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Weekly global economic update

What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.

Quantifying why US labour force participation declined


  • In recent months, the severe labour shortage in the United States has vexed businesses and economists. In fact, the labour force has shrunk in a way normally associated with recession. That is, when the economy is weak and jobs are not plentiful, discouraged workers stop looking for jobs, thereby suppressing the available pool of labour. Yet the unemployment rate is currently very low and job vacancies are high, indicative of an extremely tight labour market. So why has labour force participation remained low? I’m often asked that question by clients. Like others, I offer a variety of possible factors that likely contributed to weaker labour force participation during the pandemic, but the quantitative impact of each factor has not been clear. 

Now, however, we have an estimate of the quantitative impact of each factor. Former US Treasury secretary Lawrence Summers and economist Alex Domash have produced a study that offers a quantitative analysis of how various factors have reduced the size of the labour force below the prepandemic level. On the one hand, they worry that the continued tightness of the labour market is likely to fuel further wage gains that will contribute to continued inflation. In fact, they say that the rates of vacancies and quits are at a level normally associated with an unemployment rate below 2% (it is currently 4%). On the other hand, they offer hope that, once the pandemic is truly over, some of the people who left the labour force will return, thereby alleviating labour shortages and reducing upward pressure on wages. That, in turn, could be helpful in easing inflationary pressure. 

The authors of the study note that, in the two years of the pandemic, overall employment in the United States declined by 6.9 million. They estimate that, of this decline, 1.3 million is attributable to changing demographics unrelated to the pandemic. That is, the population continued to age, with many people retiring, and the successor generation was simply smaller. In addition, they estimate that 1.4 million jobs were lost due to pandemic-era immigration restrictions. 

Also, they estimate that roughly 1.3 million workers chose to retire early during the pandemic. Many saw their wealth rise rapidly due to increased savings and rising asset prices. In addition, many were likely averse to social interaction. Therefore, they chose to exit the labour force and will not likely return. 

The authors also estimate that 1.5 million workers exited the labour force because of COVID-19 concerns. Many people became immunocompromised, which likely increased their health concerns. Many who had been infected continue to have negative symptoms, and, at any given time, many are infected and possibly sick. These people choose to avoid work. Thus, the data indicates a sharp rise in the number of people calling in sick. The authors also estimate that 1 million people perceive a reduced incentive to work. This could be due to government support such as the enhanced child tax credit (which expired in December), a rise in savings, a rise in asset values, and a decline in the real purchasing power of wages due to accelerated inflation. Finally, the authors estimate that 400,000 people are not working because they refuse to comply with employer vaccine mandates. 

Of all the reasons offered, the ones that could be reversed once the pandemic is over amount to 4.3 million jobs. If some or all of these people could be convinced to return to the labour force, it would have the effect of reducing wage pressure, alleviating the shortage of labour, and diminishing inflationary pressure in the economy. This depends on what happens with respect to the virus.  

US producer prices and the impact of supply chain disruption


  • Producer prices in the United States continued to rise sharply in January. Prices were up 1% from December to January, the highest monthly increase since May. Prices were up 9.7% from a year earlier, the lowest annual increase in three months. When volatile food and energy prices are excluded, core producer prices were up 0.9% from December to January, the highest monthly increase since January of last year. Core producer prices were up 6.9% from a year earlier, the lowest annual increase in three months.   

The importance of producer prices is that, over time, they feed into consumer prices. A sharp rise in producer prices can contribute to an acceleration in consumer price inflation. Clearly, the surge in producer prices is related to the surge in the cost of commodities, key inputs, and transport costs. If supply chain problems abate in the coming months, this will likely have a salutary impact on producer price inflation. Interestingly, as with consumer prices, there was a larger increase in the producer price of goods than services. This reflects the impact of supply chain difficulties. For example, the cost of materials used for durable goods manufacturing increased 51% from a year earlier while the producer price of intermediate services was up 6.2%. 

The impact of supply chain difficulties on producer price inflation is evidenced by the high correlation between US producer price inflation and that of the Eurozone, although US producer price inflation is a bit higher than in the Eurozone. This is according to economists at the Federal Reserve Bank of New York. Moreover, economists at the New York Fed have found a strong correlation between both United States and Eurozone producer price inflation and their own Global Supply Chain Pressure Index (GSCPI). The latter measures the degree to which global supply chains are under stress. The New York Fed economists also note that, when oil prices are included in their analysis, the correlation is even better. In addition, they find that the GSCPI is also well correlated with consumer price inflation for goods in both the United States and Eurozone. Hence, they conclude that, “If global supply chain bottlenecks and energy price increases do not remain persistently high, we may expect to see decreasing pressure on inflation going forward.”

What does this analysis imply about the impact of government policy? For example, some central banks are now starting to tighten monetary policy in response to the recent surge in inflation, the idea being that they need to weaken credit market activity in order to reduce inflationary pressure. Yet the economists at the New York Fed state that producer prices and consumer goods prices are “importantly related to the evolution of global supply factors such as production or shipping bottlenecks and input prices.” This “suggests that domestic monetary policy actions would have only a limited effect on these sources of inflationary pressures.” 

They further note that “supply factors could indeed feed into services over time rather than simultaneously as for goods prices.” This means that if supply chain problems persist and cause a prolongation of producer price inflation, it could ultimately lead to persistent inflation for consumer services. This is the scenario that should be of most concern for those worried about inflation. On the other hand, the Fed analysis suggests that, if supply chain problems abate in the coming months (which the Federal Reserve expects), then inflation should recede as well.

War in Ukraine would mean more than just higher energy prices


  • As of this writing, the Ukraine situation continues to roil financial markets, mainly because of the uncertainty about whether Russia will invade and the certainty that an invasion will have serious implications for the global economy. In recent weeks, global equity prices fell while oil prices rose. The principal focus of analysts is the potential impact on the energy sector. It is widely assumed that oil prices will rise sharply following an invasion and that the price of natural gas in Europe will soar. By the time you read this, you could know whether or not this is true.

One other sector that has garnered little attention is technology. It turns out that Russia and Ukraine are major producers of commodities critical to the production of semiconductors. Ukraine produces 90% of the neon used by US-based semiconductor manufacturers. The neon produced in Ukraine is a biproduct of Russian steel production. In addition, Russia supplies 35% of the palladium used by US-based semiconductor manufacturers. As such, the White House is reported to be in contact with major US technology companies, urging them to quickly diversify their sourcing of these and other commodities. 

