Charts of the Week (Jan 13, 2023)

Consensus growth forecasts for 2023 Having been reasonably upbeat at the start of last year, economic forecasters became steadily more pessimistic about the economic outlook for most major economies as 2022 unfolded. However, the past two to three months have seen a little more optimism creep in to the outlook for the US and the Eurozone (see chart 1). Inflation expectations and the impact of these on monetary policy settings may be at the root of this optimism. Ebbing inflation expectations, for example, have earmarked the outlook for both regions in recent months. In the meantime it is no coincidence that the UK – where inflation expectations are highest (relative to the US, Eurozone and Japan) – is expected to see a relatively deep recession this year. Japan in contrast – where inflation expectations are the weakest – is expected to see a comparatively high pace of growth.

Stagflation stress and equities Financial markets, moreover, appear to have remained highly sensitive to the incoming economic data for both growth and inflation. This is evidenced in chart 2 below showing a fairly high correlation between global equity markets and economic data surprises. Firmer-than-expected growth data and/or weaker-than-expected inflation data have tended to be greeted positively by equity investors. And vice versa.

US inflation This week’s dataflow support the idea that US inflation is turning down. December’s CPI index, for example, fell by 0.1% m/m driving the y/y rate of inflation down to 6.5%. This compares with November’s rate of 7.1% and a peak of 9.1% in June last year. This week’s NFIB survey for December additionally suggested a reduced inclination from the small company sector to raise prices in the period ahead. That tends to act as a reasonable forward looking indicator of headline inflation in the immediate months ahead (see chart 3 below).

The euro area economy and energy prices The link between growth expectations and inflation is further evidenced in chart 4 below. This week’s euro area sentix survey for January, for example, revealed an unexpected improvement in investors’ expectations for the region’s economic outlook. This has coincided with much weaker natural gas prices across the region. Wholesale prices, as measured by the benchmark Dutch futures contract, have dropped almost 48% since mid-December and now stand below where they stood in mid-February last year, just prior to Russia’s invasion of Ukraine.

China’s re-opening Aside from inflation, the re-opening of China’s economy is another factor that could potentially influence global growth and inflation expectations in the weeks ahead. High frequency indicators certainly suggest that activity in China has picked up pace in recent weeks. However, those same indicators suggest that there may be a long way to go before normality resumes.

De-globalization While China’s re-opening may have some near-term cyclical implications for world trade growth, a likely deceleration in its potential GDP growth in recent years – and in the years ahead - may continue to place a brake on the globalization of the world economy. There is an active debate about this issue in macroeconomic circles at present with a number of factors, such as heightened protectionism, lingering scars from the pandemic and the global financial crisis, and heightened geopolitical stress among others, expected to reduce the world economy’s interconnectedness in the period ahead. Still, the evidence on this is mixed. Latest data for 2021 (and so admittedly a little backward looking) suggest that trade flows of goods have ebbed relative to global GDP over the past decade or so (see chart 6 below). Trade in services in contrast had, on the whole, been climbing over the same period until the pandemic (and lockdowns) severely disrupted activity.