Surveys Hint Against The Most Stagflationary Scenario (2/2)

A recession is likely underway in the eurozone and UK, and most leading indicators point to a similar result in the US by mid-next year. In each of those cases the downturn looks set to be mild, if somewhat protracted (in contrast to the pandemic recession which was severe but very brief).

• But when considering stagflation risks, forward indicators as well as PMIs suggest that while the "stag" scenario is in play, "flation" may not be as big a problem as feared into next year. Demand destruction - in part due to higher prices, but also to falling discretionary incomes (cf energy prices) and tightening monetary policy - is beginning to subdue price pressures.
• Per the US PMI report, "firms raised their selling prices at the slowest rate for just over two years...Some firms stated that concessions and discounts were made to entice customers to place orders amid the weak demand environment."
• In the eurozone, "the improving supply situation – combined with weakened demand – took further pressure off prices". And in the UK, "Prices charged by UK private sector companies meanwhile increased at the slowest pace since August 2021, which a number of survey respondents attributed to weaker customer demand and greater competitive pressures."
• The global economy is not going to be able to avoid a period of slow/negative growth and high inflation. However the worst case scenario would be if weaker demand failed to corral inflation, meaning an extended central bank tightening cycle and protracted uncertainty. That could still happen, but this week's surveys suggest potential for a more benign outcome.