflation, and more-aggressive-than-expected rate hikes domestically and in the U.S. are downside risks. 

After returning to sequential growth in Q3 following two consecutive quarterly contractions, the economy should have expanded at a mild pace in Q4. Consumer spending has likely been supported by easing inflation and a robust labor market, while fixed investment is seen shrinking at a softer rate than in Q3. However, government spending growth is forecast to have eased, while exports are projected to fall into contraction as external demand ebbs. Looking at available data, personal consumption expenditure rose 0.8% month on month in October, while job gains beat market expectations in October and November. 

Less positively, retail sales were weaker than expected in November, while the private-sector composite PMI fell throughout the quarter. Moreover, the real estate sector is feeling the pinch from higher interest rates, with housing starts falling for the third straight month in November. After this year’s slowdown, the economy is forecast to barely grow in 2023, as tighter monetary policy and a downturn abroad weigh on activity. That said, strong energy exports will continue to provide support. Faster-than-expected Fed tightening is the key downside risk. Potential difficulty raising the debt ceiling and heightened tensions with China also cloud the outlook. 

FocusEconomics panelists see GDP growing 0.3% in 2023, which is unchanged from the previous month’s forecast. In 2024, our panel sees the economy expanding 1.3%. Inflation came in at 7.1% in November, down from October’s 7.7% and undershooting market expectations. November’s figure marked the lowest inflation rate since December 2021. Price pressures should continue to decline going forward, aided by further interest rate hikes, a tough base effect and the gradual easing of external price pressures. 

FocusEconomics panelists see inflation averaging 4.1% in 2023, which is unchanged from last month. In 2024, our panel expects inflation to average 2.6%. At its mid-December meeting, the Fed raised the target range for the federal funds rate by 50 basis points to 4.00–4.50%, following four successive 75 basis point hikes. Our panelists see interest rates peaking at close to 5% in the middle of next year before declining by end-2023. The discrepancy among panelists is large, with an end-2023 forecast spread of 225 basis points. Our panelists project the upper bound of the federal funds target range to end 2023 at 4.68% and 2024 at 3.40%. 

The dollar index traded at 104 on 20 December, down 2.9% month on month due to lower-than-expected inflation data spurring market hopes of a more dovish Fed. However, the dollar index is still up around 8% so far this year. Looking ahead, geopolitical tensions, the health of the global economy and monetary tightening will be the key determinants of dollar strength. Composite PMI: The dollar index traded at 104 on 20 December, down 2.9% month on month due to lower-than-expected inflation data spurring market hopes of a more dovish Fed. However, the dollar index is still up around 8% so far this year. Looking ahead, geopolitical tensions, the health of the global economy and monetary tightening will be the key determinants of dollar strength.

The Fannie Mae (FNMA/OTCQB) Home Purchase Sentiment Index® (HPSI) decreased 4.1 points in October to 56.7, its eighth consecutive monthly decline and lowest reading since the inception of the index in 2011. Five of the six index components decreased month over month, including those associated with home buying and selling conditions, as persistently high home prices and unfavorable mortgage rates continue to fuel consumers’ housing affordability concerns. Only 16% of respondents indicated that now is a good time to buy a home – a new survey low – while the percentage who believe now is a good time to sell a home decreased sharply from 59% to 51% in October.

Hurry if you’re selling, halt if you’re buying, stay if you’ve borrowed, finance experts advise.

The Office for National Statistics announced on August 17th that UK inflation rose to 10.1%, from 9.4% two months earlier. The Bank of England expects it to further increase, peaking at 13.3% in October. The accompanying higher interest rates, currently at 1.75%, and bleak two-year economic outlook generally means bad news for homebuyers, landlords and renters across the UK.

