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Special edition: recession dashboards
The UK: stagnant, but improving?
Recession pressure: 60%
One of the steepest, fastest and most globally synchronized monetary tightening cycles in history has come to an end. (Or so it seems.) Will a global recession be the result?
Compared with the middle of last year, prospects for a recession in Britain seem to be receding.
However, the economy remains in rather morose state, with a prevalence of red and yellow cells in the most recent columns of our dashboard.
(The “heat-mapping” of all figures in these dashboards tracks their deviations from decades of historic data.)
We last calculated a recession pressure indicator in December. As the January indicators trickle in, job growth and business confidence are improving. Some indicators, like housing, are benefiting from a shift from dark red to “pink.”
Germany: danger zone
Recession pressure: 87%
Germany’s economy has suffered for some time from the disruption of its industrial model, which relied on expanding globalization and cheap energy from Russia.
As the trajectory of our recession indicator shows, its economic indicators are getting even worse. On Jan. 30, the national statistics office said {{nofollow}}the economy indeed shrank in the final three months of 2023, though {{nofollow}}revisions mean Germany narrowly avoided a technical recession (two consecutive quarters of contraction).
Most of our dashboard is flashing red, with a measure of cargo shipping the only recent bright spot. New orders, inflation and capacity utilization remain problematic. Data trickling in for January is showing a worsening job market and receding business confidence.
Australia: still lucky
Recession pressure: 43%
Resource-rich Australia is famous for having avoided recession in the 30 years between the early 1990s and the pandemic. Even its {{nofollow}}Covid-19 downturn was less severe than those of its peers in developed markets.
According to our dashboard, the nation looks set to remain the “lucky country” versus the rest of the economies we examined.
While consumer confidence remains weak, optimistic trends in the stock market, a robust labor market and healthy terms of trade for the nation’s critical commodity exports have pushed chances of recession down.
South Korea: a semiconductor bright spot
Recession pressure: 75%
South Korea’s recession pressure level is elevated relative to several Asian peers. The export-driven economy has suffered amid weakness in its key Chinese market. Business confidence and e-commerce indicators have been worsening.
Still, things have improved since early 2023, when our indicator surpassed 90% and a recession seemed certain. The key semiconductor industry is also worth watching; it recently tipped into green on our dashboard.
Japan: rising sun, blue skies
Recession pressure: 50%
Japan’s economy is a global outlier: its central bank is expected to raise rates, and it’s chasing a positive wage-price spiral.
Corporate credit indicators are in good shape, and consumer confidence is improving. New orders and capacity utilization remain relatively weak.
China: a mixed picture
Recession pressure: 64%
China’s dashboard offers a striking contrast of some bright green and more red.
The labor market is improving. And we’ve previously pointed out the nation’s healthy OECD leading indicator, a data point whose components include early-stage production – though that has now weakened for January.
Negative signals are coming from household credit and confidence measures for consumers and small business. And even after a series of crises in the property market, the residential housing price index continues to deteriorate.
Brazil: unexpected growth
Recession pressure: 47%
Returning Brazilian President Lula has had good economic news since he took office. December figures showed the economy unexpectedly grew in the third quarter.
Our recession gauge has steadily receded over the past year, and the dashboard looks a lot like the national soccer jersey lately, showing mostly green and yellow cells for December and January. The OECD leading indicator and manufacturing figures are historically healthy.
Canada: resource pressure, worried consumers
Recession pressure: 82%
The economies of Canada and the US are closely intertwined, but our dashboard has been suggesting for a year that the Great White North is much likelier to stumble into recession.
While employment and inflation trends seem positive, consumer confidence remains in the doldrums. Business confidence is in the red, receiving only a small uplift from the positive economic figures south of the border recently.
Meanwhile, Canada’s key resource sector is under growing pressure: the “commodity terms of trade” indicator (compiled by Citigroup) slid from positive into neutral territory over the three most recent readings.
The US revisited: pondering a soft landing
Recession pressure: 71%
We wrap up this chart pack by revisiting our US dashboard. Compared with two weeks ago, new and revised data has given us a more complete picture. Our recession indicator for December has crept somewhat higher (from 60%).