The White House as well as leading figures in the technology industry are worried that Russia might impose export restrictions on key commodities as retaliation for US and EU sanctions on Russia following its invasion of Ukraine. Moreover, an invasion would mean disruption of Ukrainian exports, especially if Russia is successful in overwhelming Ukrainian defences. 

If Russian and Ukrainian supplies of key commodities were to be cut off, there are other countries that can partly fill in the gap. The real problem is that prices would soar, thereby potentially having a cascading effect on costs in technology supply chains. It could exacerbate the global inflation problem. Indeed, prices of some commodities are already starting to rise in anticipation. The price of neon, for example, rose 600% following Russia’s incursion into Crimea in 2014. 

This situation couldn’t come at a worse time for the semiconductor industry. During the pandemic, there has been a global shortage owing to soaring demand for information technology, especially given the sharp rise in remote interaction by businesses and consumers. That shortage already had a disruptive impact on the global automotive sector. Recently, there has been a revival of automotive production, indicating that the semiconductor situation was starting to improve. The crisis in Ukraine, therefore, has the potential to reverse the progress made so far. 

Russia is a vast country with a large population. Yet it is not an especially affluent country. It has a GDP smaller than that of South Korea. What enables Russia to play above its weight? First, it has a vast stockpile of nuclear weapons. This means that the West cannot contemplate a military response to a Russian invasion of Ukraine. Second, Russia is a major exporter of oil, gas, and other commodities. This gives it the ability to disrupt the global economy, and especially the European economy, at will. Plus, given that Russia has accumulated a large pile of foreign cash, it can afford to temporarily disrupt its own stream of revenue. 

Still, Russia faces serious economic consequences if it invades. The United States and the G7 have warned of dire consequences for Russia. As such, Russia’s foreign minister, Sergey Lavrov, last week called for continued talks, suggesting that Russia could be looking for a way to avoid an invasion. Lavrov said, “It seems to me that our possibilities are far from exhausted. I would propose continuing and intensifying them.” Meanwhile, the United States is closing its embassy in Ukraine, fearful that its diplomats could be caught in the crossfire of an invasion. From the perspective of financial markets, the best-case scenario would be one in which both sides reach an understanding, thereby avoiding a conflict. Obviously, the worst case is an invasion. But the situation of continued uncertainty is hardly favourable.  

China’s difficult transition to less property development


  • The Chinese economy is widely expected to decelerate sharply in 2022, in large part because of troubles in the massive residential property market. The weak growth reported in the fourth quarter of 2021 was due, in part, to a contraction in construction. Now we have learnt that, in January, contracted sales of property by the country’s 100 largest developers were down 40% from a year earlier. Some of the largest developers reported much larger declines. Some developers have already defaulted on debts and are attempting to sell assets in order to improve their solvency. 

Property prices have stopped rising and potential buyers are likely less inclined to view property purchases as a favourable financial investment. Keep in mind that a very large share of properties in China are unoccupied. Rather, they have been purchased by speculative investors on the view that, in the long term, their value will rise as China becomes more affluent and people shift to better-quality properties. Yet, weakened government support for the property sector, combined with more onerous demographics than previously anticipated, suggests that property might be a less favourable investment than previously expected. 

The government is clearly keen to reduce the impact of the property sector troubles on the economy and create a more sustainable economic model based on consumer spending. The government is also keen to address the issue of massive debt accumulated in the process of building property. This makes sense in the long term. The challenge in the short to medium term is that shrinking such a large sector will necessarily entail slowing economic growth. As this happens, it could mean weaker domestic demand, declining wealth, and potential instability in some places. It will also likely mean weaker Chinese demand for imported goods and commodities. This, in turn, will be damaging to commodity exporters and to countries that sell products and services in the Chinese market. It could lead to a sharp decline in commodity prices. How China’s authorities manage this transition will be one of the key issues for the global economy in the next few years. 

Japan’s economy rebounded in the fourth quarter


  • In the fourth quarter of 2021, as COVID-19–related restrictions were eased, economic activity in Japan accelerated. Real GDP increased 1.3% from the third to the fourth quarter, which is an annualised rate of 5.4%, the highest since the fourth quarter of 2020. This followed a decline in real GDP in the third quarter. For all of 2021, real GDP was up 1.7% from the previous year, after having fallen 4.5% in 2020.

Household spending soared, rising 2.7% from the third to the fourth quarter, driven by a resurgence in spending on consumer-facing services. Moreover, spending on automobiles increased a blistering 9.7%, likely helped by a rebound in production—an indication that the semiconductor shortage might be receding. On the other hand, business capital expenditures increased a very modest 0.4% from the third to the fourth quarter. Exports were up a healthy 1% while imports fell 0.3%.

Going forward, it is likely that first-quarter GDP growth will be hurt by the restrictions imposed to fight the omicron outbreak. This will largely be due to weaker consumer spending, especially on services. Consumer spending will not only be hurt by restrictions and avoidance of social interaction, but rising inflation could cut into consumer purchasing power. Notably, Japanese industrial production fell 1% from November to December after having risen 7% in the previous month. The decline was likely due to omicron-related restrictions. On the other hand, industrial production in December was up 2.7% from a year earlier.

US inflation soars, but will it reverse?


  • Inflation in the United States continues to accelerate, hitting another 40-year high. Equity and bond investors reacted with pessimism, driving down equity prices and driving up bond yields. Many investors had expected that inflation would rise in January from December, but it rose more than expected, thereby spooking markets. 

Here’s what happened. The government reported that consumer prices were up 7.5% in January versus a year earlier, the highest since the early 1980s. Prices were up 0.6% from December to January, the same as in the previous month, but lower than in October and November. Thus, month-to-month inflation evidently peaked a few months ago, but the base effect from a year ago has rendered the 12-month change at an historic high. 

Food and energy prices rose sharply in January, and the two were related. Energy prices were up 27% from a year earlier and up 0.9% from the previous month. The sharp rise in energy prices in the past year likely fed into food prices as food production is highly energy intensive. The result is that food prices were up 7% from a year earlier and up 0.9% from the previous month. When volatile food and energy prices are excluded, core prices were up 6% from a year earlier, which was a 40-year high. Core prices were up 0.6% from December, the same as in the previous month. 