Top market analysts at CMC Markets expect interest rates to further rise to 2.25% in September. This directly impacts mortgages on variable rates – around 1 in 5 households in the UK – and another 3.1 million whose fixed-rate periods expire in 2022-2023, according to UK Finance estimates. Borrowers whose repayments are directly linked to the base rate, as set by the Bank of England, will now face mortgage repayments at rates between 3% and 4%, up from 1.75% and 2.75% only five months earlier. This will inevitably spill into rent prices.

CMC Markets analysed the latest data for June 2022 from HM Land Registry, published on August 17th, and concluded that the likely tendency for house prices is in a temporary slowdown, which is good news for those waiting a little longer to buy a home.

Michael Hewson, Chief Market Analyst at CMC Markets comments: “Houses sold in June 2022 only increased in price by 1% compared to May, whereas, last year, this constituted a much more generous 5.7% surge. This is only the first month this year for prices to slow down at such a fast rate, so some caution before jumping to conclusions is advised. Remember, house prices may be slowing down, but they are not decreasing. Importantly, since this is transactions data processed at the time, it does not take into account the big leap in interest rates that the Bank of England announced later that month, let alone the even bigger hike in August.

“Therefore, despite the soaring inflation and rising consumer prices across the board, UK house prices appear to be trailing behind because demand for homes has generally come to a screeching halt. Most buyers are weathering the storm for a few more months at least, while some are also working out how the cost of living crisis will pan out in the medium term so that the new mortgage is not squeezing their pockets beyond their comfort zone.

“For those still keen to get on the property ladder, there are plenty of fixed-rate banking products that can insulate them from the current spiralling interest rates on mortgages. They should, however, prepare for the possibility of being faced with higher-than-expected repayments once the fixed rate period expires, as the new variable rates are at the lender’s discretion. Fixed rates are not a cure-all either, as they may now be set to a higher level to start with.

“The buy-to-let market is equally volatile. Landlords will either pass the increased mortgage repayments onto tenants by increasing their rent or simply sell fast to lock in a better price. Right now though, those already on the property ladder are generally better off staying put rather than moving or re-mortgaging. They would not get a good deal on their old house in this market and may likely end up losing more money overall.”

What did the Bank of England do earlier in August?

The Bank of England explained that the rise in interest rates was necessary due to external pressures which are expected to persist. This means that British firms and residents will continue to feel this weight reflected on rising domestic prices, wages outpaced by soaring inflation, and even higher mortgage repayments, despite the Bank’s attempt to widen the borrowing pool through less restrictive mortgage rules.

Although historic, the Bank’s decision was not a surprise for trading analysts at CMC Markets, a London-headquartered financial services company, who believe the Bank was expected to raise interest rates higher than 1.25% during the June meeting, as a means to keep import inflation in check. This is on the backdrop of a 10% year-to-date depreciation of the British pound sterling against the US dollar and an indication from the Federal Reserve, the US central bank, of a further interest rate increase by 0.5% or 0.75% in September.

Michael Hewson comments: “The UK currently fares worse than both the EU and the US. This is due to its closer dependence on energy shocks than the States and less government intervention to soften the blow compared to its European counterparts.”

What’s next and when will things calm down?

Other than adjusting the interest rates to the accurate level to keep abreast of import inflation, the economic projections for the UK paint a bleak outlook for the next two years.

The UK is projected to enter a recession in the final quarter of this year, the Bank of England announced. The country’s economy will contract by 1.25% in 2023 and 0.25% in 2024, however, inflation is becoming a much bigger long-term threat, with unrealistic chances of falling back to the desired 2% much before 2024.

The current political race for the Conservative Party leadership and the consequent fiscal policies promoted by the new British government is a major factor to take into account for any inflation, GDP, and unemployment projections and investment decisions.

As it stands with the current measures, inflation is expected to peak at 13.3% in October – a sharper increase than the Bank anticipated in June, originally estimated at 11%. It will continue to rise throughout 2023 only to decline in 2024.