Is a recession inevitable, or will Fed Chair Jay Powell pull off his coveted soft landing? Or, a third possibility: will continued robust inflationary growth after all these rate hikes wrong-foot the markets and central bankers?
As we noted in January, some leading economic and financial indicators (such as the NFIB’s small-business confidence index) seem to have bottomed out earlier in 2023, bolstering the case for a soft landing.
Data trickling in for January has been positive overall versus historic norms: unemployment, consumer confidence, even truck sales.
However, the inverted yield curve, a classic recession indicator, is still flashing bright red – especially after Chair Powell downplayed rate-cut prospects.
Chart packs
Emerging markets equity performance
This week we focus on emerging markets (EM), starting with how they’ve been affected by the Ukraine war. The following chart compares the performance of equity markets in selected countries from before the start of the war to the period since 24 February. Countries that are heavily dependent on commodity imports, such as Egypt, Hungary and China, have suffered the most, while commodity exports such as Chile are reaping the biggest benefits.
EM equities and commodities prices
Earnings per share for emerging market equities appear to correlate with the S&P GSCI commodity price index, as this next chart shows. The recent surge in commodities prices has thus given EM equities a boost as well.
EM current account deficits and gross external debt
The current global monetary policy tightening cycle will have a large impact on emerging markets, which tend to be less resilient to rising interest rates. Let’s now look at some specific areas of weakness.
First, EMs are more vulnerable than advanced economies when it comes to persistent current account deficits, as we explained previously. Large current account deficits – where the value of goods imported exceeds the value of exports – can potentially trigger currency crises similar to the Asian crisis of 1997.
The chart below displays the cumulative current account deficit – a measure of a country’s increase in foreign debt – for some key markets. With the exception of Russia, large EMs have been racking up sizeable current account deficits since the global financial crisis.
EMs have also seen their gross external debt positions increasing in tandem with persistent current account deficits. For many economies, external debt is now at a much higher level than just a decade ago. As EMs tend to borrow in foreign currency, usually USD, rapidly depreciating domestic currencies would increase their debt burdens – making a currency crisis all the more likely.
Historical inflation
Surging global inflation is rightly causing concern now but it can be helpful to take a big picture perspective. While current figures are certainly shocking when set against the 2% inflation target adopted by many advanced economies in the 1990s, inflation has been far higher in the 20th century – particularly in the aftermath of the WWI and the oil shocks of the 1970s.
Global per capita GDP
Turning now to long-term economic output and the US has been the clear leader among all major economies for more than a century. In the last two decade, its GDP per capita surged even further ahead of other countries, particularly as European economies such as Italy and the UK experienced significant income stagnation.
UK economic output
Looking more closely at the UK’s economic performance, we can see how much real per capita GDP has fallen in recently – even approaching the pre-Industrial Revolution average in the period before 1800. In more recent history, economic output has only been lower during the Great Depression and after World War II.
UK money velocity
The Bank of England’s “a millennium of macroeconomic data” database offers a number of interesting historical trends for the UK, including the correlation between policy rates and money velocity – a measurement of the rate at which money is exchanged in an economy. As higher interest rates discourage people from hoarding cash, money changes hands more quickly when rates are rising.
As the UK battles the highest inflation in decades, financial markets are expecting further rate hikes from the BOE. As our final chart this week shows, this could even lead to a reversal of a decade-long decline in money velocity, which would put additional inflationary pressure on the UK economy.
Commodities continue to outperform
We start this week with a chart on commodity prices that we have posted previously as it is worth tracking throughout the year.
From the start of 2022, the S&P GSCI commodity price index has risen by the most since 1970 as the war in Ukraine continues to put upward pressure on prices. Commodity prices tend to display long, cyclical ups and downs because it takes a long time to ramp up investment and increase supply (e.g., construction time of oil platforms). The current price shock will not be as temporary as many economists believed last year, which is turning into a headache for central bankers wrestling with inflation far above target. Warnings about a new commodity super-cycle are not farfetched.
