Charts of the Week

The European electricity market is breaking down

Electricity prices in Europe have only one way to go -- and that’s up. Prices in Germany, France, and the UK are exceeding EUR500/MWh, about ten times 2020 levels. While the surge is driven by rapidly rising gas prices due to the war in Ukraine, it also stems from problems with nuclear generation in France, where many power plants are offline for technical reasons.   

Even more concerning, electricity futures suggest the surge is far from over: prices are set to head above EUR1,000/MWh this winter, only retreating to current levels by spring, as our chart shows.

Many small businesses and energy-intensive companies would go bust if current power prices continue. And with no income-support or subsidy program in sight, consumers are reining in spending as the situation adds to an unprecedented cost-of-living crisis. It’s no wonder that the EU is signaling its intent to intervene in power markets.

Gas inventories are low in Europe as winter approaches

The first chart compares the current “fill level” for natural gas storage in various European economies with their recent monthly usage patterns. In Germany and Italy, one month’s gas consumption in winter would use more than half of the entire national gas stock. The shades of red highlight nations where the issue is most acute: some would be on track to consume more gas in a month than they have in storage. 

Obviously, there is a constant inflow of new gas (although less than usual, given supplies from Russia have plummeted – as our second chart shows). But it’s worth keeping in mind that gas stocks are insufficient for winter without continuous replenishing.

German trade balance deteriorating as commodity prices surge

Rising energy imports have been negative for Germany’s trade balance – ending many years of continuous annual trade surpluses. 

The chart below tracks the year-on-year change in the total trade balance and its various subcomponents. Watch out for that widening orange wedge: compared to the summer of 2021, the trade balance has declined by almost EUR90 billion, of which EUR50 billion is due to higher energy imports.

Dire demographics in South Korea

South Korea has long been known for having one of the lowest fertility rates in the world, but it recently hit another low. As our chart shows, the ratio of births per female is now solidly below 1. A fertility rate of approximately 2.1 is needed to keep a population constant (without net immigration).

World Bank projections now show that South Korea is facing a more dire demographic prospect than even Japan, its famously shrinking neighbour. South Korea’s population is now expected to decline a stunning 50 percent by 2100, barring massive changes to migration policies.

Such a shrinkage has massive implications for economic growth, the country’s housing market and the viability of its pension system. Many economists argue that adverse demographics are the key driver of secular stagnation in advanced economies.

Russian imports slide on sanctions as China gains share

Russia might initially have seemed to shrug off economic repurcussions of the conflict in Ukraine, but western sanctions are starting to bite, as our chart shows. 

Imports have fallen significantly since the beginning of the year. The last value for total imports published by the Russian Statistics office is for February 2022. However, it is easy to calculate an approximate figure since that time by simply summing up the total value of all exports from every country to Russia. 

Two things stand out. First, the value of total imports has more than halved compared to the pre-war period. Second, a much larger share of total Russian imports is now coming from China, which has not joined the West in imposing sanctions.

Emerging market FX reserves dwindle in classic currency crisis indicator

The current Fed tightening cycle is bad news for emerging markets. Many EMs have seen their currencies depreciate significantly vis-à-vis the dollar. As our chart shows, foreign-exchange reserves have fallen in tandem as EM central bankers draw on them to prevent further currency depreciation.

This, together with persistent current account deficits, are classic signs that currency crises may be ahead. With the Fed continuing to hike, there will be more pain for emerging markets this year.

The Cleveland Fed has a more challenging task predicting inflation as it happens

The Cleveland Fed runs inflation Nowcast models for the consumer price index (CPI) and personal consumption expenditures (PCE). Nowcast models aim to “predict” the present, given there is a lag before data becomes available. 

As our chart shows, such Nowcasting has become less precise as inflation has surged and become much more volatile than it was pre-pandemic.  

For CPI, the Nowcast range (tracking the forecast’s daily moves over the course of a month) and the Nowcast spread (the difference between the final Nowcast of a month and the actual CPI data subsequently released) have both increased. 

Following the July decline in CPI, the August Nowcast signals further normalization. The year-over-year inflation rate is predicted to slowly decline, as month-on-month inflation has recently dropped to zero and is expected to remain low.

The US GDP data controversy is almost but not quite resolved

As our previous charts have shown, the US economy was very likely not in recession during the first half despite two quarters of shrinking gross domestic product. The labour market continued to grow, other GDP measures did not show a contraction, and GDP data has a habit of being revised. 