Meanwhile, forecasts for the Consumer Price Index (CPI) are less optimistic now, expected to decrease only to 9.5% in the third quarter of 2023, although the Bank anticipates a sharp fall in prices immediately thereafter.

Selling prices are set to increase to reflect rising costs while real household post-tax income is expected to plunge in 2022 and 2023. The Bank predicted that core prices will peak at 6.5% this year, meaning that, in the following six months, food and energy will constitute more than half of the headline CPI.

The next meeting for the Monetary Policy Committee, where the Bank of England will decide what the new base interest rates might be, is set for September 15th.

This piece has been syndicated by Chaganomics for CMC Markets.

About CMC Markets: CMC Markets is a leading global provider of online financial trading and institutional technology solutions, offering clients the opportunity to trade a broad range of financial instruments through its award-winning spread betting, CFD and share trading platforms*. Established in 1989, headquartered in London and listed on the London Stock Exchange as a constituent of the FTSE 250 index, CMC has offices in Australia, China, Singapore, and across Europe. Over 300,000 active trading and investing clients worldwide trade on the company’s proprietary platforms, native mobile trading apps and MetaTrader 4. Clients can trade on thousands of instruments across forex, indices, commodities, shares, share baskets, ETFs and treasuries. The platform is backed by competitive pricing and dedicated 24-hour customer service, whenever the markets are open.

Just wrapped up an article for a column and I wrote the following: There is a risk that a prolonged slowdown in China could weigh down the rest of the interconnected developed world. There is alot of talk of China’s real estate industry eventually slowing down and mimicking Japan's ten year long “lost decade” that occurred after Japan’s unfathomable price bubble. During that time the paper value of Japan's aggregate real estate was four times that of the United States; the ward Chiyoda-ku was more valuable than Canada and Tokyo’s 280 acre royal palace was considered more valuable than the entire state of California.

That said, I decide to type up a quick blog post about the mother of all property bubbles, Japan 1986-1991. The Japanese asset price bubble (baburu keiki, "bubble economy") was an economic bubble until early 1992, then the price bubble burst and Japan's economy stagnated.

According to HBR:

News reports indicate that in 1988, Japan’s theoretical land value surpassed by four times that of all land in the United States, a country nearly 25 times larger than Japan. Another real estate bulletin: the calculated cash value of a single ward in downtown Tokyo—Chiyoda-ku—could purchase all of Canada. And another: land in Tokyo’s Ginza shopping district is selling for $250,000 a square meter.

Americans who ask themselves how the Japanese managed to buy up a quarter of California’s banking market in such a short time, how they effortlessly outbid all comers for the Rockefeller Group or any of dozens of other major and minor U.S. corporations, or how they are so rapidly and successfully transferring manufacturing onto an international base after decades of insisting that such a thing was impossible, will find large elements of the answer in Tokyo’s real estate listings. The creation of massive amounts of paper assets, the collateralization of them through huge volumes of low-interest lending against such assets, or the realization of cash based on the same assets through the volcanic upwelling of share prices on the Tokyo stock market, and the export of the resulting capital through conversion of the yen into vastly cheapened dollars is a process that defines both how big and far-reaching this new Japanese “money machine” is. It also shows how simply and efficiently it works.

Read the rest of the 1990 article at HBR. 

US Treasury Secretary Janet Yellen speaks on the state of the US economy during a press conference at the Department of Treasury in Washington, DC, on July 28, 2022. (Saul Loeb/AFP via Getty Images)

It seems as if we have conflicting reports inside the minds of America’s economic and business elite. While recessions are generally easy to define, this time the powers that be are having trouble.

Are we in a recession or not? Officially, the National Bureau of Economic Research (NBER) committee, which decides and records recessions in the United States, defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

Yes, it is true, we have had two consecutive declines in GDP. The Federal Reserve Bank of Dallas reported, on Aug. 2, that the nation’s gross domestic product (GDP) “fell 1.6 percent on an annualized basis in the first quarter of 2022 and was followed by a 0.9 percent drop in the second quarter.”