Price rises by commodity
The following bar chart displays year-to-date performance by commodity. Fossil fuels have seen the largest gains, with natural gas and oil in the lead, followed by agricultural products and industrial metals.
The broad price increase across all commodity classes, averaging 30.8%, will hurt both industry and consumers. Emerging markets stand to suffer most as food prices surge – a trend that can lead to political instability.
US monetary policy and commodity markets
Supply and demand are not the only factors affecting commodity prices. Given the US dollar’s role as the international currency of choice, and the fact that commodities are typically priced in US dollars, the Federal Reserve’s monetary policy decisions also have an outsized impact.
The macroeconomist Jeffrey Frankel has demonstrated this relationship in various research papers. The following scatter chart shows a negative correlation between interest rates and commodity prices: when rates go up, commodities go down.
US housing market
The Fed’s rate hiking is also pushing US mortgage rates to new highs – now reaching 5% compared to less than 3% just a few months ago. While the central bank has only raised rates once this year, the housing market has already anticipated a substantial part of the 2022 tightening cycle. This will eventually put downward pressure on house prices, which rose to a record in 2021.
As the following heat map shows, mortgage rates have not surged this quickly since the 1994 bond market massacre. Back then as now, bond investors were hurt as interest rates rose rapidly.
Global monetary policy
We recently posted a global central bank decision index that shows the net balance of policy hikes against cuts from 115 central banks. This index, pushed forward by 11 months, displays a high correlation with the US ISM Purchasing Managers’ Index.
Global monetary policy is largely being set by the Fed as the US is a monetary superpower. The current tightening cycle is also driven by Fed policy, and this will most likely negatively affect US economic activity in the quarters ahead. As the chart shows, US economic activity looks set to fall on the back of tighter global credit conditions. Deutsche Bank is already forecasting a US recession in 2023.
Shanghai in lockdown
The zero-Covid strategy pursued by China has led to a complete lockdown of the world’ third-largest city. Road traffic and subway usage in Shanghai have essentially dropped to zero. Residents have been confined to their homes for weeks and food supply is becoming problematic, sparking a massive backlash.
China supply chain under pressure
The New York Fed now produces a supply chain pressure index for the largest economies, including China. The China index recently surged as authorities implemented harsh lockdown measures and shut down entire cities and regions. Export prices have started rising as a result.
From a global macro view, the developments in China could cause even more economic damage than the war in Ukraine. Not only is it a global manufacturing centre, but the Chinese economy is substantially larger than all Eastern European economies combined, including Russia and Ukraine. A major slowdown or even a bursting real estate bubble would be a blow on global growth.
Egg prices in France
Finally, here’s an Easter egg surprise.
The price of eggs for consumers in France does not appear to be affected by the large swings in prices for farmers. As our last chart shows, the volatility of the agricultural egg price index has had little impact on actual shop prices over the last few decades – probably because retailers are reluctant to pass on the price swings to consumers.
Norwegian sovereign wealth fund and currency
Norway is one of the richest advanced economies in the world thanks to decades of oil exports. Revenues have been invested in the Norwegian sovereign wealth fund, managed by the country’s central bank, Norges Bank. Total assets recently exceeded 12 trillion krone – around USD1.3 trillion, making it one of the largest funds in the world.
As almost all assets are held in foreign currencies, the fund’s NOK value fluctuates substantially depending on exchange rate movements. In recent years, changes in market value and FX fluctuations have moved in opposite directions.
Thanks to surging oil prices, Norway has enjoyed significant windfall gains; its export volume has never been higher. This has resulted in a large appreciation of the krone – leading the central bank to intervene in FX markets again by buying large amounts of foreign currencies to prevent further increases. This could lead to substantial deflationary pressures in the domestic economy.
Swiss central bank intervention
Switzerland’s central bank, the Swiss National Bank (SNB), seems to be taking a similar approach to control the franc. The safe haven currency, which tends to appreciate during times of global macroeconomic volatility and uncertainty, almost reached parity with the euro last month.
