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a09ba7097c26b358a17669fb0b18709745d6c384ebcae086a2a9cf738358925f;;[{"layout":"detailed","uid":28210,"publicationDate":"29 Jun 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183650.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPRjevfYGAe4I4tua3mCuHw=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Economics Chartbook - Downside risks to growth building (3Q22)","titleDe":"","titleIt":"","product":"The Unicredit Economics Chartbook","synopsis":"<ul class=\"ucrBullets\"><li><strong> Global: <\/strong> GDP growth will probably slow to 3.0% this year (previously 3.3%) and 2.8% next year (from 3.4%). Headwinds from the Russia-Ukraine conflict have combined with COVID-19 lockdowns in China to push inflation up further and slow the pace of economic activity. Central banks have become even more hawkish. Tighter financial conditions, a squeeze in real incomes and a sharp downturn in consumer confidence will increasingly weigh on activity. Trade is weakening, also reflecting a switching of expenditure away from goods. Global inflation will probably peak soon, but the speed and extent of the subsequent decline remains highly uncertain. We think that central banks and markets are underestimating the downside risks to growth. If Russian energy imports suddenly stop, much of Europe will likely see negative GDP growth for 2023.<\/li><li><strong> US: <\/strong> We forecast GDP growth of 2.4% this year and below-potential growth of 1.3% next year. Economic momentum is slowing, particularly for interest-rate-sensitive sectors such as housing and durable goods. CPI inflation will likely peak at about 9% yoy in 3Q22, with monthly inflation prints likely easing to levels consistent with target by around the turn of the year. Longer-run measures of inflation expectations are still well anchored and average hourly earnings growth is moderating. We expect the Fed to raise the target range for the federal funds rate into restrictive territory by the end of the year, to 3.25-3.50%, which we see as the peak. Rate cuts could start in late 2023.<\/li><li><strong> Eurozone: <\/strong> GDP is likely to expand by 2.8% this year and by 1.3% in 2023. Survey indicators signal a weakening of growth momentum in the spring and downside risks for economic activity in 2H22. Headline and core inflation have further to rise, although we see initial signs that pipeline price pressure might start easing soon from extremely high levels. Weak growth and slowing inflation will probably force the ECB to stop hiking in 1Q23 once the depo rate reaches 1.25%, i.e. the lower end of the 1-2% range the central bank regards as 'neutral'. We expect the announcement of a credible anti-fragmentation facility featuring potentially unlimited purchases and light conditionality.<\/li><li><strong> CEE: <\/strong> The EU-CEE economies will likely grow on average by 3.6% in 2022 and 2.6% in 2023, with the Western Balkans lagging. Turkey could grow by 4.4% in 2022 and 3.3% in 2023. In Russia, the economy could shrink by around 10% this year and stall next year. Hungary and Slovakia would experience the biggest direct impact from a lack of Russian energy imports, followed by Bulgaria, Czechia and Serbia. Inflation is likely to peak this year in most CEE countries, except for Hungary and Poland, where the peak could be postponed to 2023. Inflation is expected to remain well above targets in 2023. We think that central banks will end rate hikes in the autumn, but the scope for rate cuts in 2023 is very limited. The CBR could cut the policy rate to 8% in 2022 and to 7% in 2023. The CBRT might hike in 2023 if there is a change in government.<\/li><li><strong> UK: <\/strong> We forecast GDP growth of 3.4% this year and 0.6% next year. The economy will be skating on the edge of recession for the next few quarters amid a big squeeze in real disposable income. Inflation is set to stay higher for longer in the UK compared to peers, peaking at above 9% yoy in 4Q22, but should fall quickly to below 2% by end-2023. The BoE will probably stop raising the bank rate after a final 25bp hike to 1.50% in August.