Charts of the Week (Mar 10, 2023)
|in:Economy in Brief
Testimony from Fed Chairman Powell has dominated macroeconomic discussions so far this week (and ahead of the latest US payrolls report later today). Against a backdrop where the US economy has been showing unexpected resilience and firmer-than-expected inflation it was perhaps unsurprising that Powell suggested the fed funds rate will likely have to be increased more than previously expected. Still, as our first chart this week suggests, there was some evidence in this week’s February ADP report to suggest that smaller companies are now feeling the pinch from tighter monetary policy. And as our next two charts suggest, the underlying health of the broader world economy is not demonstrating nearly as much resilience at present as the United States. In the meantime, while hopes are high that China’s reopening might marshal a firmer impulse to global growth, this week’s announcement at the National People’s Congress of a 5% growth target for 2023 was lower than many China economists had expected (and we offer some context to this in our fourth chart). As for the euro area, some good news emerged for the ECB this week from its latest consumer expectations survey, specifically via a big drop in medium-term inflation expectations (see our fifth chart). Finally, on financial market matters, we illustrate in our sixth chart the still-heavy role that monetary policy has been playing in the valuation of financial assets.
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The US labour market Incoming data this week continue to suggest that the US labour market is tight and certainly too tight for the Fed’s comfort. Still, there are some early signs that employment growth may be cooling off. For instance, the details of this week’s ADP report for February reveal that small companies have been shedding labour for the past five months (see chart 1 below). While the history of this survey is admittedly not that long, the details nevertheless suggest that employment activity in the small company sector tends to lead activity in the broader US labour market.
Chart 1: The US ADP employment report: small and large company perspectives
The global business cycle At the broader global level, there was some tentative evidence too from this week’s sentix surveys to suggest that growth momentum is cooling. Having posted four consecutive monthly gains from last November through to February, the forward-looking expectations component from the global aggregation of these surveys slipped back into negative territory in March. Combined with a still-weak current situation index, this suggests the world economy may be turning down again, as our business cycle clock in chart 2 below suggests.
Chart 2: The Global Sentix Business Cycle Clock
Global growth momentum There has, however, been some disconnect between sentiment data and harder economic data in recent months. GDP growth in Q4 2022, for example, was very weak in a number of major developed and developing economies even as sentiment data were beginning to strengthen. Indeed, outright contractions in output were recorded in the likes of Germany, Italy Brazil, South Korea, India, and South Africa. The relative resilience of the US economy in Q4 against that data is placed in some context in chart 3 below.
Chart 3: GDP growth in Q4 2022
China and the world economy With the US economy now expected to lose momentum in the coming months under the weight of tighter Fed policy, a key question is whether or not China can take over the mantle of global growth leadership. From 2010 through to 2019 China accounted for roughly one-third of global GDP growth (measured at PPP-adjusted exchange rates). But during its COVID era, from 2020 to 2022, China’s average contribution was less than one-tenth of the total (see chart 4 below). Whether China can now re-establish its pre-COVID contribution in the year ahead, however, remains to be seen, not least following the announcement this week of an underwhelming GDP growth target for this year of 5%.
Chart 4: China’s contribution to global GDP growth
Inflation expectations in the euro area On a brighter note, medium-term inflation expectations have declined sharply in the euro area according to the ECB’s January Consumer Expectations Survey. Three-year ahead expectations specifically fell to just 2.5% in January from 3.0% in December (see chart 5 below). On a country-level basis, moreover, median inflation expectations three years ahead are now at the 2% target for Germany and only marginally above for France. It almost goes without saying that this is good news for the ECB’s doves.
Chart 5: Euro area consumers’ 3-year ahead inflation expectations
Financial markets Our final chart this week illustrates the continued importance of monetary policy for the broader financial market outlook. Longer-term US real yields, which are heavily influenced by expectations for Fed policy, have been highly correlated with global equity markets over the past few years (see chart below). But based on that relationship, equity markets appear richly valued at present relative to prevailing levels of real yields (see chart 6 below). That means that equity investors could be more relaxed about the interest rate outlook than bond investors. But another possible scenario is that expectations for profitability have stepped up in recent months thanks to improving supply-side conditions and even though the Fed has become more anxious about inflation.
Chart 6: US 5-year real yields versus global equity markets
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.