Take Two: US GDP shows surprise contraction; Russia ramps up gas supply pressure

What do you need to know?

The US economy endured a surprise contraction in the first quarter (Q1). GDP was down 1.4% year on year against expectations for a 1% rise – and after a 6.9% rise in Q4. The potential for a drop had been signalled earlier in the week by the US’ largest ever trade deficit, and the detail of the GDP report showed a more benign picture than the headline. The S&P 500 was -2.41% lower over the week to Thursday’s close.¹  Markets had been rattled by the impact of coronavirus restrictions in China and fears the Federal Reserve could mishandle its response to high inflation, but resisted fresh falls later in the week as positive corporate news outweighed the GDP surprise.

Around the world

Russia increased the pressure over gas provision in Europe as state energy company Gazprom cut off supplies to Poland and Bulgaria after both had rejected a request to make payments in roubles. The move ramped up tensions as the Ukraine war continues and was labelled as “blackmail” by European Commission President Ursula von der Leyen. Meanwhile, gas distributors in Germany and Austria said they were seeking sanctions-compliant routes to pay for Russian supplies. As tensions around Ukraine crisis increased, the euro sank to a five year low against the dollar. 

Figure in focus

The yen fell to a 20-year low against the dollar last week after the Bank of Japan (BoJ) reasserted its intention to maintain its significant stimulus programme and keep interest rates low, despite the backdrop of rising inflation and the weakening currency. On Thursday the yen dropped to more than 130 against the dollar – the first time it has done so since 2002. BoJ Governor Haruhiko Kuroda stressed that the Japanese economy is still on the road to recovery from the impact of COVID-19. He said: “It is most important to support economic recovery by patiently continuing monetary easing.” 

Words of wisdom

Reshoring: The process of bringing back economic activity that had been outsourced to other countries. Both the COVID-19 pandemic and the US-China trade war highlighted the fragility of global supply chains and the impact of Russia’s invasion of Ukraine has only underscored the rationale. However, a report this month from the International Monetary Fund warned that countries should resist the urge to dismantle global value chains and should pursue more diversification instead of retrenchment.

What’s coming up

A spate of Eurozone measures – including consumer inflation expectations and economic, industrial and services sentiment indices – are posted Monday. The bloc’s unemployment data for March follow on Tuesday. On Wednesday, the US Fed meets to decide interest rates, with expectations coalescing around a 50-basis-point hike as inflation surges. Wednesday also sees April’s final S&P Global Composite purchasing managers’ indices (PMIs) for the US and Europe. China’s Caixin Composite PMI is reported on Thursday, when the Bank of England convenes for its own monetary policy meeting. The latest US non-farm payrolls data are announced on Friday.