<\/li><li><strong> China: <\/strong> GDP will likely grow by 4.0% in 2022 and by 4.2% in 2023. While most COVID-19-related restrictions were lifted at the beginning of June, the supply side of the economy is recovering faster than the demand side as Chinese consumers continue their cautious behavior to avoid quarantines. The central government is stepping up efforts to support the economy and reduce the negative impact of future waves of contagion on the domestic economy through a combination of monetary and fiscal policy measures. The PBoC might tolerate further weakening of the CNY towards 7.00 against the USD to support exports. <\/li><\/ul>","synopsisDe":"","synopsisIt":"","hash":"a09ba7097c26b358a17669fb0b18709745d6c384ebcae086a2a9cf738358925f","available":"0","settings":{"layout":"detailed","size":"default","showanalysts":"2","showcompanies":"2","showcountries":"2","showcurrencies":"2","nodate":"0","notitle":"0","noproduct":"0","noflags":"0","dateformat":"d M y","nolinktitle":"0","synopsislength":"300","synopsisexpand":"1","shownav":"0","oldestedition":"","limit":"5"}},{"layout":"detailed","uid":28184,"publicationDate":"24 Jun 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183617.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPRjevfYGAe48b4Sw0UGeBI=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - Little or no sign of a wage-price spiral in the US","titleDe":"","titleIt":"","product":"Chart of the Week","synopsis":"<ul class=\"ucrBullets\"><li> In the US, amid rampant inflation and a very tight labor market, many are concerned that the economy could experience a 1970s-style wage-price spiral, which would likely require a much more aggressive tightening of monetary policy. Our Chart of the Week decomposes US wage growth into the contributions made by fundamentals: inflation expectations (red bars), labor market slack (dark grey bars) and underlying productivity growth (light red bars). These contributions are estimated from a simple model that relies on pre-pandemic relationships1. Wage growth (here measured by the Employment Cost Index, ECI) rose to an annualized rate of 5.6% in 1Q22, 3.3pp above pre-pandemic 4Q19 levels. According to the model, rising long-term inflation expectations2 accounts for 0.4pp of the rise, labor market 'slack' accounts for only 0.1pp, while trend productivity growth has had a negligible effect.3 Evidence of a wage-price spiral would come from high inflation leading to rising inflation expectations and higher wages via the wage and price setting process, but the model-estimated contribution to rising wage growth from inflation expectations is currently small.<\/li><li> The unexplained (or 'residual') portion of the rise in wage growth has been unusually large recently, as indicated by the blue bars. To be sure, the model relies on pre-pandemic relationships. It\u00b4s possible that something may have changed structurally in the post-pandemic era, and high wage growth could persist, for example driven by a rise in the equilibrium rate of unemployment, a steeper slope of the Phillips curve, and\/or uncertainty about inflation expectations.<\/li><li> However, our baseline is that high wage growth will be temporary, not structural, as the pre-pandemic forces have not gone away. In the pre-pandemic period, the unexplained component (blue bars) was mean zero and akin to white noise, whereby upward effects tended to be followed by downward effects. There are tentative signs that wage growth is already easing, as 3M\/3M growth in average hourly earnings (an alternative and more timely measure of wage growth than the ECI) fell to 3.8% in May, down from 7.0% in January. ________________________<\/li><li> The wage growth model is loosely based on that in Yellen, Janet L. (2017). 'Inflation, Uncertainty, and Monetary Policy,' speech delivered at 'Prospects for Growth: Reassessing the Fundamentals,' 59th Annual Meeting of the National Association for Business Economics, held in Cleveland, Ohio, 26 September 2017. The estimated equation for the employment cost index (ECI) is:ECIt = -1.16 + 0.99*'et-1 - 0.30*SLACKt - 0.45*'SLACKt + 0.66*PRODt + 'twhere ECI is the annualized log difference of the Employment Cost Index (ECI) for hourly compensation of private industry workers; 'e is the University of Michigan five-year ahead consumer inflation expectations; SLACK is the unemployment rate less the Congressional Budget Office\u00b4s (CBO) estimate for the equilibrium unemployment rate; 'SLACK is the first-difference of SLACK; PROD is an estimate of trend hourly labor productivity growth for the business sector; ' is an error term and t denotes time. Trend labor productivity is derived using the method detailed in Yellen (2017). The estimation sample is the pre-pandemic period 3Q90-4Q19 and the coefficients are estimated using ordinary least squares regression. All coefficients are statistically significant and the adjusted R-squared is 0.42. The pre-pandemic period, not the whole sample, is used for the estimation because we want to estimate the performance of the model in explaining recent (post-pandemic) wage growth. The estimated coefficients are used to produce out-of-sample forecasts for 1Q20-1Q22.