In the press, much was made of the acceleration in the price of rental housing. The price index of renting residential property was up 3.8% in January versus a year earlier, the highest in two years. The price index for the imputed rent of owner-occupied housing was up 4.1% from a year earlier, the highest since 2007. This important indicator is meant to measure the housing component of consumer prices. A large majority of Americans own their homes and don’t buy and sell homes frequently. Thus, to measure the housing component of inflation, the government surveys homeowners and asks them what they would charge if they were renting out their homes. Given that home prices have increased sharply in the past year, homeowners evidently believe they can command higher rents than previously. This measure moves slowly over time, but it clearly has accelerated. This could make it more difficult for inflation to abate in the coming year or two.

Still, despite a modest acceleration in the cost of housing, the main culprit in today’s inflation story remains durable goods. Specifically, the price index for durable goods was up 18.4% in January from a year earlier and up 1.3% from December. Prices of nondurable goods were up 9.8% from a year earlier and up 0.6% from December. On the other hand, the price index for nonenergy services was up only 4.1% from a year earlier and up 0.4% from December. This suggests that inflation remains a supply chain story, driven by the challenges of producing and transporting a sufficient quantity of goods to meet the surge in consumer demand. Recall, during the pandemic, most consumers shifted dramatically away from spending on services and toward spending on goods. This helped to fuel inflation for goods, which persists today. The hope of the Federal Reserve is that, over time, supply chain disruption will abate while consumer demand shifts back toward services. If this happens, inflation will decelerate. In fact, Fed Chair Powell has said that he expects a significant improvement in supply chain efficiency in the second half of this year. 

Some of the details of the report are quite interesting. For example, the price index for used cars was up 40.5% from a year earlier and up 1.5% from the previous month. For new cars, prices were up 12% from a year earlier but were down 0.2% from the previous month. Car rental prices were up 29.3% from a year earlier but down 7% from December. On the other hand, prices of smartphones were down 13.3% from a year earlier while prices of cosmetics were down 1.7% from a year earlier. 

Market reaction to the report was swift and considerable. Many investors viewed the report as boosting the likelihood that the Federal Reserve will increase short-term rates soon and often during 2022. The latest future prices reflect an expectation that the Fed will implement a 50 basis point increase in March and will boost rates by 1.5 percentage points in 2022. Such an aggressive stance would still leave the benchmark rate below 2% by the end of this year. An expectation of rising short-term rates led to higher bond yields, with the yield on the 10-year Treasury bond hitting 2% today for the first time since mid-2019. Still, bond yields remain historically low, likely due to investors’ continued expectation of modest inflation in the long term. Equity prices fell sharply on expectations of higher interest rates. 

What about the Fed? The president of the Federal Reserve Bank of Cleveland, Loretta Mester, said that “the task before us is to remove accommodation at the pace necessary to bring inflation under control. As this process continues, our monetary policy decisions will need to be data-driven and forward-looking.” The reality is that a quick tightening of monetary policy will not likely influence the factors currently driving inflation. But an extreme tightening could undermine economic recovery, thereby eventually slowing inflation. 

I believe that the role of the Fed right now is to anchor expectations of inflation. So far, investor expectations of inflation remain tame. The 10-year “breakeven rate,” an excellent measure of bond investor expectations of inflation, remains roughly where it was in June when inflation was very low. Thus, many investors have not yet panicked. But if expectations by workers and employers change significantly, there could be a wage-price spiral that would fuel continued inflation. This has not happened yet, but it could happen if inflation persists longer than expected. The labour market in the United States is very tight, as evidenced by a low unemployment rate and a high job vacancy rate. And, although wages have accelerated, they have not risen fast enough to fuel more inflation. Moreover, productivity growth has accelerated, helping to offset the inflationary impact of rising wages. 

What the Fed does now will have global implications as it will drive interest rate differentials that can affect currency values. Emerging countries are especially vulnerable to Fed action and many have already boosted their benchmark interest rates, thereby risking an economic slowdown. 

Finally, I continue to believe that inflation will gradually abate in 2022 and 2023 as supply chain difficulties recede. This view is shared by the Federal Reserve, other central banks, the IMF, and the OECD. Still, it is a lonely position. Often, participants in the market economy are afflicted by what we economists call adaptive expectations. That is, they base their expectations for the future on what happened in the recent past. We have only had about six months of accelerating inflation, but some observers now expect a decade of high inflation. They might be right, but the evidence still suggests otherwise. Nevertheless, things could still go wrong. Another outbreak of a new variant of the virus could undermine inflation predictions. So would a Russian invasion of Ukraine, which would likely result in much higher oil prices. 

Bond yields and interest rates in the current environment


  • There is much to say about bond yields. Yet, you’re probably wondering why I write so much about yields on government bonds. There are a couple of reasons. First, government bond yields are a benchmark for the pricing of corporate and other private sector securities. Thus, they have an impact on the cost of capital and the volume of transactions. Second, bond yields provide signals about investor expectations for inflation, economic growth, and supply-demand conditions in the market for bonds. These expectations can influence economic decision-makers, including government officials and private businesses. 

Here is the latest on bond yields. The yield on the US government’s 10-year bond hit 2% last week, the highest since mid-2019 just prior to the start of the pandemic. However, the yield remains well below the level reached in 2018. A government bond yield encompasses several components. Part of the yield is attributed to investor expectations of inflation in the next 10 years. This is reflected in the so-called breakeven rate that I have discussed in these pages ad nauseum. Although the overall yield has increased about 50 basis points since just prior to Christmas, the breakeven rate has not changed at all. Thus, the increase in yields is not due to changed expectations of inflation. Rather, it is due to changes in expectations about supply-demand conditions in the bond market. That, in turn, can be influenced by expectations about the level of government borrowing as well as expectations of economic growth, which influences overall credit demand. 

Investors know that the US government will issue far less debt in 2022 than in 2021. Thus, bond issuance is not the issue. Moreover, investors know that the Federal Reserve will soon stop purchasing bonds and might choose to sell them. This expectation likely contributed to the rise in yields. In addition, the rise in yields likely reflects investor confidence that the economy is strong, as evidenced by stronger-than-expected GDP growth in the fourth quarter and stronger-than-expected jobs growth in January (the latter was especially surprising given the omicron outbreak, which had been expected to be more disruptive than it was). From that perspective, the rise in yields is not necessarily a bad thing. It reflects optimism about the economy. 

