Charts of the Week (Feb 10, 2023)

Inflation surprises As noted, one key source of optimism about the economic outlook concerns inflation. Having peaked in Q2 last year, Citigroup’s inflation surprise indicators have now been in retreat for several months. Inflation outcomes in other words have been surprising forecasters on the downside far more frequently, particularly in emerging economies (see chart 1 below).

US bank lending standards Evidence is accumulating too to suggest that tighter Fed policy is slowing the wheels of credit in the US economy. This week’s Senior Loan Office Opinion Survey for January suggested there has been a broadly based tightening of bank lending standards and a big weakening in demand for new credit. In chart 2 below we illustrate this via some unweighted averages of the proportions of banks that are a) tightening standards for both corporate and household lending categories and b) reporting weaker (or stronger) demand.

The RBA The Reserve Bank of Australia (the RBA) raised its policy (cash) rate by 25bps to 3.35% this week, extending its run of rate hikes to nine meetings in a row. While high domestic inflation was cited as a key reason, the RBA is of course responding to the same global forces that have been generating tighter monetary policy in other major economies. Indeed, given its commodity price dependency, Australia’s economy is typically highly sensitive to global business cycle fluctuations. This is evidenced by the very tight correlation between its domestic rates and policy rates in other advanced economies in chart 3 below.

The global business cycle This week’s sentix surveys for February suggest that investor sentiment has continued to improve in recent weeks. Indeed the forward looking expectations components of many of these surveys (which encompass the US, Europe, Asia, Eastern Europe and Latin America) exhibited a much stronger-than-expected climb. A business cycle clock for the global aggregation of this survey suggests an upswing in the global economic cycle, as evidenced in chart 4 below. Sentiment surveys, however, have not enjoyed a very tight correlation with harder data for e.g. industrial production, retail sales and broader rates of GDP growth in recent months.

Industrial production in advanced economies That previous point was reinforced this week by much weaker-than-expected industrial production data from Germany. Production specifically slumped by 3.1%m/m in January to its lowest level since August 2020. From a slightly longer-term perspective Germany’s industrial production has been relatively weak compared with other advanced economies in recent years (see chart 5 below). Some of this under-performance can be traced to its relatively high exposure to Russian sources of energy supply and to China.

The UK and Brexit Chart 5 above also suggests that industrial production in the UK has under-performed relative to other major economies, including Germany, over the past few years. Could Brexit have been to blame? The debate on this question has become more active (and heated) in recent months sparked by growing economic, political and social instability. On the economic front, the evidence is becoming more damning. For example, UK export volumes to the EU remain below where they stood prior to the EU referendum in mid-2016. Business investment volumes are also below those mid-2016 levels and well below similar rates in other major economies (see chart 6 below).