Charts of the Week (Sep 8, 2023)

Sentix surveys and data surprises This week’s regional sentix surveys for September danced in recession territory, particularly in the euro area. Broadly-based weakness in the headline and expectations components of these surveys chimed too with the weak messaging from August’s purchasing managers surveys as well. As chart 1 below suggests, cyclical surveys such as these tend to do a good job at foreshadowing the evolution of the incoming economic data compared with expectations. As such they hint at a run of disappointing data in the period immediately ahead.

Credit impulses in the US, euro area and China One factor that is now arguably derailing the world economy with more force is tight monetary policy. Haver’s calculations suggest the credit impulse in the US, euro area and China was negative based on the available data for 2023 H1. The synchronized nature of this credit contraction clearly does not bode well for the world economy in the period ahead.

Oil prices and inflation surprises As noted, the increase in the price of oil in recent weeks is another potential negative hanging over the world economy. As chart 3 below suggests, oil price gyrations tend to foreshadow inflation surprises in the G10 economies. That increase in the oil price therefore potentially portends a run of positive inflation surprises in the weeks ahead.

Manufacturing capacity pressures and underlying inflation As also noted above, however, an important offset to this is the evidence for a re-balancing of demand and supply in the traded goods sectors. This can be seen in chart 4 via the normalisation of the supplier delivery times and order backlogs components in the global manufacturing PMI survey and how this has done a good job in recent years in foreshadowing underlying inflation in the United States.

Markets and data surprises Still, if, as charts 1 -3 above suggest, the incoming data elicit more negative growth surprises and more positive inflation surprises that combination would be unlikely to be greeted positively by financial markets. This is the message from chart 5 below showing a tight correlation between Citigroup’s surprise indices for growth and inflation in the G10 economies versus a global equity market index.

Demographics and productivity From a much longer-term perspective, the evolution of the world economy (and financial markets) will hinge on slower-moving factors such as trend productivity growth and demographics. While narratives about the productivity-enhancing potential from artificial intelligence have been all the rage in investment circles of late there has, as yet, been little evidence to suggest that trend productivity growth is responding. A number of factors could be responsible for this including straightforward implementation lags. But empirically it may be of note that weaker trend productivity growth has tended to rhyme with demographic restraint in many major economies in recent years. This can be seen in chart 6 below showing the trend increase in the UK economy’s dependency ratio – the ratio of the very old and the very young to the working age population - over recent decades (the data are inverted in the chart) against the 5 year change in the UK’s labour productivity growth.