Global Economy Faces Stagflation Fears as War, Oil Prices, and Inflation Converge

Global Business Growth Grinds to a Halt in May

The conflict in West Asia has exerted a growing toll on major economies, with the latest Flash PMI surveys from S&P Global indicating a significant decline in global business growth in May. The report highlights that Europe has been the most severely impacted, with the economies of both the United Kingdom and the eurozone slipping into decline. In contrast, expansions in the United States and Japan have shifted into lower gears.

Stagflationary Conditions Pose Challenge for Central Banks

Major economies are facing stagflationary conditions, creating a significant challenge for central bank policymakers. The report notes that services have reported the worst deterioration in demand, while manufacturers have continued to benefit from stockpiling. Manufacturing input price inflation has accelerated sharply among the major economies, reaching a four-year high, with energy prices also pushing up service inflation.

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Inflation Updates to be in the Spotlight

In the coming week, inflation updates for many of the world's largest economies will be in the spotlight as policymakers and markets assess the likely next moves in interest rates. Following the US consumer price index showing an annual rate of inflation rising to 3.8 per cent in April, its highest since May 2023, the updated core PCE inflation measure will be eagerly awaited. This measure is widely touted as the Fed's preferred gauge.

Fed Monitors Economy Amid Conflict

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The flash US PMI survey hinted at yet another rise in price pressure in May as the war triggered more cost growth among businesses. The survey also signaled only modest output growth, with the Fed monitoring the resilience of the economy amid the conflict. Upcoming US trade data, durable goods orders, and regional survey activity measures from the Chicago, Richmond, and Dallas Feds will be closely watched.

European Central Bank Evaluates Regional Inflation Trends

The European Central Bank is evaluating regional inflation trends through consumer price indices from Germany, France, and Italy, alongside producer price data from Italy, France, and Spain. The flash eurozone PMI survey data showed price growth accelerating due to a growing supply shock to the region, but also indicated that the economy has now fallen into a deepening downturn, complicating the policy stance.

Australia Faces Growing Downturn Risks

Similar pressures emerged in Australia, where the reserve bank previously hiked its policy rate at its last three consecutive meetings. The RBA's May meeting concluded with warnings that more rate hikes were likely needed. However, with PMI data hinting at growing downturn risks for the economy, it will be interesting to see if policymakers move more cautiously.

First-Quarter GDP Updates

The week also featured first-quarter GDP updates for the US, Canada, Brazil, Italy, and Singapore. S&P Global qualified these releases, noting that in all cases these data are capturing conditions prior to the impact of the war in the Middle East, so they hold few signals for the economic outlook. Strong first quarters remain important in helping position economies to weather the conflict.