Charts of the Week (Feb 17, 2023)
|in:Economy in Brief
The shift toward a soft landing consensus that had been in vogue since the start of this year has suffered some setbacks over the past two weeks. Last week’s strong US jobs data combined with this week’s firmer-than-expected US CPI report have been the principal challenges to that view. Still-hawkish communications in the meantime from a number of central bankers have additionally thrown some salt onto the wounds. Our first two charts this week home in on the recent evolution of consensus growth forecasts for 2023 and how these contrast with high-frequency indicators of economic activity. China’s re-opening is another closely-watched theme at present and we offer some perspectives on this in our third and fourth charts. Then, returning to the US, we contrast indications about recession risks from a couple of indicators in our fifth chart. And finally we make a nod to this week’s UK labour market report and its suggestion that wage pressures could now be easing, in our sixth chart.
The 2023 growth consensus The latest February Blue Chip survey of professional forecasters chimed with the idea that had, until recently, been prevailing in financial markets that global growth prospects for this year were improving. Consensus forecasts for 2023 were lifted in a number of major economies and most notably in China (see chart 1 below).
Chart 1: Blue Chip GDP forecasts for 2023 for China, the US, UK and Euro area
Higher frequency indicators of economic activity The OECD’s high frequency indicators of economic activity chime with the idea too that global growth prospects have been improving. These tracker indicators provide estimates of the year-on-year growth rate in weekly GDP based on Google Trends data and information about search behaviour related to consumption, labour markets, housing, trade, industrial activity and economic uncertainty. In chart 2 below, none of these indicators for the countries shown (the US, UK, Australia and Japan) suggest a recessionary phase has begun, at least for now.
Chart 2: OECD economic activity trackers for the Australia, Japan, the US and UK
High frequency indicators of China’s economy One of the factors that may have added some zip to global growth in recent weeks has been China’s re-opening. The Yicai high frequency index – an amalgamation of a number of indicators of growth - certainly supports the idea that the economy has enjoyed a big bounce in recent weeks on song with data for subway passenger volumes (see chart 3).
Chart 3: The Yicai High Frequency Economic Activity index and subway passenger volumes
China’s disinflation and US inflation While China’s re-opening is undeniably a plus for global growth, a sudden (and unexpected) release of pent-up demand might also fuel inflation (not least via commodity price channels). There is no firm evidence yet to suggest that traded goods price inflation has been firming, indeed China’s producer price index has been in deflation territory in recent months.
Chart 4: China’s PPI inflation versus US CPI inflation
US recession risks So will the US (and broader world economy) enter a recessionary phase? The jury is of course still out! Our US recession probability model (based on yield curve spreads) places the probability at a high level and specifically at 92%. Models based on labour market activity in contrast suggest the probability is negligible. The key question this raises, however, is whether labour market activity is a lagging indicator of the economic cycle? Certainly the leads and lags in chart 5 below suggests that it is.
Chart 5: US recession indicators compared
The UK labour market Our final chart this week stays with labour market issues and specifically homes in on UK wage pressures. While this week’s indicators of UK labour market activity were stronger than expected, much of the earnings data suggested that wage pressures are beginning to moderate (see chart 6 below). That was true of the widely watched average weekly earnings (AWE) figures as well as the less-widely- watched – and more forward looking - median pay rates from the Pay As You Earn (PAYE) data. Tight labour markets, ebbing nominal wage pressures and negative real wage pressures don’t chime with classic macro models of the inflation process (e.g. the Phillips curve model). And that potentially raises the risk of policy errors (i.e. over-tightening) if central banks are calibrating monetary policy with those models in mind.
Chart 6: Two measures of UK wage inflation
Andrew CatesAuthorMore in Author Profile »
Andy Cates joined Haver Analytics as a Senior Economist in 2020. Andy has more than 25 years of experience forecasting the global economic outlook and in assessing the implications for policy settings and financial markets. He has held various senior positions in London in a number of Investment Banks including as Head of Developed Markets Economics at Nomura and as Chief Eurozone Economist at RBS. These followed a spell of 21 years as Senior International Economist at UBS, 5 of which were spent in Singapore. Prior to his time in financial services Andy was a UK economist at HM Treasury in London holding positions in the domestic forecasting and macroeconomic modelling units. He has a BA in Economics from the University of York and an MSc in Economics and Econometrics from the University of Southampton.