Interestingly, the real (inflation-adjusted) yield on the 10-year bond remains negative—but not as negative as previously. Thus, investors are not much concerned about excessive demand for credit. Rather, they evidently expect a more-than-adequate supply of bonds. Meanwhile, the fact that yields remain well below levels reached just two years ago suggests optimism that inflation will ultimately be brought under control.   

  • Expectation of a potential tightening of ECB policy has led to a rise in European bond yields, especially in southern Europe. Will this create financial trouble for southern Europe? The yields on bonds issued by Italy and Greece have risen in recent weeks, faster than the increase in yields on bonds issued by Germany. Although yields remain well below the level seen in early 2019, the rise has led some observers to wonder if Italy, and especially Greece, could face financial repercussions. The very low yields seen in the past two to three years have enabled these countries to easily service their unusually large debts, thereby boosting the confidence of investors and allowing for strong business investment. A reversal might not only create financial stress but might also stifle business investment and, therefore, economic growth. On the other hand, investor confidence in the current governments of both countries is unusually high.

The increase in yields is not a reflection of increased expectations of inflation. Indeed, European breakeven rates have remained steady. Rather, the rise in yields likely reflects investor expectations of a shift in monetary policy beyond what the ECB has indicated. Investors probably expect a rapid end to bond purchases and a more imminent increase in short-term interest rates than the ECB has let on. Moreover, investors are likely pleased that economic growth is strong and that the economic consequences of the omicron variant were mild. These factors also contribute to higher yields. 

  • With higher US interest rates coming, some emerging market central banks have already raised their interest rates substantially while others are now ready to act. In the past year, the central banks of Mexico, Brazil, Argentina, Russia, and South Africa increased policy interest rates to avert substantial capital outflows that would have severely depressed their currency values. A depreciating currency would damage the ability of debtors to service foreign currency denominated debts. It would also boost import prices, thereby contributing to higher inflation. 

Meanwhile, some countries have waited, including India, Indonesia, and especially Turkey. Yet there has lately been an increase in capital outflows from India, suggesting that the central bank might soon raise rates. The problem with raising rates is that it stifles credit market activity, thereby hurting economic growth. As for Turkey, it is currently experiencing very high inflation following a sharp currency depreciation. This followed a policy of cutting interest rates that led to large capital outflows. It is not clear how long this policy can be sustained.

The tightening of US monetary policy is one of several potential challenges faced by emerging markets. Others include a slowdown in China’s economy, which would reduce Chinese demand for imports and weaken global commodity prices; a low vaccination rate in many emerging markets, which means that such countries are at greater risk from new variants; and weakened migration, which has had a negative impact on potential revenue from the remittances of overseas workers. In addition, emerging countries lack sufficient flexibility to use monetary and/or fiscal policy to boost demand. These are among the reasons that the IMF and other forecasters are expecting a slower return to normalcy in emerging economies than in advanced economies.

Britain’s economy grows, but remains below prepandemic level


  • The British government reports that real GDP increased 1% from the third to the fourth quarter and was up 6.5% from a year earlier. For all of 2021, real GDP was up 7.5% from the previous year, the highest rate of growth since 1941. Of course, the economy contracted 9.4% in 2020. Consequently, fourth-quarter GDP remained 0.4% below the prepandemic peak. The growth of the British economy in the fourth quarter was faster than growth in neighboring France, Italy, and Germany, but slower than that in Spain, the United States, or Canada. 

In the fourth quarter, real consumer spending was up 1.2% from the previous quarter. Government spending was up 1.9%, capital formation was up 2.2%, and exports were up 4.9%. Imports were down 1.5%. Although exports were up strongly in the fourth quarter, export growth for all of 2021 was modest. Some analysts point to Brexit-related problems for trade with the European Union. 

By sector, there was strong growth in health care and social services, professional services, and transportation. Activity declined in accommodation and food services (likely due to pandemic–related restrictions), public administration and defence, wholesale and retail trade, education, real estate, and finance. 

By type of activity, services were up strongly while production was down in the fourth quarter. As for the latter, construction activity increased strongly, manufacturing output was flat, and there was a sizable decline in output by electric utilities and the mining industry. Within manufacturing there was a big increase in output by the pharma industry while there were sharp reductions in output for machinery/equipment as well as transportation. 

Going forward, the first quarter is likely to be adversely affected by omicron-related restrictions in January. For the remainder of the year, Britain’s economy is likely to be hurt by a sharp decline in real household income. This will be due to high inflation not offset by sufficient wage gains, higher taxes, and higher energy prices.  

Dealing with Japan’s onerous demographics


  • Japan will likely face a labour shortage in the coming two decades, driven principally by demographic trends. The working-age population is set to decline sharply while the retired population continues to rise. The Japan International Cooperation Agency (JICA), which is the arm of the government responsible for foreign aid, issued a report saying that Japan needs to quadruple the number of foreign workers by 2040 to avert a severe shortage and to continue growing. Currently, there are about 1.7 million foreign workers (about 2.5% of the workforce) and the government says this must rise to 6.7 million by 2040. Moreover, the agency said that Japan must invest heavily in labour-saving and labour-augmenting technologies to boost the productivity of existing workers. If investment falters, then the number of foreign workers needed would be 21 million by 2040. 

In recent years, Japan has welcomed a significant number of foreign workers, disproportionately from Southeast Asia as well as from China. Japan’s government is considering allowing more foreign workers to seek permanent residency, thereby making Japan a more attractive destination for migrants. Currently, only those in construction and shipbuilding are permitted to obtain permanent residency. Japan must contend with competition from other migration destinations such as the United States and Europe. 

In addition, some of the more middle-income countries in East Asia, including China, Thailand, and Malaysia, now face their own demographic challenge, with declining working-age populations and a rising elderly population. Hence, it is likely that Japan will procure more workers from the poorer countries in Southeast and South Asia. These include Vietnam (currently the biggest source of migrants), Cambodia, Myanmar, India, Bangladesh, and Nepal. The JICA has also highlighted Africa, with its fast growing and youthful population, as a good potential source of migrants. 

In addition to immigration, Japan has sought to boost the size of its labour force by encouraging more women to work and by encouraging existing workers to retire later. Still, the JICA indicates that immigration is the key to resolving Japan’s demographic challenge. The closure of borders during the pandemic has been a setback in meeting targets and—according to the JICA—has weakened the attractiveness of Japan to foreigners. The president of the JICA said, “If we keep going like this, Japan could become like a deserted village where people are unfriendly to foreigners and fewer newcomers would arrive. It would be a vicious cycle towards downfall.”  

