GlobalDataWatchTightlaborandrisingcostpressuresriskstransitiontoafire-and-imstoneFedNear-termgrowththreatsabound;ChinarisksincreaseHawkishwavetoohardtoresistforformerdovesRiksbank,RBA,RBIUpnext:AprilCPI(US0.4%HLandcore);Chinatrade(down)meMrChairmanforIhavesinnedAllexpansionscometoanend.ThisisoftentiedtotightUSlabormarkets.Inadditiontocontributingtoinflation(orinflationrisk)thatproducesarestric-tiveFedpolicystance,tightUSlabormarketsareusuallyassociatedwitharangeoffinancialandeconomicimbalances.Asexpansionsmature,theforcespushingunemploymentratesloweralsoencouragespendingondurablegoodsandexcessprivatesectordebt.Cyclicalfatiguealsotendstosetin,asproduc-tivitygainsareexhaustedandtightlabormarketsputupwardpressureonwagesthatcompressprofitmargins.WhiletherelativeimpactsofarestrictiveFed,anoverextendedprivatesector,andprofitmargincompressionvarywidelyacrossrecessions,theirassociationwithtightlabormarketsanddown-turnshasbeenahallmarkofUSbusinesscycledynamics.tightenbroadlydespitelastquarter’ssubpargrowthperformance.Thisweek’sgtoConcernsthatUSlabormarketsmayhavetightenedtoanunsustainablelevelwerereinforcedbythisweek’s1Q22productivityreport.Lookingthroughthequarterlynoise,productivitygrowthappearstobeslowingalongsidebuildingcostpressures(Figure1).Ifthesedevelopmentssustainunitlaborcostgainswellabove3%,theUSeconomyfacesunpleasantarithmeticahead.AreturnofinflationtotheFed’stargetwoulddeliverasubstantialandlikelyunsus-ntinwhichpricesFigure1:USlaborcostsandprices%oya,non-farmbus.9Pricedeflator307075808590950005101520Source:BLSandJ.P.MorganyearaheadcoreCPI)Figure2:USu-rateandrealpolicyrate%,forecastthroughyearaheadcoreCPI)34567UUrateinv95863687378838893980308131823Source:BLS,FederalReserve,andJ.P.Morgan%6420ResearchyntsUS:Highergasprices,lessinthetank,lessdemandoverallUS:Wars,plagues,andinflationUK:BroadeninginflationisaproblemfortheMPCBankofKorea:TowardneutralwithoutationIndia:Bewarenominalillusion21GlobalEconomicOutlookSummary4GlobalCentralBankWatch6Nowcastofglobalgrowth7SelectedrecentresearchfromJ.P.MorganEconomics9J.P.MorganMarketWatchDataWatchesUnitedStates25Euroarea2Japan6Canada8MexicoazilArgentina404244Andeans46UnitedKingdom48SwedenandNorway1EmergingEuropeSouthAfricaAustraliaandNewZealandChina,HongKong,andTaiwan49137ASEAN93eKasman(1-212)834-5515bruce.c.kasman@JPMorganChaseBankNAJosephLupton(1-212)834-5735joseph.p.lupton@JPMorganChaseBankNAhaelSHanson(1-212)622-8603michael.s.hanson@JPMorganChaseBankNA256535047444138China56535047444138ChinaJPMorganChaseBankNABruceKasman(1-212)834-5515bruce.c.kasman@JosephLupton(1-212)834-5735joseph.p.lupton@MichaelSHanson(1-212)622-8603EconomicResearchGlobalDataWatchmichael.s.hanson@May6,2022orporatemarginsremainstablewouldimplysustainedcorporatepricingpowerandinflationpersistingabove3%—anout-cometheFedisunlikelytotolerate.WhiletheUSexpansionmaybeonanunsustainabletrajecto-ryitalsoimportanttorecognizethattheconditionslikelytounderminetheexpansionarenotyetestablished.Incontrasttopastcycles,inwhichtightlabormarketswereaccompaniedbyelevatedprivatesectorvulnerability,theprivatesectorisinremarkablygoodhealth.Balancesheetsareflushwithcash,debtservicingarecostslow,andspendingondurablesismoderate.Corporateprofitmarginsremainclosetorecord-highlevelsasa7%arincreaseinthenon-farmbusinessdefla-torinrecentquartershaskeptpacewithacceleratingunitla-borcosts.Finallyandperhapsmostimportant,theFedre-mainsforgivingofourinflationsins.Despiteexpressingacommitmenttofightinginflationandasignalthatitwillmoveexpeditiouslytoneutral,theFOMCisnotyetsignalinganeedtoemployrestrictivepolicythatwouldpushtheunemploy-mentratehigherIndeedifweareright,USinflationissettomoderatesubstantiallyinthecomingmonths.Itremainsun-likelythatrealpolicyrateswillmovemateriallyabovezerountilsometimenextyear.Thetensionsintheoutlookreflectabalancingoftheexisten-tialthreatthatliesaheadwiththeunderstandingthatcurbinginflationwilllikelytakeamorematerialshiftfromtheFedthanhasalreadyoccurredinitsactionsandforwardguidance.Shouldtheraresoft-landingevadepolicymakers,theFedwouldthenbeforcedtoshiftfromitsNewTestamentattitudeofforgivenesstoanOldTestamentwillingnesstosmitetheeconomyforitsinflationsinswithasignificantlyrestrictivepolicystance.TherisksamongusThethreattotheexpansionoutlinedabovepresumestheglob-aleconomywillpassitsimmediateresiliencytest.Therere-mainseveralrisksthatcouldupendtheexpansionlongbeforetheFedturnsrestrictiveorunsustainableimbalancesemerge.ChinadragThebiggestnear-termriskcomesfromChina,whereanoutrightcontractioninGDPthisquarterlooksin-creasinglylikely.Thefalloutfromitszero-toleranceCOVIDpoliciesisbuildingandthisweek’sPolitburomeetingindi-catesthatapolicyalterationisnotlikelysoon.China’sposi-tionisuniquebutitsdemandandproductionenginesareim-portantdriversofregionalandglobalgrowth.Asaresult,thisweek’splungeintheAprilPMIswasalarming,withdatatrackinga0to-2%arcurrent-quarterGDPoutturn.Nextweek’stradedataforMarchwillbecloselywatchedtotrackdomesticdemand(imports:-3%m/m)andglobalsupplychaindragsexports-4.3%m/m).Thecredit(TSF)reportshouldshowasolid10.8%oyagain,withalargercontributionfromgovernmentdebtthantheprivatesector.FromRussiawithrisk.TheRussianwaronUkrainecon-tinuestothreatentheEuropeanexpansionprimarilythroughconstrainingcommoditysupply.Thisweek,theEuropeanCommissionannouncedaproposaltoendRussianoilimportsinlate2022.Ahandfulofnationswillbegivenmoretimetoimplementthatembargo,whileothersmaybereluctanttoadherealtogether.TheproposalalignswithourforecastofambdremovalofRussianoilsupplythisyear,whichisalsoreflectedinthecurrentBrentprice.Fornow,theembargolookstohavetakentheplaceoftheproposedreductioninnaturalgasimports,whichwouldbehardertoimplementandcouldleadtoenergyrationingintheregion.WhetherlimitsongasimportscomebackontotheagendawilldependatleastinpartonthelengthandintensityofthewarinUkraine.SpeedkillsEvenifthemacroimbalancesthatwouldtendtotriggerrecessionsarepresentlyabsent,marketsarehavingahardtimedigestingwhatlookslikelytobethemostaggres-sivehikingcyclesince1994.Whiletighteningfinancialcon-ditionsareapartofthemonetarytransmission,recentmovesraisesomeconcerns.ThisshouldnothavebeentoosurprisingsinceoneconsequenceoftheFAITstrategyofliftofflaterthanusualisalsotheneedtomovemorerapidlythanusual.Figure3:ManufacturingoutputPMIDI,saAsiaRoWexChina20182019202020212022Source:S&PGlobal,J.P.MorganFornow,theseconcernsarebeingtemperedbyresilienceinthelatestdataoutsideChina,whereAprilPMIsslippedbutremainconsistentwithourcallforglobalGDPtoexpandarthisquarterNotably,themanufacturingPMIsactuallyfirmedbroadlyoutsideMainlandChinaandTaiwan(Figure3).InEurope,incomingactivitydataforMarchhavebeenmixedratherthanoutrightweak.GermanMarchIPdroppedalarge9%m/m,butVDAcarproductiondatahavealreadyshownapartialreboundinAprilanddailylorrydataalsohaverecovered.Euroarearetailsalesdeclinedonlyslightlyin3JPMorganChaseBankNABruceKasman(1-212)834-5515bruce.c.kasman@JosephLupton(1-212)834-5735joseph.p.lupton@MichaelSHanson(1-212)622-8603EconomicResearchGlobalDataWatchmichael.s.hanson@May6,2022MarchdespitesurginginflationandaplungeinconsumerconfidenceWhilelessvisible,weexpectservicestobouncestronglyinthecomingmonthsastheremovalofpandemic-relatedrestrictionsshouldallowamuchmorenormalsummertouristseason.Onedarkcloudisglobalcapex,whichpostedarobustgainlastquarterbutnowlookstobesofteninggivenweakcapitalgoodstradereportsfromAsiaforMarchandtheAprilcapexinvestmentPMI.ncentralbankhawksurviewsonmonetarypolicynormalizationcontinuetoevolve(Figure4).Centralbanksaroundtheworldhaveshift-edrapidlyAnumberofpreviouslyquitedovishcentralbankshaverecentlyrediscoveredthatold-timeinflation-fightingreligion.Followingthesurpriseabout-facebytheRiksbanklastweekthisweektheRBAcompleteditshawkishpivotbyhikingamore-than-expected25bpanddroppingguidancearoundwaitingforwagegrowth.Wenowseefrontloadedhikesthattakeratesto1.5%byNovemberandreachatermi-nalrateof2.25%in2H23.InIndia,theRBIsurprisedbyhik-ingatanemergencymeetingthisweek.Withinflationtrack-ingwellabovetheRBI’sforecast,thereactionfunctionhaswhirledtoprecludinghigherinflationexpectationsfrombe-comingentrenched.Wenowlookfora50bphikeinJuneandentoldnormalizationwouldbewelltelegraphed,marketsarepricingafur-therbpbeyondthat.UpsideinflationsurprisesintheEuroareathisweekledcentristsontheECBtoendorseaJulylift-offandabove-zeropolicyratesbyyear-end.Thatintroducesahawkishrisktoourcallforthreehikesthisyear(startinginJuly)andfournext.Figure4:Evolutionofend-2022policyrateforecasts%p.a.;bothaxes1.751.501.251.000.750.500.25EmergingEmerging*Developed5.755.505.255.004.754.504.254.00Nov21Dec21Feb22Mar22May22Source:J.P.MorganGlobalEconomics.*ExcludingChina,Russia,TurkeyCentralbanksthathavemovedaheadofthecrowdalsoaresignalingfurthertighteningasinflationstayshigh.AmongtheEMbothCzechiaandPolandhiked75bpthisweek—morethanexpectedforCNBlessforNBP—andweexpectbothtohikesimilarlyinJunetoreachtheirrespectiveterminalratesof6.5%.TheBankofKoreaminutessignaledwillingnesstotakeratestoneutral,andgiventhelatestsurpriseinAprilin-flationwehaveadded50bptoourpolicypath,liftingtheter-minalrateto2.75%by1Q23.IntheDM,theBoEwasnear-termhawkish—withthreedissentsfora50bpmovethisweek,againsttheexpected25bphikethatitdelivered—butmedium-termdovish,astheMPCindicatedonly1to2morehikesthereafter.AlthoughtheBoEisconcernedthatsharplyfallingrealincomeswillstagnatetheeconomyfrom2Q,wethinktheBoEwillcontinuetobesurprisedbylabormarketresiliencyandstrongwagegrowth.ThusweexpecttheBoEtohikebpatthenexttwomeetingsbeforeslowingtoaquarterlypace,withgiltsalessettobegininNovember.ttleagainstinflationRelentlesslyhighinflationinLatinAmericahasgeneratedtwosetsofpolicyreactions:orthodoxcentralbanktighteningandheterodoxgovernmentmeasurestoassuagetheimpactonhouseholds.ThisweekBrazildeliveredawell-telegraphed100bphikeandkeptthedooropenforfurthermoves(includ-ing50bpinJune),whileChilesurprisedwitha125bphike.NextweekweexpectBanxicotohike50bponitswayto200bpoftighteningtoyear-end.HigherinflationshouldforceColombiatohike150bpinJune.Whilecentralbanksareposi-tioningtobringdownfutureinflation,theregion’sgovern-mentsareactingnow.Afterflirtingwithpricecontrols,Mexi-co’sgovernmentsettledonfiscalsupports,primarilythroughtaxexemptions,thatmightreducenear-terminflationby40-50bp.Brazilcutthemanufacturedgoodstaxrate,whileCo-lombiaalreadyhasalargesubsidyongasoline;othersarediscussingsimilarwaystocurbenergyprices.Butthesemovesriskforcingcentralbankstotightenfurther,shouldinflationexpectationsde-anchorfurtherasaresultofaddi-tionalfiscalspending.TurkeystillgoesitsownwayAnnualinflationinTurkeyhasreached70%,andweseein-flationremainingelevatedatleastuntiltheendofthisyear.Withinflationrunningfivetimesthepolicyrate(14%),mone-tarypolicyisloosebyanystandard,andthisunorthodoxap-proachhasledtoliraweaknessandacollapseincredibility.TheAprilCPIdataprovidedfreshevidenceofasharpstrengtheningofpricepressures,exacerbatedbytheriseinglobalenergyprices.WerevisedupourCPIforecaststo49.5%(from43.5%)forend-2022andto19%(from15%)forend-2023,withrisksstillskewedtowardhigherfigures.Cur-rentpolicymakersshownointentionoftightening,andwedonotexpectanypolicyratechangesatleastuntiltheelections.4JPMorganChaseBankNACarltonStrong(1-212)834-5612carlton.m.strong@JosephLupton(1-212)834-5735EconomicResearchGlobaleconomicoutlooksum-maryMay6,2022outlooksummaryjoseph.poutlooksummaryP%overayearagoP%overpreviousperiod,saarConsumerprices%overayearago2021202220234Q211Q222Q223Q224Q22Q4Q212Q224Q222Q23UnitedUnitedStatesCanadaLatinLatinAmericaArgentinaBraBrazilChileCColombiaEcuador6.66.610.344.611.7↓2.03.0↓3.07.53.05.0↓3.53.5-0.1-0.1↓2.8t-0.25.0-4.5-2.022.40.0-1.8t-3.-1.8t-3.0↓0.02.53.00.60.03.03.0↓↓3.04.7tt8.351.4110.5t88.0t6.110.2t58.812.1t11.3t9.3t3.16.2t5.38.2t66.29.3t8.3t8.7t2.73.3t2.25.0t58.15.9t4.65.4t5MexicoMexicoPeru44.813.32.561.62.02.3-1.36.07.97.9t7.05.5t4.2.5↓UUruguay8.33.008.35.6Asia/PacificJJapanAustraliaNewNewZealandEMAsiaCChinaIndiaExExChina/IndiaHongKongIIndonesiaKorea6.274.1↓↓3.1t4.5 -1.54.04.21.014.412.69 5.9↓2.9t4.8 