To read the complete article, see here.

From Focus Economics: Prices for Australian thermal coal rose over the last month, averaging USD 408.4 per metric ton in July, which was up 3.4% from June’s price and was 180.0% higher than in the same month last year. Meanwhile, on 29 July, the commodity traded at USD 407.9 per metric ton, which was 5.7% higher than on the same day of the previous month. As Europe’s energy crisis worsened in July, demand prospects for Australian coal improved. The EU has pledged to phase out most Russian oil imports by the end of the year and ban Russian coal imports from August. Meanwhile, Russia has gradually reduced gas exports to Europe since the start of the war in Ukraine, with the Nord Stream pipeline—through which most Russian gas to Europe flows—now operating at 20% capacity. In response to this, Europe is turning to Australian coal, with Germany’s decision in July to reactive two mothballed coal plants the latest example. Global coal consumption will rise to the highest level since 2013 this year, according to the IEA. Weaker supply also supported prices, as exports from the Port of Newcastle in Australia—the world’s largest coal port—fell to a five-year low in July due to flooding. Thermal coal prices should soften by the end of 2022 as Australian production picks up: The La Niña weather pattern has now ended, and Covid-19 related work absences should decline. Meanwhile, slowing global economic momentum should dent demand. However, our panelists see prices remaining around USD 60 per metric ton higher than before the war in Ukraine, with the EU’s turn to coal supporting prices. The key risk to the outlook is further Covid-19 lockdowns in China. The Australian government’s climate change policy, further restrictions on Russian energy exports to Europe and more heavy rains in Australia are other key factors to watch.

The red-hot housing market is showing signs of cooling down, but it’s not just in America where this is happening. Globally, cities all over are feeling the crunch, with price-to-rent and price-to-income ratios skyrocketing. These two ratios are important measurements as they measure housing affordability in given housing markets. In New Zealand alone, the price-to-rent index is 156.8 and the price-to-income ratio is 143.9.

A mixture of low interest rates across the developed world has created equally low mortgage rates; add cheap money to construction material shortages, and a short supply of finished housing, and you have a supply and demand issue. That has created a surge in home prices. The surge is still raging on; but while part of the market is overheating, other segments of the market are starting to cool down. There are a lot of moving parts in the housing industry, but if we do get to the point where housing prices begin to drop, it is a good sign of a recession.

Apart from recessionary fears, falling home prices are just plain bad. Certainly bad for elections. On June 21, Bloomberg reported: “Falling home prices would erode household wealth, dent consumer confidence, and potentially curb future development. Animal spirits are typically tamed when people are faced with higher repayment costs on an asset that’s losing value. And property construction and sales are huge multipliers of economic activity around the world.”

Granted, some parts of America are insulated from this. The majority of overpriced housing markets lie in the Northeast and the West Coast; see the chart below for an illustration.

What Has the Fed Said?

Recently, Fed Chairman Jerome Powell alluded to a “reset” in housing prices, and even mentioned the possibility of falling housing prices. Powell said the following at the FOMC Press Conference on June 15, 2022: “We saw [home] prices moving up very very strongly for the last couple of years. So that changes now. And rates have moved up. We are well aware that mortgage rates have moved up a lot. And you are seeing a changing housing market. We are watching it to see what will happen. How much will it really affect residential investment? Not really sure. How much will it affect housing prices? Not really sure. Obviously, we are watching that quite carefully… It’s a very tight market. So prices might keep going up for a while, even in a world where rates are up. So it’s a complicated situation and we watch it very carefully. I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again.”

While Chairman Powell is “not really sure” about a lot, others are much more certain. For instance, David L. Steinbach, global chief investment officer and co-head of Investment Management of Hines stated: “I think we’re in for a rough few months, this year is going to be choppy. Higher inflation is without a doubt making its way into private real estate. The bidding pools are becoming thinner.” It is worth noting that Hines is one of the largest privately-held property owners and developers in the world.

