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Scope for labour supply to improve

There is still scope for an improvement in labour supply in the US, UK and euro-zone, which might over time alleviate some of the tightness in their labour markets. But it could yet take a long time to materialise.
Vicky Redwood Senior Economic Adviser
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Global Economics Update

What recessions mean for the labour market

Given that unemployment rates have usually risen significantly in recessions, it is tempting to conclude that history is about to repeat itself, to the frustration of policymakers seeking soft landings in labour markets. But the pandemic has produced uncertainties that raise the possibility of jobless rates not rising too far.

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Not all price pressures are easing

There have been growing signs that we are at the turning point in global inflation. Commodity prices and shipping costs are down both in y/y and level terms, while product shortages have alleviated as softer demand and fewer bottlenecks have opened up spare capacity. And, in the past week, we received the US CPI print for July, which showed that headline inflation there fell by more than the consensus expected. However, central banks won’t take too much comfort from all this just yet. While headline inflation is set to fall sharply in the year ahead, red-hot labour markets and elevated inflation expectations mean that underlying sources of inflation remain intact. Slowing economic growth and tighter monetary policy should help resolve this problem. In fact, the past month’s data showed that activity is already bending under the weight of higher interest rates and multi-decade-high inflation. But it is still far too early to be confident that inflation will settle around target rates in two years’ time. So, our sense is that investors have gone a bit too far in anticipating a major shift in – particularly Fed – policy in the next 6-12 months.

12 August 2022

Global Central Bank Watch

Will frontloading make hard landings less likely?

The pace of policy tightening has increased still further, with many central bankers arguing that rate hikes must be “frontloaded” to tackle inflation risks quickly. In the current environment, this probably does offer the best chance of avoiding a future hard landing for most economies. And given evidence so far that activity is slowing but not slumping as policy tightens, aggressive rate hikes seem set to continue in the near term. But while this policy may reduce the threat from inflation in the medium term, it carries big economic risks in the near term, particularly where household debt is high and house prices are elevated.

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More from Vicky Redwood

Global Economics Focus

How high will interest rates go?

Equilibrium interest rates in advanced economies are probably still very low. However, there is still a lot of uncertainty about how far above this equilibrium interest rates will have to go in the near-term to quash inflation. Even if we are right in thinking that there is no need for a repeat of the early 1980s “Volcker shock” in order to bring down inflation, we are still heading for the most aggressive tightening cycle in decades. (This is an updated version of the Focus originally sent on 16 February 2022.)

21 June 2022

Global Economics Update

House price falls loom

Housing markets are now showing signs of starting to weaken. While the consensus is that house price inflation will merely slow, we expect outright prices to fall in several of the most vulnerable markets.

13 June 2022

Global Economics Update

UK lagging behind in labour supply recovery

It remains a mixed picture when it comes to how well the labour force is recovering in the wake of the pandemic. The recent improvement in some countries supports our view that much of the pandemic-related drop may be reversed eventually. But this could yet take a while. And for now, the UK’s labour force is still falling, adding to reasons to think that interest rates there have much further to rise.

31 May 2022
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