<\/li><li> In the model, inflation expectations are proxied by the University of Michigan five-year ahead consumer inflation expectations, for reasons of goodness-of-fit and because it is a long-running survey. It performed better than the Survey of Professional Forecasters (SPF). We also tested short-term (one-year ahead) measures of inflation expectations, both from the University of Michigan consumer survey and the SPF, and both were found to be not statistically significant. This is important because one-year ahead inflation expectations have moved materially higher, while the rise in longer-run measures has been much more muted.<\/li><li> More recently, the preliminary estimate for June of University of Michigan five-year ahead consumer inflation expectations jumped to 3.3%, up from 3.0% in May, something which Fed Chair Jerome Powell called 'eye-catching' and one of the reasons why the FOMC chose to raise interest rates by 75bp instead of 50bp at its meeting earlier this month. It would have been consistent with a 0.3pp rise in the model\u00b4s prediction for wage growth, taking it to 3.4%, all else equal. But in the final release of the University of Michigan June survey, published today, the preliminary reading was revised down significantly, to 3.1%.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}]},{"layout":"detailed","uid":28103,"publicationDate":"10 Jun 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183514.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJIfTZUMx2FS4rnTgvsAeCCA=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - US CPI: Inflationary pressures are not easing, increasing odds of a 50bp Fed hike in September","titleDe":"","titleIt":"","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> US CPI inflation accelerated to 8.6% yoy in May, up from 8.3% yoy in April. It is the highest year-on-year rate since December 1981. Core CPI (that is, excluding energy and food) inflation eased slightly in year-on-year terms, to 6.0% from 6.2% in the prior month. Since base effects influence year-on-year rates, a clearer picture of underlying inflation dynamics can be seen by looking at the monthly seasonally-adjusted inflation rates. On a monthly basis, headline CPI rose a rapid 1.0% mom in May, up from 0.3% mom in April, while core CPI rose a strong 0.6% mom, the same rate as in April and three times the rate consistent with the Fed\u00b4s inflation target. Price rises were broad-based, with the largest upward contributions to monthly inflation coming from shelter, energy and food.<\/li><li> The rise in energy and food prices was widely expected, although the magnitude of the rise was a bit larger than we had expected, notably for utility gas prices. Energy prices rose 3.9% mom, with gasoline prices up 4.1% mom and utility gas prices up a huge 8.0% mom, reflecting recent movements in crude oil and natural gas prices, respectively. Food price inflation accelerated to 1.2% mom in May, with the food at home index rising 1.4% mom. This largely reflects the increase in food commodity prices, with the UN FAO Food and Agricultural World Food Price Index up almost 20% since the end of last year.<\/li><li> The big news in the May CPI report is the stickiness of monthly core inflation. It was hoped that, as expenditure-switching away from goods and towards services continued, rising core services price inflation would be offset by a decline in core goods inflation. But in fact, only the first part of this was true in May. Core services inflation (0.6% mom) remained strong, reflecting an acceleration in rents (0.6% mom) as well as rapid price rises for travel-related items. The strength in rents reflect the high demand for housing, tight labor market and strong wage growth. Rents tend to be sticky as rental agreements are set periodically. As the direct effects of the pandemic fade and pent-up demand for services is unleashed, the price of travel-related services surged (airfares up 12.6% mom after 18.6% mom in April). The surprise, however, was that core goods inflation accelerated to 0.7% mom in May, reversing the trend of the previous three months of deceleration. We suspect this is due to supply bottlenecks, particularly in China during the past couple of months as well as from the Russia-Ukraine conflict, and still strong demand for goods, as evident in the US retail sales figures. Notably, used and new car prices rose strongly.<\/li><li> For the Fed, the May CPI report is precisely the kind of report that could cause it to lean towards a 50bp rate hike in September, in addition to the likely 50bp hikes on 15 June and on 27 July. Indeed, as Fed Vice Chair Lael Brainard recently said, 'if we don\u00b4t see the kind of deceleration in monthly inflation prints' then it may be appropriate to hike by 50bp in September too.Chart 1 shows that, in year-on-year terms, CPI inflation is at a 40-year high, at 8.6%, while core CPI inflation is at 6.0%.CHART 1: CPI INFLATION AT A 40-YEAR HIGH<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}]},{"layout":"detailed","uid":27869,"publicationDate":"06 May 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183218.