However, macroeconomic data is divergent enough to fuel conflicting narratives. Gross domestic income grew both in Q1 and Q2, and we are experiencing the largest gap between GDI and GDP ever recorded. The former is 4 percent higher than the latter, even though the two metrics are ostensibly recording the same thing. This statistical discrepancy will most likely dissipate. 

Research released by the Obama White House showed a simple average of GDP and GDI was more accurate than either measure on its own. Similarly, the Philadelphia Fed constructed a GDP Plus figure that uses a sophisticated error-correction approach to combine GDP and GDI. Both approaches indicate GDP growth was probably robust in the first half of 2022.

As our chart shows, given that GDP contracted but three other metrics did not, it’s likely we will see upward revisions.

US inflation was far more demand driven than in Europe

Economists debate whether the current inflationary spike is due to global supply shocks (surging commodity and food prices, disrupted supply chains) or excessive demand-side policy. The answer surely varies by country. 

Europe is enduring greater suffering from energy prices, so inflation seems mostly driven by supply-side factors. In the US, by contrast, fiscal measures and Fed policy were probably pushing the economy beyond full capacity in 2021, meaning some inflation is demand-driven. This thesis is backed up by recent research from the San Francisco Fed showing core inflation in the US was markedly higher than in other OECD economies. 

Core inflation is the measure central banks target. It strips out food and energy prices and is thus a better measure for demand-side price pressures. As our chart shows, there was a record increase in US core inflation throughout 2020 and 2021, outpacing a group of 20 other advanced economies. 

US inflation is full of hotspots but a cooling trend is on the horizon

There are many ways to track inflation. The following heat map is a comprehensive view of how price increases are being experienced in the US economy. The various inflation gauges, gathered from a variety of sources, include personal consumption expenditure (PCE), the consumer price index (CPI), producer prices, and their “core” siblings that exclude volatile food and energy. 

Note that the most recent months are on the left side of the map. Deep shades of red indicate the strongest statistical deviation from recent norms.

Year-on-year inflation has been extremely high for more than a year now, comfortably exceeding the Federal Reserve’s 2 percent target for core PCE. Inflation expectations, on the other hand, are mostly still below 3 percent, indicating that markets are still on board with the “inflation is transitory” story. 

One reason to be optimistic is the broad-based decline in commodity prices – reflected in that patch of cool blue emerging at the bottom left of the map. This means energy will play a smaller role pushing up CPI, and will most likely start contributing to disinflation. That would be great news for the Fed.

US wages are inflating consumer prices

The very hot US labour market is worrying for central bankers. Our chart shows how the “pass-through effect” from wages to prices gathered pace during the pandemic, according to new research from the New York Fed. That’s in stark contrast to how muted the pass-through effect was after the financial crisis. 

The employment cost index is approaching 7 percent year-on-year growth, twice the pre-pandemic rate. That’s combining with broad-based inflationary pressures. There is no doubt that accelerating wages will feed back into prices -- as services CPI is showing.

Realising economic potential as US capacity use hits highest since 2008

One of the Fed’s headaches is good news for workers and their bargaining power: capacity utilisation, a measure of how close an economy is to maximizing its potential. The following chart shows the Fed’s data for this economic indicator. 

Two things stand out. First, capacity utilisation has been on a long-run downward trend for decades, suggesting the US economy may have been operating below its full potential for many years. Other measures, such as the output gap, seem to confirm this interpretation. It would also explain muted inflationary pressures in recent decades. 

Second, capacity utilisation has risen to its highest point since before the financial crisis. The hot economy and tight labour market obviously explain recent wage growth.

Europeans cannot bargain on inflation-beating wages

In the euro area, negotiated wages are falling sharply in real terms – i.e., any increase is being more than outpaced by inflation. As our chart of national data shows, that decline in real wages is more than 6 percent -- a record figure across all eurozone economies, where most nations are seeing inflation approach 10 percent. 

This painful headwind for workers is reflected in abysmal consumer confidence numbers all over Europe. Given this wage erosion, it’s only a matter of time until domestic consumption takes a large hit and plunges the eurozone into an economic contraction. 

King dollar spells trouble for global economy

The US dollar tends to appreciate in recessions, and its current strength is therefore a bearish indicator for the global economy. It’s a safe-haven currency, so investors flow in during economic downturns – and even more so when the global financial system is under stress. 

The following chart shows the greenback’s 7 percent surge this year vis-à-vis the basket of currencies known as the dollar index, as compiled by the Fed. The year-to-date gain in 2022 – the thick, black line – is graphed against the dollar’s performance for every year in recent decades. 

Two vintages stand out at the top of the graph, showing the effect of economic turmoil: 2008, year of the global financial crisis, and 1997, the year of Asia’s crisis.  

