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War fallout: U.S. economy to slow, Europe risks recession and Russia to suffer double-digit decline

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In a first pass at gauging the economic impact from the Ukraine invasion, forecasters say the U.S. will grow more slowly with higher inflation, Europe’s economy will flirt near recession and Russia will plunge into a deep, double-digit decline.

The CNBC Rapid Update, the average of 14 forecasts for the U.S. economy, sees GDP rising by 3.2% this year, a modest 0.3% markdown from the February forecast, but still above-trend growth as the US continues to bounce back from the Omicron slowdown. Inflation for personal consumption expenditures, the Fed’s preferred indicator, is seen rising by 4.3% this year, 0.7 percentage points higher than the prior survey in February.

CNBC Rapid Update
Forecasters cautioned, however, that much remains unknown about how the U.S. economy will respond to an oil shock that has seen crude prices surge quickly above $126 a barrel and the national average gasoline price over $4 per gallon. Most see risks to their forecasts skewed toward higher inflation and lower growth.

A complete removal of Russian oil from global supply could mean a far more grim outcome, economists said.

″…The consequences of a complete shut-off of Russia’s 4.3 (million barrels per day) of oil exports to the US and Europe would be dramatic,″ JPMorgan wrote over the weekend. “To the extent that this disengagement gathers steam, the size and length of the disruption — and thus the shock to global growth— will build.”

The CNBC Rapid Update shows U.S. growth accelerating to 3.5% in the second quarter from 1.9% in the first. But that second quarter estimate is down 0.8 percentage points from the prior survey. So the economy is still seen bouncing back from the omicron wave, but not as strongly as inflation takes a bigger bite.

Inflation estimates are 1.7 percentage points higher for this quarter and 1.6 percentage points for next. Inflation is expected to decline from 4.3% this year to 2.4% by year-end.

CNBC Rapid Update
Overall, U.S. economic growth is seen enduring.

“Energy prices are spiking, and they may remain higher persistently, but I expect much of the run-up seen in recent days to recede within a few months, which means mainly a short-term impact on growth and inflation,” said economist Stephen Stanley, with Amherst Pierpont. “Consumers have massive liquidity, income growth, and wealth to draw on.”

One factor that makes this price shock different from others is how much oil the U.S. produces. With U.S. production and demand in rough balance, money is transferred from consumers to producers inside the economy, rather than from the U.S. to foreigners. That will hit individual American families and certain regions of the country harder, but boost the profits of U.S. energy companies.

Oil companies, in turn, will likely boost growth by using profits to increase drilling.

Still, some are pessimistic that the drag from higher prices will lead to a bigger drag on U.S. growth. “The US is on the cusp of a recessionary inflation, with energy and now food prices potentially soaring significantly further,″ said Joseph Lavorgna of Natixis.

Europe to be hit harder
Most agree that effect will be worse in Europe.

Barclays marked down its growth forecast for Europe this year to 3.5% from 4.1% last month.

“Soaring commodity prices and risk aversion in financial markets are the main contagion channels, implying a global stagflationary shock, with Europe being the most exposed region” the investment bank said.

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JPMorgan took off nearly a full percentage from European growth this year, and now forecasts GDP will increase by 3.2%. But the second quarter has been filled in at zero.

Russia is forecast to get hit hardest of all. JPMorgan forecasts a 12.5% decline in GDP as the country’s economy buckles under the weight of unprecedented sanctions that have frozen its $630 billion in foreign exchange reserves and cut its economy off from the rest of the world.

The Institute for International Finance sees a 15% contraction, double the decline from global financial crisis. “We see risks as tilted to the downside. Russia will never be the same again” wrote IIF’s Chief Economist Robin Brooks.

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BUSINESS

US stocks suffer biggest daily drop in almost two years

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US stocks posted the biggest daily drop in almost two years as investors assess the impact of higher prices on earnings and prospects for monetary policy tightening on economic growth. The dollar and Treasuries gained amid a pickup in haven bids.

The selloff sent the S&P 500 down 4%, with the plunge in consumer shares surpassing 6%. Target Corp. tumbled more than 20% in its worst rout since 1987, after trimming its profit forecast due to a surge in costs. Shares of retailers from Walmart Inc. to Macy’s Inc. were caught in the downdraft. The Nasdaq 100 fell the most among major benchmarks, dropping more than 5% as growth-related tech stocks sank. Megacaps Apple Inc. and Amazon.com Inc. slid at least 5%.

Treasuries rose across the board, sending the 10- and 30-year Treasury yields down as much as 11 basis points. The dollar rose against all of its Group-of-10 counterparts, except the yen and Swiss franc. Gold caught bids in the move into havens.

The benchmark S&P 500 is emerging from the longest weekly slump since 2011, but any rebounds in risk sentiment are proving fragile amid tightening monetary settings, Russia’s war in Ukraine and China’s Covid lockdowns.