Implications of a declining Japanese yen


  • Since the start of 2021, the value of the Japanese yen has fallen sharply against the US dollar. Normally, a declining yen would be seen as a positive development. First, it leads to increased import prices, thereby boosting inflation. Given that Japan has been afflicted by persistent deflationary pressure, this is welcome. Second, a declining yen reduces export prices, thereby boosting the competitiveness of Japan’s exports. That, in turn, is seen as positive for economic growth. 

However, the declining yen has had unintended consequences. According to the Japanese government, import prices are up about 30% from a year ago. This has led to a surge in some prices paid by consumers, having a negative impact on their real purchasing power. Food prices, in particular, have risen sharply, leading to a significant increase in the food share of total consumer spending. This measure has hit the highest share since the mid-1980s. In addition, prices of apparel and consumer electronics, both heavily imported, are up strongly from a few years ago. This, too, has reduced the real purchasing power of households. 

Meanwhile, export prices have not fallen. Rather, they are up about 10% from a year ago. This is due, in part, to the fact that higher-priced imported inputs and commodities are embedded in exports. Thus, the decline in the yen has not had the desired impact on export competitiveness. 

Despite a surge in import prices and in the prices of some key imported goods, the overall inflation rate in Japan remains very low compared to other major industrial economies. The Bank of Japan retains an extraordinarily easy monetary policy, one it says it intends to keep. As the US Federal Reserve embarks on a tighter policy, the interest rate differential between Japan and the United States has risen, thereby contributing to the rise in the value of US dollar against the yen. It is unlikely that the yen will recover anytime soon. 

Rising Eurozone inflation and what the ECB intends to do


  • Inflation in the 19-member Eurozone hit a record high in January, with consumer prices up 5.1% from a year earlier. Yet, this was largely due to a 28.6% surge in energy prices. That, in turn, was partly due to the natural gas crisis in Europe in which prices have soared from a year earlier. On the other hand, natural gas prices in Europe have fallen sharply since December. Still, this was offset by a sharp rise in oil prices. Thus, energy prices were up 6% from December to January. Overall consumer prices were up a modest 0.3% from December to January. Meanwhile, when volatile energy and food prices are excluded, core consumer prices were up only 2.3% in January from a year earlier, the lowest in three months. Core prices fell 0.8% from December to January. 

Examining this in a little more detail, the European Union reported that nonenergy industrial prices were up a modest 2.3% in January from a year earlier and were down 2% from the previous month. Prices of services were up 2.4% from a year earlier and were unchanged from the previous month. These numbers suggest that underlying inflation, unrelated to energy and food, has either peaked or is abating. Improvements in supply chain efficiency might explain this. 

By country, overall annual inflation was 5.1% in Germany, 3.3% in France, 5.3% in Italy, 6.1% in Spain, 7.6% in the Netherlands, 8.5% in Belgium, 5.5% in Greece, 5% in Ireland, and 3.4% in Portugal. Some of these numbers are different than what was reported earlier this week by national governments. The difference is that the European Union has a harmonised method of comparing inflation in different member countries that is somewhat different than the methods employed by member country governments. 

  • Following the news regarding record high inflation in the Eurozone, the European Central Bank (ECB) said that it does not intend to change the trajectory of short-term interest rates. However, it reiterated that it intends to continue to reduce bond purchases throughout 2022. The high inflation number led some observers to call for a tightening of monetary policy as has happened in the United States and the United Kingdom. 

Although the ECB did not change policy, ECB president Christine Lagarde did acknowledge concern. She did not dismiss the idea of raising interest rates in 2022. She also said that the risk of inflation is “tilted to the upside.” Her comments had an impact on investors. In response, the value of the euro increased against the US dollar and Eurozone bond yields increased sharply. In addition, future prices reflected an increased probability that the ECB will raise interest rates sometime in 2022. Specifically, investor expectations suggest that the ECB will raise its benchmark rate from –0.5% to –0.1% during 2022. Thus, whether intended or not, Lagarde’s comments moved the needle in terms of investor expectations of monetary policy.

Meanwhile, the ECB continues to predict that inflation will drop below 2% by the end of this year (it was 5.1% in January). Given that core inflation (excluding the impact of volatile food and energy prices) is already below 3%, this is not as big a leap as it seems.  

The US jobs market surprises on the upside and investors react


  • The US job market surprised investors, adding 467,000 jobs in January following a significantly upwardly revised 510,000 job increase in December. This was far more than had been expected, especially given that ADP had predicted a loss of 300,000 private sector jobs in January. Moreover, the omicron outbreak had been expected to dampen job growth in January—at least temporarily. After all, the services PMI and various indicators of consumer mobility had worsened in January. In response to the surprise report, the yield on the US government’s 10-year bond soared to a 25-month high of 1.9%. That reflects a view that the economy is stronger than previously thought. Moreover, investors are increasingly expecting that the Federal Reserve will boost the benchmark interest rate by as much as 50 basis points in March. A strong economy is seen as providing further fuel for inflation. Finally, the government’s report found that participation in the labour force increased sharply in January, hitting the highest rate since the start of the pandemic. This raises the possibility that the pandemic-related suppression of participation may be reversing. Let’s look at the details:

The US government issues two reports on the labour market each month: one based on a survey of establishments; the other based on a survey of households. The establishment survey found that employment rose by 467,000 in January and was up 6.6 million from a year earlier. However, employment remained 2.9 million below the prepandemic level from February 2020. This reflects the fact that participation remains below the prepandemic level. 

Some sectors experienced especially strong job growth in January, led by leisure and hospitality, which saw an increase of 151,000. Other sectors with significant gains were professional services (up 86,000), transportation and warehousing (up 54,200), and retail trade (up 61,400). These four sectors, which account for about 40% of total employment, accounted for 75% of job growth in January. The strength of job growth in leisure and hospitality as well as retail is somewhat surprising given that the massive omicron outbreak had been expected to especially disrupt these types of businesses. Meanwhile, manufacturing only added 13,000 jobs, which included 4,900 jobs lost in the automotive sector. 

