Inflation, Rising Rates Curb Global Economic Growth

Growth in the U.S. and global economies slowed in May as high inflation and rising interest rates dented demand, business surveys said Tuesday.

Business activity at services businesses in the U.S., eurozone, U.K. and Australia all grew more slowly in May amid rising prices, according to S&P Global surveys. The firm’s purchasing managers index surveys also reported Tuesday that factories in major global economies face supply-chain disruptions related to Covid-19 surges and the Ukraine war, as well as higher fuel costs and rising wages.

Separate U.S. figures on Monday pointed to slower growth in a segment of the housing market. The Commerce Department said purchases of newly built single-family homes declined in April for the fourth straight month, dropping 16.6% in April from the prior month to a seasonally adjusted annual rate of 591,000. That marked the slowest pace of sales since April 2020 at the start of the pandemic.

New-home sales are a relatively narrow slice of all U.S. home sales, and sales figures can be volatile and subject to revisions. Still, the drop adds to signs the housing market is slowing amid record home prices and rising mortgage rates.

The global economy faces a series of obstacles this year, ranging from Covid-19 lockdowns in China, soaring energy and food prices, Russia’s invasion of Ukraine and a broadening drive by central banks to combat high inflation by increasing borrowing costs.

Some businesses are planning for a significant slowdown in growth or economic contraction.

Electronics retailer Best Buy Co. reported falling sales and profits for the latest quarter and said its results for the current fiscal year will be worse than it had previously predicted amid increased sales promotions and higher supply-chain expenses. Abercrombie & Fitch Co. swung to a quarterly loss, hurt by higher freight and product costs.

Retailers have posted mixed results for the first quarter. Last week, Walmart Inc. and Target Corp. posted weaker-than-expected earnings.

The surveys of purchasing managers at businesses in some of the world’s largest and richest economies indicate that activity continues to be supported by the easing of restrictions on the services sector as Western societies learn to live with Covid-19, with sectors such as tourism experiencing a strong recovery. Still, high inflation, geopolitical tensions and rising interest rates are clouding the outlook.

In the U.S., S&P Global said its composite purchasing managers index—which measures activity in both the manufacturing and services sectors—was 53.8 in May, down from 56.0 in April and the weakest rate of growth in four months. Separately, S&P Global said its index for the eurozone’s services and manufacturing sectors fell to 54.9 in May from 55.8 in April. A reading above 50.0 points to an expansion in activity, while a figure below that threshold points to a contraction.

While the surveys point to continued growth in the second quarter, they appear to have exaggerated the strength of the global economy during the first three months of the year.

According to the Organization for Economic Cooperation and Development, economic output in its 38 members was just 0.1% higher in the three months through March than it was in the final quarter of 2021, a sharp slowdown from the 1.2% growth recorded in the three months through December.

Economists at Capital Economics say that, based on their history, the PMIs pointed to growth in rich countries of around 0.5%.

“This partly reflected volatility in imports and inventories and the effects of Covid restrictions, all of which should fade from now on allowing the PMIs to give a more accurate steer,” wrote Ariane Curtis in a note to clients.

Facing the full brunt of the jump in energy prices triggered by Russia’s attack on Ukraine, European policy makers are preparing for tough economic times ahead.

“It’s now very clear that the economic toll of this war is world-wide,” said Irish Finance Minister Paschal Donohoe after heading a meeting of eurozone treasury chiefs Monday. “High prices and disruption to food supplies are rippling across the world with very serious consequences for the most vulnerable in our societies.”

According to the surveys of purchasing managers, the U.K. has suffered the sharpest blow to activity in the wake of the invasion. S&P Global said its PMI for the country slumped to 51.8 in May from 58.2 in April to hit its lowest level in 15 months. Inflation hit a four-decade high in April as home energy prices surged.

“In the U.K., we are facing a very big negative impact on real incomes caused by the rise in prices of things we import, notably energy,” said Andrew Bailey, governor of the Bank of England, in a speech Monday. “We expect that to weigh heavily on demand.”

Citing the impact of the conflict on energy and food prices, the United Nations last week lowered its forecast for global economic growth in 2022 to 3.1% from 4%, and its forecast for U.S. economic growth to 2.6% from 3.5%.

Business leaders share those worries. A survey conducted by the Conference Board and released Tuesday found chief executive officers at 56 of Europe’s leading companies had become much more gloomy about their prospects in the six months since the last poll. The measure of confidence fell to 37 from 63, with a reading below 50.0 indicating that more CEOs are pessimistic than optimistic about the outlook.

