Charts of the Week (Oct 14, 2022)

Consensus growth forecasts Expectations for global growth next year have declined again according to the October Blue Chip survey of economic forecasters. The consensus forecast for US GDP growth in 2023 has been downwardly revised to just 0.2% from 0.6% in the September survey. This contrasts – for now - with the recessionary conditions that are expected to unfold in Europe next year. GDP in the Euro area and the UK, for example, is now expected to contract by 0.2% next year. Japan's economy in the meantime is expected to hold up quite well relative to Europe and the US, with GDP forecasts now centred on growth of 1.3%. That's in part a function of the likely release of pent-up demand from its somewhat longer and later pandemic lockdown phase. Monetary conditions are also likely to be somewhat looser thanks to its relatively low rates of CPI inflation.

Inflation forecasts On the inflation front the latest Blue Chip survey signals a rising risk of a stagflationary environment for many major economies next year. Consensus forecasts for CPI inflation for the US and Euro area have continued to climb, even as their growth forecasts have continued to fall. UK inflation forecasts have also mostly been revised higher for 2023 in recent months. But this month's survey saw a meaningful retreat in the consensus expectation for next year. This was a function of the recent- largely unfunded – fiscal policy package designed to cap consumers' energy bills.

Global monetary policy Sharply higher – and above target – rates of inflation have generated a global trend toward tighter monetary policy in recent months. And this shows no sign of letting up. The 6-month change in Haver's aggregation of policy rates in advanced economies topped 2% in September. That's the fastest pace of interest rate tightening in our aggregation's history, which kicks off in the early 1980s (see chart 3 below).

Growth, inflation and bond yields A key – if not the key – question for financial markets at present is whether or not global monetary conditions have now been tightened enough to fend off inflationary pressures. Incoming data over the next few weeks will provide some clearer answers to that question. But evidence is already accumulating to suggest that monetary policy has moved into more restrictive territory in many economies. At the global level the recent weakness of an index of economic activity in industrial commodity markets is one example. Empirically too this fits the narrative given the close correlation this index used to enjoy with 10 year US Treasury yields, as evidenced in chart 4 below.

The UK housing market A further example of how tighter monetary conditions are now weighing on economic activity concerns the UK housing market. This week's September survey from the Royal Institute of Chartered Surveyors (RICS) of UK housing market conditions was certainly sobering. For example the number of inquiries from potential buyers fell sharply. The survey's results also suggested a sharp slowdown in house price inflation and specifically to its weakest pace since the onset of the pandemic in early 2020 (see chart 5 below).

The US dollar One of the factors that is further tightening global monetary conditions is the ongoing appreciation in the US dollar. As our final chart this week suggests an appreciation in the trade-weighted value of the US dollar typically accompanies weaker growth in emerging economies. Still, the strength of the dollar remains impressive – indeed arguably too impressive – relative to those EM growth fundamentals. This suggests that other factors (e.g. rising risk aversion) have been playing a big role in driving the dollar up.