The establishment survey also indicated a 5.7% increase in average hourly earnings in January versus a year earlier. This, of course, was lower than the 7% inflation rate reported. Thus, in real (inflation-adjusted) terms, hourly earnings declined. Notably, the leisure and hospitality sector experienced a 13% increase in hourly earnings. This is not surprising given that this sector also has the highest job vacancy rate and the highest quits rate of any industry. In a very labour-intensive sector, companies cannot provide their services if they cannot employ enough workers. Thus, leisure and hospitality companies are evidently willing to pay far more in order to attract the labour they require. Meanwhile, wages were up 6.9% for professional services, up 6.8% for transportation and warehousing, up 5.4% for retailing, and up 5.1% for manufacturing. 

The separate survey of households reported a big increase in labour force participation, with participation rate rising from 61.9% in December to 62.2% in January. It was up from 61.4% a year earlier. Still, the participation rate had been 63.4% in February 2020. The decline since the start of the pandemic partly reflects the decision by many older workers to retire early. Meanwhile, as the size of the labour force grew even faster than the number of employed, the unemployment rate increased from 3.9% in December to 4% in January.  

As noted above, the yield on the 10-year bond increased sharply following news of the jobs report. However, shorter-dated bond yields increased even more. That reflects a view that the Federal Reserve will soon significantly increase short-term interest rates. Next week’s inflation report will provide further information that could drive the direction of Federal Reserve policy, or at least expectations of Fed policy. 

Meanwhile, bond yields also increased in Canada, across Europe, and in Japan and China. Global yields clearly responded to the US jobs news, which has implications for Federal Reserve policy. Moreover, this came following the news that the Bank of England is raising its benchmark rate and that the ECB is increasingly amenable to future rate hikes. Thus, the global economy and financial system, characterised by tight labour markets, accelerated inflation, and shifting monetary policy, are becoming more synchronised. Also, the fact that US employment grew strongly even in the midst of the omicron outbreak is significant. It implies that the economic impact of the pandemic is abating. That suggests that, if there are future outbreaks of new variants in the coming year, they might not have a big impact on economic activity.  

US productivity growth and its impact on inflation


  • The shortage of labour in the United States has led to an acceleration in wages. This has led to fears that rising labour costs could set off a wage-price spiral that would exacerbate and prolong high inflation. Yet, it is not just labour costs that matter. Productivity plays a role as well. For example, if a worker’s hourly wage rises 5% and his/her productivity (output per hour worked) also rises 5%, then the hourly labour cost of producing a company’s product or service would not increase at all. That is, the rise in wages would be entirely offset by a rise in productivity. This would mean that the company needn’t raise prices to maintain profitability. We economists measure this phenomenon by estimating unit labor costs (ULCs). This is the labour cost of a unit of output. The change in ULC is calculated as the change in wages divided by the change in productivity. 

The good news is that, although wages have accelerated, so has productivity. The result is that ULCs are rising modestly, thereby alleviating potential inflationary pressure. Here are the relevant numbers: in the fourth quarter of 2021, nonfarm output was up 7% from a year earlier while hours worked was up 4.9%. Hence, labour productivity grew 2%. Meanwhile, hourly compensation was up 5.1%. Thus, ULC increased only 3.1% from a year earlier. It was up only 0.3% from the previous quarter. Also, for all of 2021, ULC was up 3.3% from 2020.

It should be noted that productivity data was likely distorted during the pandemic by a shift in the composition of the workforce. Still, the relatively modest increases in ULCs bode well for bringing inflation under control. A rapidly rising ULC, in contrast, would bode poorly for suppressing inflation. The key is productivity. During the pandemic, there was an acceleration in investment in information technology. This likely had a positive impact on productivity. Another key is the fact that, although wages have accelerated, they have not accelerated as much as prices. Thus, in real (inflation-adjusted) terms, wages have been declining. In fact, the government reports that, in the fourth quarter, real compensation was down 1.5% from a year earlier. While helpful in averting a wage-price spiral, the reduction in real wages means less purchasing power for consumers. If this persists, it could likely have a negative impact on economic growth.

New data suggests a shift in direction for the US economy


  • The United States witnessed strong economic growth in 2021, with real GDP up 5.7% from the previous year. This was the strongest growth since 1984. After having grown at an annualised rate of only 2.3% in the third quarter, real GDP accelerated sharply in the fourth quarter, growing at a rate of 6.9%. However, 4.9 percentage points of this can be attributed to business replenishment of depleted inventories. The surge in inventories took place as retailers, wholesalers, and automotive companies imported vast quantities of goods and inputs, in part to avoid shortages at a time of robust consumer demand. The fourth-quarter surge will likely mean weak inventory accumulation in the first quarter of 2022, thereby dampening economic growth. On the other hand, the retail industry’s inventory-sales ratio remains historically low. Thus, retailers might continue to accumulate inventory. 

The major components of GDP offer a mixed picture of economic performance. Let’s begin with real consumer spending, which was up at an annual rate of 3.3% in the fourth quarter. For the past year and a half, the big trend was a shift away from spending on services toward spending on goods. The surge in demand for goods contributed to supply chain disruption and rising inflation. Yet, it now appears that the trend has reversed for the most recent two quarters. In the fourth quarter, real spending on goods grew at a rate of 0.5% while real spending on services grew 4.7%. As for goods, durable goods were up only 1.6% having declined at a rate of 24.6% in the third quarter. The weakness of durables was mostly due to a sharp decline in purchases of automobiles. Notably, spending on durable goods was up 18% for all of 2021. Thus, a major reversal is in the works. Nondurable goods were down 0.1% in the fourth quarter. If sustained, this shift away from spending on goods will likely relieve pressure on supply chains and help to dampen inflation. It should be noted that the lion’s share of inflation in the past year stemmed from increasing prices of goods, not services. 

As for investment spending, nonresidential investment was up a modest 2% in the fourth quarter. Investment in structures (office buildings, shopping centers, warehouses, factories, oil wells) declined at a rate of 11.4% in the fourth quarter—the third consecutive quarterly decline. In fact, the real volume of spending on structures hit the lowest level since 2011. Weak demand for structures might reflect a structural shift in the economy toward remote interaction. That is, if people increasingly work and shop from home, there will be less need for office space or shopping centers. 