In some of his most hawkish remarks to date, Federal Reserve Chair Jerome Powell said Tuesday that the US central bank will raise interest rates until there is “clear and convincing” evidence that inflation is in retreat. Chicago Fed President Charles Evans said Wednesday he sees a half-point rate increase at next month’s meeting and “probably thereafter.”

In Europe, new-vehicle sales shrank for a 10th month in a row as the industry remains mired in supply-chain crises, while euro-area inflation plateaued at a record high. Meanwhile, UK inflation rose to its highest level since Margaret Thatcher was prime minister 40 years ago, adding to pressure for action from the government and central bank.

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BUSINESS

Netflix lays off 150 employees due to slow revenue growth and business needs

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Netflix is reportedly laying off nearly 150 employees in the coming days due to disappointing earnings and slow revenue growth.

According to a Variety report, the Amazon Prime Video rival might also terminate its contract with contractual contributors.

The layoffs are about 2 per cent of Netflix’s US workforce. “As we explained [in reporting Q1] earnings, our slowing revenue growth means we are also having to slow our cost growth as a company. So sadly, we are letting around 150 employees go today, mostly U.S.-based,” a Netflix spokesperson said.

The statement further revealed that the decision was primarily driven by business needs rather than individual performance. Netflix reported $7.87 billion in Q1, which was short of Wall Street’s estimates of $7.93 billion.

The report further reveals that nearly 70 part-time employees in Netflix’s animation studio will have to pack up and leave. A report by The Verge stated that about 26 contractors working on Netflix’s fan-focused Tudum website might see a termination.

“A number of agency contractors have also been impacted by the news announced this morning. We are grateful for their contributions to Netflix,” the company said.

Netflix, in its recent earnings call, revealed that it lost thousands of subscribers, which is a first for the company in over a decade.

The company expects to lose an additional 2 million in the next quarter due to the ongoing war between Russia and Ukraine. Netflix has shut shop in Russia following the country’s invasion of Ukraine.

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BUSINESS

Dollar breaks N600/$ ceiling ahead of party’s presidential primaries

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Less than two weeks to the presidential primaries of the political parties ahead of the 2023 elections, the US dollar has broken the N600/$ mark at the parallel market and set the tone for a possible uptick in the coming days.

The black market rate had traded between N570/$ and N590/$ since the beginning of the year while the Central bank of Nigeria (CBN)’s intervention at the Nigerian Autonomous Foreign Exchange (NAFEX) has kept its rate under N420/$.

With the latest slump of the naira, the arbitrage between the parallel and NAFEX, which is regarded as the official window, is now inching close to N200/$. The spread measures the deviation of the controlled official rate from the real rate of exchange, with experts calling for liberalisation of the market to enable naira to find its true value.

The World Bank and the International Monetary Fund (IMF) have also warned of the repercussions of sustaining an artificially high naira while calling on the CBN to embark on market reform.

But the CBN has maintained that Nigeria, with the current high level of importation and underperformance of the industrial sector, cannot afford to float the naira completely as the exchange rate could spill out of control.

At the Lagos street market, yesterday, naira traded between N595/$ and N600/$ band. With the presidential primaries of the two leading political parties scheduled for Abuja next weekend, there is an expectation the demand pressure has not peaked, suggesting that naira is in for a protracted pressure.

At peer-to-peer (P2P) trading platforms, the dollar has been trading above N600 in the past three weeks, which had signaled that the black market rate could break through the psychological ceiling.

With that eventually happening, naira could be on a renewed free fall.

But there is also hope that it is a season to offload warehoused hard currencies for political campaigns to possibly shore up supply.

Experts are not sure where rising demand and supply of foreign exchange would lead the naira to, but the interplay between the movements of the two variables is a key factor in predicting the value of the naira in the tense political season. Godwin Owoh, a professor of applied economics, advised Nigerians to prepare for a steeper fall of the local currency, saying partisan politics and intra-party meetings, which are highly dollarised would bring much pressure to bear.

The CBN has promised to continue to protect the naira but its ability could be constrained by the equally falling reserve. For the first time in eight months, the gross reserves dropped below N39 billion on Monday, when CBN data put the figures at N38.92 billion. Effectively, the country’s reserves have depleted by $160 billion year-to-date.

Bismarck Rewane, an economist, had projected the reserve to collapse to $32 billion in the year as he expected the CBN to spend $8 to $10 billion defending the naira, which is taking much pressure from excessive importation.

The value of Nigeria’s imports increased by 64 per cent last year to N20.84 trillion. Sadly, the value of exports increased at a slower rate – 51 per cent – to N18. 91 trillion in the same period. The falling reserves and rising imports have put the apex bank in dire straits in its efforts to continue to defend the naira.

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