Economic trends in countries around the world and whether they will have an impact on the semiconductor chip industry

Discerning the impact of the recent banking crisis in the United States

• When Silicon Valley Bank (SVB) failed in March, there were fears that this could lead to a larger financial crisis that would cause credit markets to seize up. That did not happen. Instead, the US Federal Reserve and the US Treasury took steps to provide liquidity to banks and to reassure depositors and investors, thereby avoiding a ruinous credit crisis. However, although only a handful of banks failed during the crisis, and although risk spreads have reverted to normal levels, the crisis did take a toll on credit markets in a way that weakens the US economy. Indeed, Federal Reserve Chair Powell has said that the negative impact of the crisis on bank lending will likely influence Fed decisions in the months ahead. It is widely expected that the Fed will soon pause rate increases, in part due to a belief that the banking crisis weakened credit markets sufficiently to suppress inflationary pressure.

What has been the impact of the crisis on the US banking sector? The Institute of International Finance published a report showing that US bank deposits fell sharply after the SVB failure but have stabilized during the past two months. That stabilization suggests that the crisis was relatively short-lived and that the banking sector is starting to revert to normal.

Meanwhile, bank lending growth has been very slow, especially compared to the rapid growth a year earlier, as well as compared to the period just prior to the failure of SVB. Since March, there has been a decline in commercial and industrial lending, offset by a modest rise in consumer lending. On the other hand, lending for both commercial and residential property has risen modestly since the crisis began.

We can infer that the brief banking crisis, while slightly weakening credit markets, has not significantly increased the risk of recession as had been feared.

Eurozone inflation decelerates, but ECB likely raise rates further

• Inflation in the Eurozone is receding. Moreover, not only is headline inflation declining, largely due to a drop in energy prices, but core inflation (excluding the impact of energy and food prices) is also decelerating.

Let’s look at the details. In May, consumer prices in the 20-member Eurozone were up 6.1% from a year earlier. This is down from an increase of 7% in April and a peak rate of inflation of 9.2% in December. Moreover, prices were unchanged from the previous month. Meanwhile, energy prices were down 1.7% from a year earlier and down 2.2% from the previous month. On the other hand, food prices were up 12.5% from a year earlier and up 0.4% from the previous month. When food and energy are excluded, core prices were up 5.3% from a year earlier, down from 5.6% in April. Core prices were up 0.2% from the previous month. In part, the drop in core inflation can be attributed to the introduction of transport subsidies in Germany.

The principal driver of Eurozone inflation is now food, accounting for roughly half of the overall inflation. The good news is that agricultural commodity prices are falling, thereby setting the stage for a further decline in Eurozone inflation. The situation in Europe is different than in the United States where inflation is now largely driven by the services sector, especially shelter.

By country, annual inflation was 6.3% in Germany, 6% in France, 8.1% in Italy, 2.9% in Spain, 6.8% in the Netherlands, 2.7% in Belgium, 4.1% in Greece, 5.4% in Ireland, and 5.4% in Portugal. Annual inflation decelerated from the previous month in 18 of the 20 countries.

Although the sharp decline in inflation is good news for the European Central Bank (ECB) as it ponders its next move, ECB President Lagarde made clear that further monetary tightening is coming. In a speech delivered after the release of the inflation data, she said that “inflation is too high and it is set to remain so for too long. We are determined to bring it back down to our 2% medium-term target in a timely manner.” She added that “we have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels.” She said that further tightening is “still in the pipeline.” She concluded that “we need to continue our hiking cycle until we are sufficiently confident that inflation is on track to return to our target in a timely manner. At the same time, we need to carefully assess the strength of monetary policy transmission to financing conditions, the economy and inflation.”

Further monetary tightening in the Eurozone will likely weaken credit markets and slow economic growth. Already Germany is in recession and other countries are at risk of recession. German industry has been especially hurt by weakness in China. On the other hand, declining energy prices and increased government subsidies help to reduce the risk of recession.

The impact of China’s slow growth on the global economy

• China’s weaker-than-expected economic performance is having an impact on global commodity markets. Prices of copper, iron ore, steel, nickel, and other metals have all fallen sharply since early March. Some analysts point to declining commodity prices as evidence of a weak global economy. Yet it might simply be evidence of a weak Chinese economy given China’s huge demand for mineral commodities.

What are the indications of economic weakness in China? They include decelerating retail sales, declining industrial production, decelerating credit activity, and declining housing starts. Private sector business investment has stagnated while export growth has slowed markedly. In addition, youth unemployment has hit a record high level.

However, many observers were especially shaken by the unexpected decline in the PMI in May. PMIs are forward-looking indicators meant to signal the direction of economic activity. The government said that the manufacturing PMI for China fell from 49.2 in April to 48.8 in May, signaling a continued and accelerating decline in manufacturing activity. A reading below 50 indicates declining activity. The subindices for output, new orders, and raw material inventory all declined. Markit suggested that this indicates weakness of export demand as well as weak demand for capital goods. The separate PMI for services was above 50. Thus, the economy continued to grow in May, but was held back by the weakness in manufacturing. And, of course, it is the manufacturing sector in China that purchases commodities on a large scale.

The impact of climate change on the global economy

• Last summer, heat waves around the world led to declining water levels and disruption of agriculture, inland transportation, and energy production. It was especially bad in China where the Yangtze River’s water level fell sharply, leading to disruption of hydroelectric and nuclear power generation. An electricity shortage ensued, having an impact on industrial activity while leading the government to reopen closed coal mines.

Now, it appears, that China is facing something similar again. In March, April, and now May, temperatures in China have hit record levels. On Monday, the temperature in Shanghai hit a May record of 36.1 degrees Celsius (96.7 degrees Fahrenheit). Shanghai is not alone. Many cities in China are hitting records, having also seen records in the previous two months. The result is a shortfall of rain and a decline in water levels. Also, power grids are facing additional stress. In Guangdong Province in southern China, demand for electricity has lately surged due, in part, to additional usage of air conditioning. If this continues throughout the summer, there could be electricity shortages again.

There have been unusually high temperatures in Southeast Asia as well. Meteorologists are predicting that global temperatures will hit records this year and next year. Thus, climate change is now having a disruptive impact on human life and on the global economy. As governments and the private sector struggle to accelerate the transition to clean energy, demand for carbon-based fuels continues to rise. Moreover, climate change will continue to disrupt the ability to produce clean energy such as hydroelectric power and nuclear power. While China is currently experiencing the brunt of this problem, it is not a Chinese problem. Rather, the global economy is facing a new era of periodic disruption that will influence multiple industries—energy, agriculture, manufacturing, finance (especially insurance), health care, and construction.