More emerging markets are in a vulnerable place

Emerging markets usually suffer during periods of dollar strength, and this cycle is no different. More and more countries’ government bonds are yielding 10 percent or more – as shown by our chart, which tracks the number of nations suffering such a burden (as assessed by two measures of local yields that are closely watched by financial markets). 

Higher nominal interest rates are a function of rising domestic inflation. Surging yields are both a sign and a cause of macroeconomic vulnerability, as they increase funding pressures for emerging markets.

Japanese import prices soar

Even Japan, once the poster child for a deflationary economy, is experiencing inflationary pressures. This is mostly due to rising import prices as a result of the depreciating yen. 

Japan is one of the world’s biggest commodity importers, tapping the global market to buy almost all of its coal, oil and gas. These hydrocarbons make up a significant chunk of the national energy mix. 

The following chart shows how the global commodity price shock means Japan is importing inflation. It graphs the year-on-year percentage change in what the nation pays for its energy in yen terms. As commodity prices retreat from recent highs, Japan’s price pressures should slowly subside.

A not-so-scattered picture for global inflation

In the middle of the pandemic, a broad, global view suggested inflation was not a worry. Some nations were even seeing declining prices. That’s not true today, as our chart shows. 

The following scatterplot includes a group of large, advanced economies and emerging markets. Each nation’s position is based on its most recently reported inflation rate (July) versus its counterpart in January 2021. (The line reflects positions where inflation would be unchanged during that time frame.) 

The only two economies enjoying lower inflation than 18 months earlier are Hong Kong and Saudi Arabia. (Not coincidentally, both have currencies tied to the surging US dollar.) Every other country in the plot has seen inflation quicken.

Though widely varying local conditions affect its severity – differences in labour-market tightness, sensitivity to imported commodities, etc. – surging inflation remains a global phenomenon that is affecting almost everyone. 

Hong Kong tourism is finally showing signs of life

The following chart shows that people are visiting Hong Kong again after quarantine policies began to be relaxed at the beginning of the year. 

Month-on-month growth has been strong, but the absolute level remains a tiny fraction of what it once was: 50,000 people visited in July, compared to the usual 5- million-plus monthly visitors that Hong Kongers welcomed in 2018.

US inflation is falling but only slowly

The drip-feed of price data continues to fuel the debate between those who think we have entered a new era of high inflation and “team transitory,” believers in a post-pandemic spike that will recede. The US consumer price index (CPI) for July, as reported by the US Bureau of Labor Statistics (BLS), showed a marked decline in the year-on-year rate, with the month-on-month change at zero.

How does this change the outlook for the rest of the year? Our chart below models how the CPI could evolve. Even if we have falling month-on-month inflation for the rest of 2022, inflation will come down only gradually and remain significantly above the Fed’s target. (That target is a 2 percent figure for the “core” personal consumption expenditures (PCE) price index, which excludes food and energy.)

Covid-19 results in extended labour shock from sick workers

For labour markets, Covid-19 and its negative macroeconomic effects are far from over. Before the pandemic, the number of Americans at any given moment who were employed but not at work due to illness averaged about 1 million. 

Since early 2020, that number has jumped 50% to an average of 1.5 million people. The chart below shows the effect of the pandemic’s lingering labour supply shock, and that’s while the long-term negative effects of “long Covid” remain unknown.

Canadian housing market seems to be finally turning

Observers of Canadian real estate have long wondered whether Vancouver and Toronto can sustain some of the world’s most expensive housing markets. This chart shows that average estimated sale prices for homes in the greater Vancouver and Toronto regions have been falling substantially in recent months. 

While this could be the start of a sustained turn, it’s worth bearing in mind that the average sale price is not the same as a general house price index. The drop could also reflect a compositional effect, showing lower-end real estate is dropping more quickly. However, that could suggest higher-priced houses aren’t selling as easily as before -- another indicator that market sentiment has changed.

Chinese yuan likely has further to fall

The chart below shows the relationship between the yuan-USD exchange rate and the spread between Chinese and US interbank rates pushed forward by 80 days. With US interest rates surging, the spread has slid into negative territory in recent months. This indicator, combined with other Chinese data pointing to a significant economic slowdown, predicts further yuan depreciation ahead. 

Chinese high yields are staying higher than Asian peers

For some time, Chinese spreads have surged amid expectations that the economy is heading into a severe slowdown -- and potentially even a housing crash that could spark a long recession. Interest rates on Chinese high-yield securities surged at the beginning of the year and continue to be extremely elevated compared to the high yield emerging market corporate plus index for Asia.