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJJAYtfRRuP-QJKFYiZxui9M=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - A still very tight labor market; tentative wage growth moderation","titleDe":"","titleIt":"","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> The US economy added 428k jobs in April, a robust pace of hiring. It leaves payrolls 1.2mn below their pre-pandemic level from February 2020, but at the current pace this gap would be made up in just three months\u00b4 time. Job gains in April were broad-based across industries.<\/li><li> The unemployment rate was unchanged at 3.6%, well below the rate that the Fed thinks is consistent with price stability (4%). The unemployment rate is computed using the household survey, while payrolls are computed from a different survey called the establishment survey. We note this difference because the household survey measure of employment fell 353k (in contrast to payroll employment rising 428k) and the reason why the unemployment rate didn\u00b4t rise in April is because labor force participation declined by 363k. Now, we wouldn\u00b4t put much weight on the fall in household employment, because it came after an outsized rise in the prior month and tends to be volatile, as well as being computed from a smaller sample than the payroll measure of employment. But what we do put weight on is the fall in participation, which is a disappointment, after six consecutive months of improvement. The lack of people actively participating in the labor force (-537k from pre-pandemic levels) is exacerbating the shortage of workers, which is contributing to wage pressure. The U6 measure of underemployment (a broader measure of labor underutilization than unemployment alone) rose, driven by a rise in marginally attached workers, who are not in the labor force because they didn\u00b4t actively seek a job but would like a job. It seems likely that the fall in participation is just a blip, perhaps caused by the survey week coinciding with Good Friday, and we expect to see a rebound in May.<\/li><li> Average hourly earnings (AHE) rose 0.3% mom (3.8% annualized), down from an upward-revised 0.5% mom in March. Looking through the monthly volatility, there are tentative signs that pay growth is moderating. The annualized growth rate of AHE over the last three months is 3.7%, down from 5.5% in the 12-month period before this. Taken at face value, average earnings growth of around 4% would be consistent with the 2% inflation target, assuming trend labor productivity growth of around 2%. One caveat here is that average hourly earnings are influenced by so-called selection effects (for example, if below-average pay sectors see larger increases in employment it would lower the average wage), but recently payroll gains have been broad-based, so this is unlikely to be the main explanation for the easing. Rather, we think the prior several months of improvement in labor force participation has eased labor shortages somewhat, easing wage pressures, but time will tell. <\/li><li> The April employment report will likely do nothing to change the hawkishness of the Fed, but equally it\u00b4s unlikely to add to the hawkish tones, given the AHE news discussed above. As Fed Chair Jerome Powell said in the FOMC press conference earlier this week, he does not currently see any tension between the Fed\u00b4s dual objectives for price stability and maximum employment, and that\u00b4s because the labor market is, in his words, 'extremely tight' and 'too hot'. By this he means that the unemployment rate is below the (equilibrium) rate consistent with price stability, and wage growth is growing strongly. In other words, while high inflation today is mostly driven by external factors (commodity prices, supply bottlenecks), labor market tightness is contributing to high inflation, and while the Fed would normally look through much of the externally-driven inflation, it cannot ignore the tight labor market and domestically-generated inflation, particularly at a time when headline inflation is so high that the tight labor market risks generating a wage-price spiral (or so-called second round effects).Chart 1 shows that nonfarm payrolls rose 428k jobs in April, which matched the gain in the prior month. Payrolls in the prior two months were revised down slightly (by a net 39k).CHART 1: A ROBUST PACE OF HIRING<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}]},{"layout":"detailed","uid":27799,"publicationDate":"28 Apr 22","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_183148.