The marketplace has spoken and, at least for now, it’s showing preference for hybrids and plug-in hybrids (PHEVs) over battery electrics. That makes Toyota’s foot dragging on EVs (and full speed ahead on hybrids) look fairly wise, though the timeline along a bumpy road still gets us to full electrification by 2035.

Italian supercar producer Lamborghini, in business since 1963, is also proceeding, incrementally, toward battery power. In an interview, Federico Foschini , Lamborghini’s chief global marketing and sales officer, talked about the new Urus SE plug-in hybrid the company showed at its lounge in New York on Monday.

The Urus SE interior gets a larger centre screen and other updates.
Lamborghini

The Urus SE SUV will sell for US$258,000 in the U.S. (the company’s biggest market) when it goes on sale internationally in the first quarter of 2025, Foschini says.

“We’re using the contribution from the electric motor and battery to not only lower emissions but also to boost performance,” he says. “Next year, all three of our models [the others are the Revuelto, a PHEV from launch, and the continuation of the Huracán] will be available as PHEVs.”

The Euro-spec Urus SE will have a stated 37 miles of electric-only range, thanks to a 192-horsepower electric motor and a 25.9-kilowatt-hour battery, but that distance will probably be less in stricter U.S. federal testing. In electric mode, the SE can reach 81 miles per hour. With the 4-litre 620-horsepower twin-turbo V8 engine engaged, the picture is quite different. With 789 horsepower and 701 pound-feet of torque on tap, the SE—as big as it is—can reach 62 mph in 3.4 seconds and attain 193 mph. It’s marginally faster than the Urus S, but also slightly under the cutting-edge Urus Performante model. Lamborghini says the SE reduces emissions by 80% compared to a standard Urus.

Lamborghini’s Urus plans are a little complicated. The company’s order books are full through 2025, but after that it plans to ditch the S and Performante models and produce only the SE. That’s only for a year, however, because the all-electric Urus should arrive by 2029.

Lamborghini’s Federico Foschini with the Urus SE in New York.
Lamborghini

Thanks to the electric motor, the Urus SE offers all-wheel drive. The motor is situated inside the eight-speed automatic transmission, and it acts as a booster for the V8 but it can also drive the wheels on its own. The electric torque-vectoring system distributes power to the wheels that need it for improved cornering. The Urus SE has six driving modes, with variations that give a total of 11 performance options. There are carbon ceramic brakes front and rear.

To distinguish it, the Urus SE gets a new “floating” hood design and a new grille, headlights with matrix LED technology and a new lighting signature, and a redesigned bumper. There are more than 100 bodywork styling options, and 47 interior color combinations, with four embroidery types. The rear liftgate has also been restyled, with lights that connect the tail light clusters. The rear diffuser was redesigned to give 35% more downforce (compared to the Urus S) and keep the car on the road.

The Urus represents about 60% of U.S. Lamborghini sales, Foschini says, and in the early years 80% of buyers were new to the brand. Now it’s down to 70%because, as Foschini says, some happy Urus owners have upgraded to the Performante model. Lamborghini sold 3,000 cars last year in the U.S., where it has 44 dealers. Global sales were 10,112, the first time the marque went into five figures.

The average Urus buyer is 45 years old, though it’s 10 years younger in China and 10 years older in Japan. Only 10% are women, though that percentage is increasing.

“The customer base is widening, thanks to the broad appeal of the Urus—it’s a very usable car,” Foschini says. “The new buyers are successful in business, appreciate the technology, the performance, the unconventional design, and the fun-to-drive nature of the Urus.”

Maserati has two SUVs in its lineup, the Levante and the smaller Grecale. But Foschini says Lamborghini has no such plans. “A smaller SUV is not consistent with the positioning of our brand,” he says. “It’s not what we need in our portfolio now.”

It’s unclear exactly when Lamborghini will become an all-battery-electric brand. Foschini says that the Italian automaker is working with Volkswagen Group partner Porsche on e-fuel, synthetic and renewably made gasoline that could presumably extend the brand’s internal-combustion identity. But now, e-fuel is very expensive to make as it relies on wind power and captured carbon dioxide.

During Monterey Car Week in 2023, Lamborghini showed the Lanzador , a 2+2 electric concept car with high ground clearance that is headed for production. “This is the right electric vehicle for us,” Foschini says. “And the production version will look better than the concept.” The Lanzador, Lamborghini’s fourth model, should arrive in 2028.

Inflation, Rising Rates Curb Global Economic Growth

Slower reported growth due to rising prices and concerns over interest rates, survey finds.