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Economy in Brief

Charts of the Week (Oct 7, 2022)
by Andrew Cates  October 7, 2022

A growing belief that central banks may soon "pivot" toward a more growth-friendly monetary policy strategy and away from fighting inflation has been a catalyst for a rally in risk assets in recent days. As our first three charts this week suggest, there is certainly some compelling evidence to support the idea that monetary policy has become more restrictive and that inflationary pressures from traded goods prices are in retreat. However, as our fourth chart also suggests, while additional evidence has emerged to suggest the US labour market is also now cooling off, many metrics still suggest that it remains in "overheating" territory. In the meantime, this week's news from OPEC about forthcoming production cuts might leave oil prices uncomfortably high for many policymakers in the period ahead. This is notwithstanding the evidence in our fifth chart that suggests - from a fiscal perspective - that many OPEC nations could cope with lower prices. It is possible that structural changes in the world economy also played some role in OPEC's recent decision. As our final chart this week suggests, the share of renewables in the world economy's capacity to generate electricity continues to climb, notwithstanding regional variations.

Financial markets and monetary policy

Are central banks over-doing it? That debate surely has further to run in the coming weeks but evidence is emerging that suggests monetary policy is, at the very least, much less accommodative and arguably now moving into restrictive territory. Broad money growth, for example, is now decelerating quite sharply in a number of major economies. Indeed the year-on-year growth rate of a US-dollar-adjusted aggregation of the level of M2 in the US, Canada, Europe and Japan slipped into negative territory in July. This slowdown in broad money growth – which is a crude measure of liquidity in the real economy - could be one reason why equity markets (and other risk assets) have floundered in recent months, as evidenced in chart 1 below.

Chart 1: Broad money growth and equity markets

Growth surprises in commodity and trade-dependent economies

Evidence is also accumulating to suggest that world trade – and traded goods prices – are now decelerating quite sharply. Haver's aggregation of consumer goods demand in the world's major economies fell by 2.1% y/y in Q2. That's in part because of a post-pandemic shift away from spending on goods towards spending on services. But it is in part a consequence of a fading boost to consumer spending from the looser monetary and fiscal policies that were enacted during the pandemic. It's no coincidence, however, that as goods consumption has slowed that there have been ripple effects on economies that are highly dependent on world trade and commodity prices. Citigroup's surprise indicators, for example, show that incoming economic data for Asia, Australia, Canada and New Zealand have elicited a much higher tendency to disappoint consensus forecasts on the downside over the past few weeks.

Chart 2: Weaker consumer demand for goods and growth surprises in trade-dependent economies

Inventory excesses in South Korea

A consequence of weaker consumer goods demand in the world economy has been rising inventories of manufactured goods in trade-dependent economies too. South Korea is a good bellwether of world trade and its inventory turnover ratios – the ratio of its manufacturing inventory to its shipments – have been climbing sharply over the past 12 months as evidenced in chart 3 below. Steep climbs in this ratio signal a growing imbalance between demand and supply and usually presage a cyclical downturn in manufacturing activity in the period ahead.

Chart 3: The manufacturing inventory turnover ratio in South Korea

The US labour market

One feature of many economies that continues to concern central banks, however, is labour market activity. While this week's US JOLTS data suggested a big decline in job openings in August there is still a big mismatch between those openings and unemployment.

A formal representation of this is shown in chart 4, via the so-called Beveridge curve, showing the relationship between unemployment (on the x-axis) and job openings (on the y-axis). The pandemic's impact on US labour supply shifted that curve to the north-east corner of the chart. This was because higher numbers of discouraged workers, reduced participation from the elderly, lower job mobility, and higher sickness levels, impeded supply but increasingly found a mismatch at the same time with higher employment demand as the economy opened up. This, in turn, is worrying the Fed because it is igniting nominal wage pressures. While the latest data suggest the curve could be reverting toward pre-pandemic norms there is no question that, at present, the US labour market is still tight.

Chart 4: The Beveridge curve for the US labour market

Oil prices

Of course a further headache for policymakers, at present, concerns the impact on oil prices from this week's decision by OPEC to reduce oil production, specifically by 2 million barrels per day from November. IMF analysis of the so-called fiscal breakeven oil price - the price that is necessary to balance the budget of an oil-exporting country – suggests that current prices do not pose any major threat to the fiscal solvency of most OPEC economies (see chart 5 below). That may lead to conjecture suggesting that geopolitical factors also played a role in this decision too.

Chart 5: Breakeven oil prices for selected Middle-Eastern economies

Renewable energy

From a longer-term perspective, the ascendancy of renewables in the global energy equation is also surely a key talking point for OPEC members, even if it had little bearing on this week's decision. In our final chart this week, we illustrate some data from the International Renewable Energy Agency showing an impressive climb in the share of renewables in electricity capacity generation in recent years. This share now stands at over 40% at the global level, and at over 50% in Europe. High oil prices, enduring geopolitical tensions, and longer-term climate policy commitments suggest a further increase in the years ahead.

Chart 6: The growing share of renewables in global electricity capacity

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