Sight deposits, money held by financial institutions at the SNB, increased recently – which could be a sign the SNB has been buying foreign currency to prevent the franc from rising further.
French election
It’s a face-off between incumbent president Emmanuel Macron and far-right leader Marine Le Pen.
As the chart below shows, every other candidate in the French presidential election now has almost zero chance of becoming the country’s next leader following the first round of voting. While polls give Macron a mere 6% margin of winning the second round, prediction markets still expect him to win – with odds exceeding 75%. Research suggests prediction markets are quite accurate and can outperform expert opinion and polling data. Let’s see!
US credit card transactions rise
Consumers in the US are feeling the pain from soaring inflation and energy prices. High-frequency data from the US Bureau of Economic Analysis (BEA) shows credit card spending on gasoline recently surged to some 30% above normal levels.
Credit card transactions across other categories show key trends that emerged during and after the pandemic.
For example, card spending on accommodation plunged in 2020 due to various government lockdowns, remained depressed throughout 2020 and 2021, and only recovered very recently.
By contrast, spending on electronics and appliances soared as consumers cashed in government stimulus checks to improve life at home.
US consumer spending set to slow
The US CARTS (Chicago Fed Advance Retail Trade Summary) is a new weekly economic indicator that tracks monthly retail trade data. It points to a substantial decrease in retail trade, which is consistent with other US indicators hinting at a broad economic slowdown, including consumer confidence, yield curve inversion, and rising inflation.
US equities
While high inflation deters US consumers, equity investors are still riding high.
Typically, the US economy enters a recession around 12 to 18 months after the yield curve inverts. As this next chart shows, equities still tend to perform well between the start of an inversion – we used the spread between two-year and 10-year yields as the benchmark – and the beginning of a recession.
China mobility
One factor behind rising global inflation is the supply chain crisis, which is being aggravated by yet another full lockdown in China as part of the country’s zero-Covid strategy. This next chart shows the impact of the lockdowns on subway traffic in major Chinese cities.
Russia inflation
Finally, we revisit a chart first posted a few weeks ago to see where Russia inflation is heading as western sanctions continue to hurt the economy. The chart below overlays different year-to-date changes to compare the evolution of the CPI throughout the year.
Prices are rising much more sharply than in 2015, when Russia invaded Crimea. How much longer before inflation reaches double digits?
Central bank policy rates
Using data from the Bank for International Settlements, we created a dashboard displaying changes to central bank policy rates over the last year. It clearly shows we’re in the midst of a major global tightening cycle. Central banks across emerging markets (EMs) have seen their currencies depreciate against the dollar while also experiencing high inflation rates. In anticipation of the Federal Reserve tightening that has just begun, EMs have been forced to increase their own policy rates in recent months to ward off further inflationary pressures and currency depreciations.
Here’s another way to visualise central bank activity. This chart compares the net balance of policy hikes against cuts from 115 central banks. As you can see, the number has recently turned positive, meaning an increasing number of central banks are now tightening monetary policy.
US yield curve as predictor of recession?
As we noted in 2019, an inverted yield curve often indicates an overly tight monetary policy, when the Fed has hiked the policy rate above neutral.
However, conditions behind the current yield curve inversion are slightly different: the US is experiencing high inflation, but the Fed has yet to undertake any substantial tightening – though markets are expecting up to six more rate hikes this year, followed by cuts in 2023.
Bond traders now anticipate a severe economic slowdown or even recession by year end or beginning of 2023. The Fed must quickly bring down inflation without killing the economy – a tricky balancing act.
Oil price decomposition
The New York Fed has a model that decomposes, or splits, the change in oil price into demand and supply components to see which one is driving the oil price. Its last report showed the most recent price rise was mostly due to an anticipated decrease in supply, and to a lesser extent, an increase in demand.
Spread between Urals and Brent
This next chart shows the spread between the price of Urals – Russian oil exports – and Brent. Until January of this year, Urals traded at a relatively minor discount of only a couple of percentage points. Since the Ukraine war and the sanctions imposed on Russia, the spread has widened to as much as minus 25 percent.
