Charts of the Week (July 21, 2023)

US data surprises and equities Incoming US economic data have been highly influential for US equity market investors in recent months. That’s the message from chart 1 below showing a tight relationship between Citigroup’s US growth and inflation surprise indicators and the S&P 500 index. Recent weeks have specifically seen a greater tendency from incoming US economic data to post positive surprises relative to consensus forecasts. Incoming inflation data, in the meantime, have mostly surprised forecasters on the downside. Equity markets have, in turn, perked up off the view that this combination raises the probability of a soft-landing scenario.

China’s cyclical and structural challenges As noted above, the incoming news concerning China’s economy has not been as auspicious. GDP growth in Q2 (of 0.8% q/q) was shy of expectations with accompanying news from June’s retail sales data suggesting that flagging consumer spending was a reason for this. Property sector investment, in the meantime, is still sinking, a symptom of excess capacity that’s engulfing the housing market and possibly the broader economy as well. That, in turn, may be one reason why looser monetary policy is not yet generating a positive impulse to credit or indeed to China’s broader inflation arithmetic (see chart 2).

UK inflation This week’s UK inflation report for June was a little weaker than expected, a welcome let-up from a trend toward stronger-than-expected price momentum in recent months. Encouragingly, the momentum in service prices – which the BoE is watching very closely– also weakened, while upstream producer price inflation also fell (see chart 3). That said, the monthly gain of 0.5% in consumer service prices was almost certainly stronger than the BoE would wish to see.

Wage pressures in the US and Europe Policymakers remain concerned that tight labour markets might forestall their efforts to bring inflation back to more target-friendly levels. There is, however, some tentative evidence to suggest that these markets are now cooling off and not just from the official data. Wage tracker data from the Indeed hiring company, for example, suggests that wage inflation has started to slow in the euro area. The same data for the US in the meantime suggests that wage inflation has been slowing for several months albeit from much higher levels (see chart 4).

Globalisation or de-globalisation? Debates about inflation tend to be preoccupied with cyclical issues that concern the economic cycle, the level of spare capacity and the stance of economic policy. But the longer-term inflation outlook will also hinge on slower-moving supply-side factors such as demographics, climate change and globalisation. A popular narrative of late on the latter has concerned the scope for price pressures to build off reduced global competition in the years ahead. Companies are reportedly now shifting their production bases onshore and turning to domestic sources of labour and new technology, and cheered on in that effort by more protectionist policymakers. The evidence for this de-globalisation narrative is, however, mixed. A widely followed statistic, for example, from the World Bank, suggests that while the share of world exports in GDP did decline in the decade leading up to 2020, the past two years have, in contrast, seen a strong recovery. Indeed, at 30.7% in 2022, the world trade share of GDP is now not that far off the peak of 31% that was chalked up in 2008.

Refugee flows Refugee migration flows remain a potent political issue at present and one that is unlikely to lose any potency in the immediate months ahead. Latest data from the World Bank, for example, suggests that the refugee population in high income economies more than doubled in 2022, from 3.7 million people, to 7.7 million (see chart 6). That increase has been driven by a combination of factors, including geopolitical instability in Eastern Europe, by political persecution, and by climate change among others. It is, however, additionally generating heightened strains on the economic and social fabric of these economies with attendant political consequences.