Weekly Update - Ukraine: so far households are feeling the pinch more than companies

The Ukraine war grinds on, which means we cannot yet draw a full picture of its economic impacts. That said, the conflict began at the end of February and some early indicators for March and April are now out, giving us a first assessment of how economic activity is being affected. Business activity and confidence indicators show different trends among households, which are apparently hard hit, and companies, who seem near immune. 

Household confidence has plunged. Confidence has dropped to levels last seen during the first Covid lockdown in spring 2020. United States and European households are suffering similar dips in sentiment, although for slightly differing reasons. In the United States, confidence began to fade before the Ukraine war and mainly reflected the sharp rise in inflation over recent months. In the Euro area, the key factor undermining confidence is the shock from the war. Households are being affected by the conflict in a near neighbor and the energy price hikes specific to Europe have taken a direct toll. But taking a broader view, with wages no longer automatically indexed to inflation and energy demand effectively inelastic, it comes as no surprise that households fear a hit to their purchasing power. To offset this, they are likely to either run down savings or cut back on other areas of consumption. It should also be noted that in the Euro area, consumption is already showing early signs of a slowdown (in France, household consumption is down by 1.3% quarter-on-quarter in Q1-2022), while at this stage, consumption remains more vigorous in the United States. (+2.7% in Q1).

Companies’ activity is holding up. Purchasing manager surveys reveal surprisingly robust sentiment in the private sector on both sides of the Atlantic. Such resilience reflects underlying trends in economic activity, including, in Europe, a gradual return to business-as-usual for service sectors post the Covid Delta variant. It also reflects the fact that, so far, companies have been able to pass on higher production costs to final prices. Wage pressures in Europe remain modest - speeding up in the United States but still lagging inflation - offering companies another way to damp down spiraling costs. On this point, of the S&P 500 companies who have so far reported Q1 results, 80% have posted earnings ahead of analyst forecasts. In the STOXX 600, 60% beat earnings expectations. That said, digging down into the surveys reveals hints of a slowdown to come, notably a decline in order books.

Conclusion 
The Ukraine war seems to be hitting households first. Activity levels at companies are holding up, indicating sound economic fundamentals (labour markets heading in the right direction, savings still high, etc.). However, the slowing of household demand represents a rude shock coming down the track, which will make itself felt at some point. The question is whether central banks - and particularly the ECB - will have time to adjust monetary policy to deal with high inflation before it hits.

Also, in the main events of the week, we chose to talk about commodity prices forecasts and the Nasdaq performance.

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