Meanwhile, investment in equipment increased only 0.8%, almost entirely due to a sharp decline in investment in transportation equipment. Investment in information technology continued to grow. The last category of business investment, intellectual property, grew strongly—up 10.6% in the fourth quarter, led by strong investment in software. Interestingly, residential investment was down 0.8% in the fourth quarter, the third consecutive quarterly decline. This weakness, at a time of strong demand for homes and rising home prices, likely reflects shortages of key inputs as well as labour. 

The strongest part of the GDP report concerned trade. Exports of goods were up at a rate of 24.4% while exports of services were up 24.7%. Meanwhile, imports of both goods and services were up at a rate of 17.7%. Finally, purchases by both the Federal and state governments declined in the fourth quarter.

Notably, the government reported that real disposable personal income fell at a rate of 5.8% in the fourth quarter. This was despite healthy growth of wage income. The decline was largely due to the unwinding of several government stimulus programmes. Despite the decline in real income, consumer spending grew modestly due to rising wage income and a decline in the personal savings rate—down from 9.5% in the third quarter to 7.4% in the fourth quarter. Importantly, the governments child tax credit expired in December. If it is not renewed (as proposed in the Build Back Better bill), this will cause a further decline in income in the first quarter, especially for lower-income households. 

Going forward, there are three factors that are likely to cause weak economic growth in the current first quarter. First, the omicron outbreak has had a negative impact on consumer mobility and activity in the services sector in January. Even if this is reversed in February, the effect on the first quarter is expected to be negative. Second, the massive accumulation of inventories in the fourth quarter means that inventory investment in the first quarter could be modest, thereby slowing growth. Third, the expiration of the child tax credit will significantly decrease income for lower-income households, thereby dampening consumer spending. 

What are the factors that will determine economic performance for the remainder of 2022? On the negative side, fiscal and monetary policy will both be contractionary, thereby dampening growth. In addition, assuming wage inflation lags price inflation (as has been the case in the past year), then real incomes could suffer, thereby hurting consumer spending. 

On the positive side, many households and businesses are flush with cash. And, despite a likely rise in short-term interest rates, borrowing costs are likely to remain historically low. These factors will likely have a positive impact on spending. Moreover, assuming that supply chain difficulties are gradually resolved, then bottlenecks and production constraints will lessen. This will both boost output and weaken inflation. Finally, if omicron turns out to be the last hurrah for the virus, then a perception that the pandemic is over will likely lead to an acceleration in spending on services, especially travel, leisure, and hospitality.  

What PMIs tell us about the United States’ economic outlook


  • The omicron variant had a negative impact on global economic activity in January, but nowhere more so than in the United States. The latest Purchasing Managers’ Indices (PMIs) show that US economic activity slowed substantially in January, with the composite PMI hitting the lowest level in 18 months. This slowdown was disproportionate due to a sharp deceleration in activity in the services industry.

PMIs are forward-looking indicators meant to signal the direction of activity in either the manufacturing or services industries. They are based on a group of subindices such as output, new orders, export orders, employment, inventories, pipelines, pricing, and sentiment. A reading above 50 indicates growing activity, and vice versa. The higher the number above 50, the faster the growth. 

The latest flash PMI estimates from IHS Markit indicate that the PMI for US manufacturing slipped from 57.7 in December to 55.0 in January, a 15-month low. Still, the PMI is at a level indicating solid growth of activity. The PMI for services fell from 57.6 in December to 50.9 in January, an 18-month low indicating barely any growth at all. 

In the manufacturing sector, output stalled in January, remaining at roughly the same level as in December. In part this reflected the disruptive impact of supply chain difficulties such as worsening lead times and shortages of key materials and labour. Meanwhile, new orders grew, but at the slowest pace since July 2020. Manufacturers report that some customers are cutting back on spending due to price increases. On the other hand, the rate of cost inflation fell to the lowest level since May 2021. Output inflation fell to the lowest level since April 2021. Markit said that “there were signs of pressure waning.” Notably, manufacturer confidence in the future was the highest since November 2020. Evidently, current troubles are seen as temporary.

In the service sector, output stalled in January while shortages of labour and employee absences disrupted the ability to grow. Meanwhile, new orders were strong, including from overseas. Also, input cost inflation decelerated in January. But output inflation accelerated to the highest rate on record as companies increasingly passed on their cost increases to customers. Finally, business confidence worsened as service providers worried about the impact of inflation and the current outbreak of the virus. 

In sum, Markit said that “soaring virus cases have brought the US economy to a near standstill at the start of the year.” However, Markit also noted that “output has been affected by Omicron much more than demand, with robust growth of new business inflows hinting that growth will pick up again once restrictions are relaxed. Furthermore, although supply chain delays continued to prove a persistent drag on the pace of economic growth, … the overall rate of supply chain deterioration has eased compared to that seen throughout much of the second half of last year.”  

What about US labour costs?


  • Labour costs in the United States grew rapidly in December, reflecting the severe shortage of labour that has lately afflicted the US economy. However, the data needs to be considered in context. For example, it is notable that, although wages have accelerated sharply, they continue to rise more slowly than prices, thereby rendering workers with less purchasing power. Moreover, this means that we have not yet seen the start of a wage-price spiral that would contribute to prolonged inflation.

Let’s look at the data. First, the US government’s Employment Cost Index (ECI), which encompasses both wage and salary income as well as benefits such as health insurance, increased 4% in December versus a year earlier. This was the fastest rate of increase since 2002. For most of the last 20 years, the ECI grew faster than the Consumer Price Index, with periodic exceptions. The current period is one such exception, and it is a big one. In real (inflation-adjusted) terms, the ECI declined about 3% in December from a year earlier. This was the largest decline in the last 20 years. 

The surge in compensation is due to a shortage of labour. Yet, the shortage is evidently not sufficiently severe to drive real increases in compensation. Moreover, the shortage might be abating as evidenced by a deceleration in wage gains from the third to the fourth quarter. In addition, although wage gains are not currently inflationary, the drop in real wages is a matter of concern as it means that households have less purchasing power. The result could be downward pressure on real spending, thereby slowing economic recovery. 

Meanwhile, the wage and salary component of the ECI was up 4.5% in December versus a year earlier, still lower than the rate of inflation. The benefits component increased 2.8% from a year earlier. In real terms, wages and salaries were down about 2.5% from a year earlier. Also, wages and salaries grew 5% for private sector workers but only 2.7% for state and local government workers. 