Japan inflation
Japan is the only major economy where inflation remains significantly below target. In fact, core inflation recently turned sharply negative, potentially indicating a big economic slowdown.
Rising energy prices have widened the spread between core and normal consumer prices, showing that current inflation is not demand-driven. Furthermore, the most recent measure of the output gap is also negative, meaning that the economy is operating below potential.
‘Opportunistic reflation’
Consequently, the Bank of Japan (BOJ) decided to swim against the tide of global tightening to engage in a type of “opportunistic reflation.” It just reinforced its commitment to keep long-term yields low via yield curve control, which BOJ Governor Haruhiko Kuroda started in 2016.
So while the monetary base has now soared above 130% of GDP, 10-year yields remain between -0.2 to 0.2% thanks to the BOJ’s asset purchases.
Yen USD exchange rate
As a result of the BOJ’s policy easing, the yen fell against the dollar – now trading at around 124 compared to 110 just a few weeks ago.
To determine a fair value exchange rate between the yen and the US dollar, we created a model that incorporates the following variables:
- Growth differential
- Economic sentiment indicator differential
- CPI differential
- Yield differential
- Money growth (M2) differential
- Time trend variable
As you can see, the model’s predicted exchange rate tracks the actual exchange rate rather well.
You can also see the impact of the BOJ’s easing on the yen’s value against the US dollar. This will boost net exports and lead to higher imported inflation in the short run, consistent with the central bank’s target of 2%. In the longer run, however, we should expect the gap between actual and predicted value to narrow again.
Japan’s Phillips curve looks like Japan
The Phillips curve is an established relationship in macroeconomic theory that shows the interaction between inflation and unemployment. Historically, a higher rate of inflation is associated with a lower rate of unemployment, but the relationship is far from stable. For example, a country’s topography could affect the curve…
Of course, that was just a joke – although, interestingly, the curve did really resemble the Japanese islands back in 2008, as Gregor Smith discovered – and which we replicated above. Happy April Fool’s Day!
Prediction markets
Similar to stock markets, prediction markets are useful aggregators of information and public opinion. Even as casualties and sanctions pile up amidst the war in Ukraine, prediction markets tell us that Russian President Vladimir Putin will unlikely leave office anytime soon. Instead, it appears that UK Prime Minister Boris Johnson would be the next European leader to go.
Credit impulse and global sentiment
‘Credit impulse’ represents the flow of new credit from the private sector as a percentage of GDP and is seen as a large driver behind economic growth. With central banks tightening policies, credit impulse is likely to turn negative, with obvious implications for global economic growth.
In the chart below, we created a credit impulse measure for the three largest economies: US, China, and the eurozone, and set it ahead of the world Sentix indicator, a measure of global sentiment, by eight months. Based on the correlation we found, we should expect the Sentix indicator to significantly decline in the months ahead.
Global net fund flows
The war in Ukraine has led to a significant risk-off moment in global equity markets. Net fund flow data per sector shows investors have grown more skeptical after a year of broad positive net flows along all asset classes. Among funds with global mandates – i.e., those with no regional restrictions on equity investments – only cyclical equity funds saw positive net flows in recent weeks.
German business sentiment
The Ifo Business Cycle Clock shows the cyclical relationship between Germany’s business situation and expectations. Even though the German economy contracted in Q4 2021 and is expected to shrink again in Q1 of this year, the Ifo clock still shows the economy in a boom phase as of February 2022, potentially indicating that Ifo surveys may not be the best leading indicator for economic activity.
However, the March value already shows a substantial decline in business expectations, moving the economy from the boom phase into the downturn quadrant in the graph. This is in line with many other macroeconomic indicators that currently show the German economy heading for a recession.
The ZEW economic expectations indicator for the German economy, on the other hand, shows the largest absolute decline ever recorded, dropping from above 50 in February to almost -40 in March. This shows Germany is already facing a substantial economic slowdown this quarter that might turn into a severe recession, depending on how the war in Ukraine evolves and commodity price movements throughout this year.