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJHlYjR85eD_wgMNrB2XtLJw=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - US 1Q22 GDP: Not as bad as it looks","titleDe":"","titleIt":"","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> The US economy contracted 1.4% qoq annualized in 1Q22 (-0.4% qoq non-annualized). It\u00b4s the first quarterly fall in GDP since 2Q20, when part of the economy was shutdown to contain the spread of COVID-19. Importantly, the fall in GDP is not nearly as bad as it looks. This is because the big detractors from GDP in 1Q22, net exports and inventories, are also the most volatile components and are likely to improve in coming quarters. Real\u00a0final sales\u00a0to domestic purchasers, a measure of expenditure that removes the volatile net trade and inventories components of GDP, rose 2.6% annualized, an acceleration from the 1.7% pace in 4Q21.<\/li><li> The huge downward contribution from net exports reflects a surge in imports (17.7% annualized) and a fall in exports (-5.9% annualized). The fall in exports comes after a rapid rise in 4Q21 (22.4% annualized), while the ongoing rapid growth of imports in part reflects the relative strength of the US economy. Some improvement in net exports is likely in 2Q22. The downward contribution from the change in inventories comes after they added a whopping 5.3pp to outsized GDP growth of 6.9% in 4Q21. To be sure, inventories rose in 1Q22, but not as fast as they did in 4Q21, which results in a drag on GDP growth. Separately, government spending fell again in 1Q22 (down 2.7% annualized) reflecting the fiscal drag, but an increase in defense spending (related to Ukraine) should reverse this in coming quarters.<\/li><li> The more enduring drivers of GDP growth, personal consumption and fixed investment actually grew faster in 1Q22 than in 4Q21. Personal consumption rose 2.7% annualized in 1Q22, slightly faster than the 2.5% pace in 4Q21. Fixed investment rose a rapid 7.3%, driven by investment in equipment. However, for personal consumption, the quarterly average likely hides a sharp deceleration in momentum. Monthly data shows a jump in real personal consumption of 2.1% mom in January but then a fall of 0.4% mom in February. Today\u00b4s release for 1Q22 would imply a 0.6% mom fall in real personal consumption for March, with the data due for release tomorrow. It reflects the impact of higher prices and the squeeze in real personal disposable income (which was down 2% annualized in 1Q22) on consumer spending. Spending was propped up by a fall in the personal savings rate, to 6.6% from 7.7% in 4Q21.<\/li><li> The Fed is likely to look through the contraction in 1Q22 GDP, for the reasons outlined above. While real consumption slowed meaningfully in February and likely in March too, this is due to the very high inflation weighing on incomes and spending, which the Fed will argue is why it needs to expeditiously raise rates to neutral by the end of this year, in order to rein in rampant inflation. The US economy is not in in any real danger of entering a recession (two consecutive quarters of negative growth) in the near term. GDP will likely rebound in 2Q22, also as inflation probably begins to ease gradually. Also released today was weekly initial jobless claims data, which fell to a historically-low 180k, a good sign that the labor market and the wider economy are still in pretty good shape. Chart 1 shows that net exports subtracted 3.2pp from GDP growth and the change in inventories subtracted 0.8pp from GDP growth in 1Q22.<\/li><\/ul>","synopsisDe":"","synopsisIt":"","analysts":[{"first":"Daniel","last":"Vernazza","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=analyst&tx_research_piedition%5Banalyst%5D=36&tx_research_piedition%5Baction%5D=analyst&tx_research_piedition%5Bcontroller%5D=Edition&cHash=9cd2c54b797ddd33a22d9a5ea50fac10"}],"countries":[{"name":"United States","ticker":"US","link":"https:\/\/www.unicreditresearch.eu\/index.php?id=country&tx_research_piedition%5Bcountry%5D=42&tx_research_piedition%5Baction%5D=country&tx_research_piedition%5Bcontroller%5D=Edition&cHash=7bc8e05d14fb73ad6fbafeda31d249b7"}]}]


Daniel Vernazza, Ph.D.
Chief International Economist
UniCredit Bank AG, London
Moore House -
120 London Wall
UK-EC2Y 5ET London
United Kingdom
+44 207 826-7805

Daniel Vernazza joined UniCredit in March 2013 as an economist. He previously worked in the economics department at Goldman Sachs and taught economics at the London School of Economics (LSE) for th...

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