Where the Federal Reserve stands


  • Last week, the Federal Reserve’s policy committee, the Federal Open Market Committee (FOMC), released a statement concerning its latest deliberations. It said that it will leave the federal funds rate unchanged this month and will continue to reduce the pace of asset purchases, with the intention of ending such purchases by March. It did not say, however, if it intends to start selling assets later this year as has been suggested by some analysts. 

Meanwhile, the Fed said that it “expects it will soon be appropriate to raise the target range for the federal funds rate.” Most analysts believe that the Fed will initially raise the federal funds rate in March. In addition, market commentary suggests a likelihood of four to five rate hikes this year. Currently, the rate is targeted at between 0% and 0.25%. By the end of this year, it seems likely that the rate will be between 1% and 1.5%—which is still a very low level compared to historical data. In his press conference, chairman Powell said that the members of the committee believe the labour market is relatively tight. Consequently, he is not worried that a tightening of monetary policy will hurt labour market conditions. In fact, he said that there is plenty of room for interest rate normalisation without hurting the labour market. 

There were a couple of notable parts of the Fed’s statement. First, it said that “supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.” This is consistent with its previous statements about the causes of inflation. That is, the Fed appears to believe that inflation is largely a supply chain story. It also suggests that the Fed still sees the current high inflation as temporary, if higher and more prolonged than previously anticipated. Indeed, Powell said that there are some signs of improvement in supply chains that should eventually lead to lower inflation. Still, he remained uncertain as to how quickly this will take place. He suggested that supply chain disruption will begin to abate significantly in the second half of this year. Moreover, he said that a tightening of monetary policy is meant to signal that the Fed intends to prevent inflation from getting much worse. 

In addition, the Fed said that “the path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus.” This is a recognition of the uncertainty surrounding the virus. It is also a recognition that the path of the virus could prolong the current inflation, or it could undermine economic growth. That uncertainty means that the Fed’s future path is uncertain as well and will be dependant on new data. 

The Fed’s decision and statement on interest rates was approved unanimously by the members of the FOMC. Moreover, the decision was not a surprise and largely reflected market expectations. Nevertheless, the announcement by the Fed was followed by a sharp rise in bond yields. This might reflect a view that the Fed’s decision indicates a likelihood of more prolonged inflation. Or it could reflect a view that the Fed’s decision indicates a likelihood of a stronger economy in the coming year. In addition, the announcement was followed by a decline in equity prices as investors repriced valuations based on expectations of higher interest rates. Also, the value of the US dollar increased in line with higher bond yields. 

Finally, the Fed’s announcement could have a further disruptive impact on financial markets in emerging countries. In many emerging markets, central banks are already tightening monetary policy to stifle capital outflows that can have a negative impact on currency values. Depending on what the Fed does in the coming year, there could be significant further tightening of monetary policy in key emerging markets. Higher interest rates in emerging countries could stifle economic growth at a time when these countries already face serious obstacles including low rates of vaccination.  

Recent growth trends in the Eurozone


  • In the Eurozone, three major economies released data on GDP growth for the fourth quarter and the results were varied. Germany’s economy contracted, France’s economy decelerated, and Spain’s economy grew at a healthy pace. Here are some details:

Germany’s real GDP fell 0.7% from the third to the fourth quarter, likely due to restrictions imposed during the delta outbreak of the virus. For all of 2021, real GDP was up a modest 2.8%. Going forward, the government said that first quarter GDP “will still be subdued due to the coronavirus pandemic, especially in the service sectors.” The government predicts real GDP growth of 3.6% for all of 2022. Germany has faced challenges meeting global demand for its exports due to supply chain issues. Those issues have contributed to Germany’s relatively high inflation. 

It is notable that Germany is now one of the slower growing economies in Europe but one of the higher inflation economies. For the European Central Bank (ECB), which must target inflation in the entire Eurozone, this is a challenging combination. A tightening of monetary policy might hurt Germany’s recovery while not necessarily addressing supply chain–related inflation. Thus, the ECB has so far chosen to retain an expansive monetary policy. 

France’s real GDP increased 0.7% from the third to the fourth quarter. This is a sharp deceleration from 3.1% growth in the previous quarter. For all of 2021, France’s real GDP grew 7% from the previous year, the highest rate of growth in 52 years. In the fourth quarter, household spending decelerated while business investment accelerated. 

Finally, Spain’s real GDP grew 2% from the third to the fourth quarter, a very rapid pace following 2.6% growth in the previous quarter. Growth was fuelled by very strong business investment, with especially strong growth for investment in business equipment (up 6.1%) and intellectual property (up 10%). In addition, exports were very strong. On the other hand, consumer spending declined, largely due to restrictions related to the spread of the virus as well as the impact of a sharp increase in inflation on consumers’ purchasing power.  

What PMIs say about the Eurozone’s economic outlook


  • In the Eurozone, the services and manufacturing sectors moved in different directions in January. The services PMI fell from 53.1 in December to 51.2 in January, a nine-month low. Meanwhile, the manufacturing PMI increased from 53.8 in December to 55.8 in January, a five-month high. What happened?

In the service sector, output stalled in January, largely due to the reimposition of economic restrictions related to the omicron outbreak. Such restrictions limited interaction with consumer-facing businesses such as restaurants and hotels. Markit said that, in Europe’s largest economies, such restrictions in January were at the highest level since May. Markit also noted that employee absenteeism had an adverse impact on output. 

Meanwhile, manufacturing activity accelerated, despite continued labour shortages that constrained growth. Notably, Markit commented that supply chain problems showed “signs of easing.” The rebound in manufacturing was largely due to an improvement in Germany, especially in the critically important automotive sector. With respect to German industry, Markit said that “the drag on production from supply-chain issues looks to have eased further, although there is still a lot of room for improvement on this front.” French manufacturing activity did not accelerate.

Finally, although Markit said there was an easing in raw materials pricing, it noted that wages and energy costs continued to accelerate in January, thereby “dashing hopes of any imminent cooling of inflationary pressures.”


Deloitte Global Economist Network


The Deloitte Global Economist Network is a diverse group of economists that produce relevant, interesting and thought-provoking content for external and internal audiences. The Network’s industry and economics expertise allows us to bring sophisticated analysis to complex industry-based questions. Publications range from in-depth reports and thought leadership examining critical issues to executive briefs aimed at keeping Deloitte’s top management and partners abreast of topical issues.

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Cover image by: Sylvia Chang

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