US used vehicle inflation
A significant contributor to US inflation dynamics has been used car prices that had risen by more than 40% on a year-on-year basis in at the end of 2021. More recently though, we have finally seen some moderation in price dynamics and the monthly rate of changes have finally rolled over.
At least used car prices will not significantly contribute to US inflation anymore going forward – we now have to worry about house and commodity prices.
US consumer expectations
A recent paper by former Bank of England economist Danny Blanchflower shows that large declines in consumer expectations are always preceding a US recession.
The Michigan Survey consumer expectations have recently dropped like a stone. Relative to a long-term trend, we are now seeing a record decline that easily falls outside the standard deviation band.
Similar to the yield curve inversion, this is one more indicator that is flashing warning signs that the US economy is slowing down.
US investment growth
As we know, the Covid-19 shock does not factor into a standard business cycle. In fact, it caused the only US recession that saw household disposable income surge thanks to generous income support policies. Furthermore, real estate and stock prices have also held up well as the Fed and other central banks implemented large-scale asset purchase programmes to support financial markets.
Investment is usually one of the more volatile subcomponents of GDP. As our last chart shows, the investment to GDP ratio decreases significantly during recessions and also takes time to recover during the subsequent economic expansion. After 2008, for example, it took a decade for investment to recover. During Covid shock, on the other hand, investment did not fall at all and is currently at a decade high. This is obviously good news for future economic growth.
Global real estate bubbles
Frankfurt, Toronto and Hong Kong lead the cities with the most inflated housing markets. Our first chart this week brings together the UBS Global Real Estate Bubble Index with Oxford Economics’ macroeconomic indicators for selected metropolitan areas. Markets rated below -1.5 are depressed; those ranging between -1.5 to -0.5 are undervalued, -0.5 to 0.5 are fairly valued, 0.5 to 1.5 are overvalued and everything above are in a bubble.
The German-speaking parts of Europe, as well Canada’s two biggest cities, score high on the index while major US cities are still relatively undervalued despite large house price rises in recent years.
US housing
In the wake of house price surges in 2021, rental prices of apartments have also risen. Prices have increased an average 17% since 2020 though the growth is uneven across the country. The chart below shows the states that have seen the fastest and slowest growth over the past two years.
Sellers’ market
The existing stock of real estate has been steadily decreasing in recent years, putting further upward pressure on house prices. The percentage of sales of homes that have been on the market for less than a month surged to about 90% last year and is still comfortably higher than at any point in time before the pandemic.
The University of Michigan Consumer Survey also shows that the US is currently a seller’s market.
Construction starts
One thing that may finally slow the runaway housing prices is that construction starts – which fell to a record after the 2008 recession and remained depressed for nearly a decade – have resumed.
However, using our Macrobond ratios to calculate the series in per capita terms, we can see that on a population-adjusted basis, construction remains relatively low on a historical basis.
China property prices
Over to China now, where we can see a correlation between a city’s GDP and property prices. As this next chart shows, the largest cities – both in economic output and population – tend to have the highest residential real estate prices.
China’s real estate sector is still struggling amid a liquidity crisis that first engulfed the property developer Evergrande.
Yields on Chinese high-yield bonds are soaring while the spread between China and the rest of Asia is also approaching record highs. Both credit and equity risks have also surged. The rise in high yields and credit risk can be traced back to the deflating housing bubble, as Chinese real estate developers account for a significant part of Chinese high-yield bonds.
Residential real estate prices in the secondary market are now falling, while the number of Chinese cities reporting positive growth has fallen to around 30%.
Hong Kong real estate prices and mobility
The new Covid-19 restrictions in Hong Kong and mainland China are set to have a significant negative impact on the Chinese economy and its real estate market. The following chart shows a correlation between office property in Hong Kong and the movement of people. Commercial real estate prices that started recovering after the last lockdown will likely fall again as infections surge.
Global workplace mobility
Hong Kong’s worst outbreak of Covid-19 has made it the most ‘immobile’ city when compared to the pre-pandemic era, as our last chart shows. Employees in most European cities are also slow to return to the workplace while those in the Middle East are keenest.