On June 23, Lance Lambert from Fortune reported: “Between April 2022 and April 2023, CoreLogic predicts U.S. home prices are poised to rise another 5.9 percent. But not every housing market will be so lucky. Fortune reached out to CoreLogic to see if it would provide us with its assessment of the nation’s largest regional housing markets. Among the 392 regional housing markets it looked at, CoreLogic found 45 markets had a greater than 50 percent chance of seeing local home prices decline over the next 12 months. Last month, only 26 markets fell into that camp. That’s a 73 percent one-month jump.”

Yes, housing prices have been driven upwards due to market dynamics, and yes, prices have been clearly inflated. It is true we are facing a housing shortage, and the lack of housing supply is very real. Estimates peg the actual number at 4 million units. In other words, we need 4 million more houses to meet demand. Even NPR reported about it: this past March, NPR correspondent Chris Arnold wrote: “The Housing Shortage Is Significant. It’s Acute For Small, Entry-Level Homes. And that’s the main reason we’ve ended up millions of homes short—builders for many years just weren’t building enough to keep up with demand. That lack of supply has pushed home prices to record levels—up nearly 20 percent last year alone.”

It has been said by numerous housing experts and analysts that the U.S. housing market has about two months of housing supply available. An oversupply of housing could occur at six months of supply. This leads one to believe that housing prices will fall once we reach an oversupply; if a recession occurs before the oversupply occurs, problem averted.

The only thing that worries me is the lack of brinkmanship and strategy in the Fed. Will they be able to navigate all of the moving parts? Housing is already unaffordable across the country; even rent is expensive. According to the Bureau of Labor Statistics, rent increased last year by 4 percent, surpassing the 3.3 percent annual average increase.

This is a reprint from the original article by Chadwick Hagan, June 2022.

Japan: The economy likely rebounded in Q2. The recovery’s spearhead will have been consumer spending. Most Covid-19 restrictions were removed in late March, helping to push the services PMI up to the highest level since 2013. Rising inflation may have dragged on private spending toward the end of the quarter—consumer confidence fell in June—but consumption is expected to have accelerated in Q2 overall. Less positively, the external sector likely dented growth, due to supply constraints and a slowing global economy. The trade deficit was the highest in more than eight years in the quarter, while industrial production contracted at the sharpest rate in two years in May. In politics, the prime minister’s party won a majority in elections for the upper house on 12 July, allowing him to press ahead with key policies such as increasing defense spending and reforms to boost wage growth. Growth should be stable this year, with looser Covid-19 restrictions bolstering private consumption. That said, our panelists project that the economy will remain below its pre-pandemic level at the end of 2022; a weaker external sector should cap momentum. Key risks to the outlook include rising inflation and increased supply bottlenecks. FocusEconomics panelists see the economy expanding 1.7% in 2022, which is down 0.1 percentage points from last month’s forecast, and 1.6% in 2023.

United Kingdom: The economy likely registered a muted performance in Q2 amid higher inflation, record-low consumer sentiment and tighter financial conditions. That said, recent GDP data for May surprised markets on the upside, with the economy logging 0.5% month-on-month growth. Together with an upward revision to April’s contraction in GDP, this paints a less negative-than-previously anticipated picture of economic activity in early and mid-Q2. Turning to Q3, services and manufacturing PMI data points to a loss of steam. In politics, in early July, Boris Johnson resigned as the Conservative Party leader, and announced he will step down as prime minister after a new Conservative leader is chosen on 5 September. Ex- Chancellor Rishi Sunak and Foreign Secretary Liz Truss are the final two candidates, with Sunak prioritizing fiscal restraint if elected and Truss promising immediate tax cuts. This year, growth will weaken notably due to multi-decade high inflation and higher interest rates. Upside inflation shocks and faster-than- expected rate hikes pose downside risks, while extra fiscal stimulus is an upside risk. Tensions over Northern Ireland, which could result in the suspension of the Brexit trade deal or the imposition of EU tariffs, cloud the outlook. FocusEconomics panelists expect the economy to expand 3.4% in 2022, which is down 0.1 percentage points from last month’s forecast, and 0.8% in 2023.