3.07.05.05.05.35.044.5↓4.2↓-0.5↓3.93.9t9.1↓.0↓3.63.6↓4.6t4.5↓-11.1↓6.2t7.0↓2.422.92.04.31.7↓4.2↓2.21.5t4.93.04.92.412.55.03.02.05.02.04.84.03.32.0MalaysiMalaysiaPhilippinesSiSingaporeTTaiwanThailandWesternEurope6.928.913.0112.015.05.2t3.35.0t2.32.4↓3.06.05.02.62.065.73.02.8t0.92.5Euroarea3.02.83.02.2Germany2.93.04.53.06.58France7.03.02.83.2-0.21.02.0ItalySpainSpainNorway2.7-0.71.02.07.67.05.91.03.0-2.05.54.03.53.03.5t1.8tSSwedenUnitedKingdomEMEAEMEAEMCzechRepublicHHungaryIsraelPolaPolandRomaniaRussiRussiaSouthSouthAfricaTurkey12.53.04.01.82.02.84.01.82.04.14.1-9.90.88-2.32.02.023.514.39.2t7.620.912.18.1t3.2t3.78.4t17.66.668.32.00.03.913.03.7t11.12.3t8.96.044.73.4-6.05.6- -2.03.6-30.04.110.05.35.06.14.08.08.38.311.018.5↓10.017.7↓9.26.5t4.9111.093.23.5 0.450.0t72.3t6.9t61.5t5.518.4tGlobalDevelopedDevelopedmarketsEmergingEmergingmarketsEmergingexChinaGlobal—PPPweighted↓2.34.0 ↓2.9 ↓3.46.06.3.0↓ 0.8t0.0.0↓ 0.8t0.0t22.722.93.1-0.13.2↓tt6.4t5.06.8t7.1t6.5t11.1t7.8t6.1t5.9t6.4t10.0t7.1t3.2t2.74.0t5.1t3.7tSource:GovernmentagenciesandJ.P.MorganGlobalEconomics.Detailsonrequest.Note:ForsomeemergingeconomiesseasonallyadjustedGDPdataareestimatedbyJ.P.Morgan.BolddenoteschangesfromlasteditionofGlobalDataWatch,witharrowsshowingthedirectionofchanges.UnderlineindicatesbeginningofJ.P.Morganforecasts.Unlessnoted,concurrentnominalGDPweightscalculatedwithcurrentFXratesareusedincomputingourglobalandregionalaggregates.RegionalCPIaggregatesexcludeArgentinaandEcuador.Source:J.P.Morgan.Anylong-formnomenclatureforreferencestoChina;HongKong;andTaiwanwithinthisresearchmaterialisMainlandChina;HongKongSAR(Chi-na)andTaiwan(China).5JPMorganChaseBankNACarltonStrong(1-212)834-5612carlton.m.strong@JosephLupton(1-212)834-5735G-3economicoutlookdetailjoseph.G-3economicoutlookdetailEconomicResearchGlobalDataWatchMay6,20222021202220232021202220234Q1Q2Q3Q4Q1Q2QUnitedStatesRealRealGDPPrivateconsumption3.33.02.82.7 Equipmentinvestment2.815.33.03.0Non-residentialconstruction-8.00.95.4-8.3-0.911.09.07.04.04.0 Intellectualpropertyproducts10.08.18.06.06.06.05.0Residentialconstruction9.2-2.11.01.01.00.50.5 Inventorychange($bnsaar)-32.6186.6167.8193.2158.7175.1206.3206.3214.9185.7Governmentspending0.50.02.5-2.6- Exportsofgoodsandservices22.4-3.06.06.0Importsofgoodsandservices14.017.75.06.06.07.06.0 Domesticfinalsalescontribution2.8Inventoriescontribution0.41.1-0.15.3-0.00.2-0.6 Nettradecontribution-1.2-1.1-0.4-0.2-3.2-0.3-0.8-0.8-0.7-0.5Consumerprices(%oya)6.78.08.03.3 Excludingfoodandenergy(%oya)5.0CorePCEdeflator(%oya)2.7FederalFederalbudgetbalance(%ofGDP,FY)-12.1-4.2-3.6Personalsavingrate(%)5.2 Unemploymentrate(%)3.3Industrialproduction,manufacturing1.5EuroareaRealRealGDP2.83.02.8Privateconsumption-1.3-4.02.02.0 Capitalinvestment14.54.04.06.04.03.53.2Governmentconsumption3.92.02.01.00.00.01.0 Exportsofgoodsandservices11.06.34.511.93.04.06.0Importsofgoodsandservices8.78.04.819.82.07.07.0 Domesticfinalsalescontribution2.6-3.01.82.0Inventoriescontribution-1.8-0.41.00.6 Nettradecontribution1.4-0.50.0-2.70.6-1.2-0.2Consumerprices(HICP,%oya)2.2 exfood,alcoholandenergy2.1Generalgovt.budgetbalance(%ofGDP,FY)-5.7-3.9-2.3 Unemploymentrate(%)6.3Industrialproduction-0.65.03.05.04.03.02.5JapanRealRealGDP2.51.01.0Privateconsumption10.0-3.07.06.03.01.21.2 Businessinvestment-1.4-1.05.05.05.03.03.0Residentialconstruction-1.90.01.1-3.83.02.01.01.01.01.0 Publicinvestment-3.7-5.5-0.7-14.40.0-0.5