United States: The economy is forecast to have returned to growth in Q2 as the contributions from net exports, government spending and inventories improved. Moreover, underlying domestic activity appeared fairly robust in the face of rising inflation and interest rates. Monthly job gains beat market expectations throughout the quarter, with growth particularly strong in contact-intensive sectors which had previously been impacted by Covid-19. Meanwhile, retail sales posted strong gains in April and June, likely aided by accumulated savings and notwithstanding lower consumer confidence. In addition, the composite PMI averaged only slightly below its Q1 level in Q2. However, momentum appeared to weaken at the outset of Q3, with the Composite PMI—which covers both the manufacturing and services sectors—dipping into contractionary territory in July. Growth will weaken in 2022 from 2021 on aggressive Fed hikes, and panelists have now downgraded their 2022 growth forecast by 1.5 percentage points since the start of the year. That said, the robust labor market and strong energy exports will provide support. A continued rise in inflation and faster-than-expected Fed tightening are key risks to the outlook. FocusEconomics panelists see GDP growing 2.3% in 2022, which is down 0.3 percentage points from the previous month’s forecast. In 2023, our panel sees the economy expanding 1.3%.

Switzerland: Economic growth accelerated in Q1 from Q4, amid faster expansions in private and government consumption. In contrast, fixed investment declined due to lower investment in equipment and construction, while export and import growth slowed. Turning to Q2, the economy likely lost steam. Both the manufacturing and services PMIs, as well as the KOF Barometer, averaged lower in Q2 relative to Q1. That said, all three indicators still pointed to an ongoing expansion in activity. Moreover, unemployment fell to an over two-decade low in June, and all Covid-19 restrictions were lifted in the quarter. Plus, inflation was close to a third of the euro area average in Q2. These factors should have propped up household spending, notwithstanding weaker consumer sentiment. GDP growth will slow this year on milder expansions in exports and government spending. However, lower unemployment and the removal of all pandemic-related restrictions will keep overall growth above its long-term potential. Interest rate hikes and the gradual weakening of trade links with the EU in the absence of a revamped trade deal cloud the outlook. FocusEconomics Consensus Forecast panelists project the economy to expand 2.5% in 2022, which is unchanged from the previous month’s forecast, and 1.4% in 2023.

Euro Area: The economy likely lost steam in Q2. Shrinking retail sales in sequential terms in April–May, and falling consumer confidence amid soaring inflation throughout the quarter, mean household spending was likely subdued. Moreover, weaker business confidence and lower manufacturing PMI prints suggest that soaring input and logistics prices, coupled with supply shortages, hit the secondary sector. That said, some support to growth will have come from a falling unemployment rate and recovering tourism sectors in Mediterranean countries. In other news, on 21 July flows of Russian gas via the Nord Stream I pipeline resumed, but at reduced volumes. Meanwhile, EU countries reached an agreement to reduce gas demand by 15% this winter to face possible supply cuts from Russia. In politics, Italy’s government fell on 21 July, with new elections due for 25 September. The prime minister will carry on in a caretaker role until then. GDP will expand at a milder pace this year. Depressed confidence, supply chain disruptions, higher commodity prices and rising interest rates will limit growth. That said, a recovering tourism sector, lower unemployment and EU funds disbursements should support activity. Financial instability risks stemming from high public debts and gas rationing cloud the outlook. The economy is seen expanding 2.6% in 2022, which is unchanged from last month’s forecast. In 2023, GDP is seen increasing 1.5%.

(c) FocusEconomics 2022

ISSN 2013-648X