Hong Kong is losing people

Hong Kong has seen a severe net migration outflow over the past year, and the total population has declined by about 300,000 from its peak. This is due to a combination of factors, such as boarder restrictions and a general economic slowdown. Hong Kong economy is likely facing further pain as a result of the hard currency peg to the USD. As the Fed hikes interest rates this year, the Hong Kong Monetary Authority must strictly follow suit to keep the exchange rate stable, damping economic activity.

US corporate bonds are in a historic slump as the Fed hikes

The US corporate bond market is enduring its worst performance in recent history amid high inflation and rapidly rising interest rates. This chart plots the total return for every year since 1997, and shows the median yearly return was almost 7 percent. The bold line shows that 2022’s year-to-date total return is approaching minus 12 percent - without adjusting for inflation. It’s not a good market to be in as an investor.

This time is different for corporate bonds in a tightening cycle

The following chart displays how US corporate bonds performed during every tightening cycle since the late 1990s. Strikingly, total performance was highly positive in previous cycles. There are reasons why this cycle, which began with the Fed’s first hike in March, is so different. 

Firstly, inflation in the 1990s and 2000s was very low; today, the US faces inflation of close to 10%, a much harder scenario for the Fed to navigate. Secondly, long-term rates were stable (and sometimes even declining) as the Fed hiked rates – see former Fed chair Ben Bernanke’s bond market conundrum.  This kept bond market returns more stable due to higher valuations. 

By contrast, the current hiking cycle has seen both short-term and long-term rates go up significantly, pushing bond prices down. Finally, the pace of the current tightening cycle is much speedier than its predecessors. These factors add up to a much more painful environment for corporate bonds than we have seen in the past.

UK stagflation forecast to become reality

The Bank of England is forecasting a bleak outlook for the UK. This four-year chart shows the central bank’s forecast for a spike in inflation – which it expects to top 12% by the end of the year – coupled with negative or flat economic growth throughout 2023. The unemployment rate is expected to increase from less than 4% to more than 6% in two years’ time. The aftermath of the pandemic and the global commodity price shock are contributing to this stagflationary outlook – with several economists pointing to Brexit’s impact on the labour market as a contributing factor.

Indonesian food costs push inflation higher

Consumer prices are surging around the world, but Indonesia has enjoyed relatively subdued inflation compared with many advanced economies. Until several months ago, the consumer price index (CPI) remained below the upper limit of the central bank’s inflation target (which is centered around 3%). However, the last two months have seen the CPI surge above 4%. This chart shows how food price inflation is the most notable culprit.

Emerging markets under stress as higher rates boost debt burden

Emerging markets are often the first casualties when the Federal Reserve starts a tightening cycle. Rate hikes by the Fed and other central banks are negatively affecting the fiscal outlook for many such countries. This chart shows interest payments as a percentage of GDP are surging for nations including Turkey, Indonesia, Mexico and Brazil.

US productivity a negative outlier amid positive economic data

In a series of charts last week, we cast doubt on the thesis that the US was in a recession during the first half of 2022. However, one recent data point contradicts the other evidence: employees are working more to produce less. This chart shows one of the largest declines in labour productivity recorded in recent decades.

According to research from the Peterson Institute for International Economics, productivity data is very hard to measure, and the recent record divergence between gross domestic income (GDI) and gross domestic product (GDP) might imply that productivity has not fallen nearly as much as recent figures suggest. GDI is a measure of economic activity based on the money earned for goods and services produced, and hourly compensation spiked during the early stages of the pandemic (ultimately to be passed on to consumers via price inflation).

It may take six to 12 months, or even longer, for data revisions to confirm whether we are truly seeing a huge productivity decline, or whether that data point is an outlier untethered from economic reality.

The ECB is targeting Southern European asset purchases (again)

The European Central Bank’s new Transmission Protection Instrument (TPI) has the explicit goal of preventing a surge in bond-yield spreads for Southern Europe akin to the debt crisis of 2011-12. (This is particularly in focus as Italian government debt is higher as a proportion of GDP than it was during the crisis a decade ago.)

This chart based on net asset purchases shows how the ECB‘s stockpile of German government bond holdings is currently going down as a fraction of German bonds on the ECB’s balance sheet is maturing each month. Southern European holdings, on the other hand, are still increasing as the ECB is targeting reinvestments from the asset purchase programs towards Southern European countries with higher yields. This remains politically very controversial in Northern European countries.

Could TARGET2 balances suggest stress in banking systems?

This chart shows the expansion of TARGET2 (Trans-European Automated Real-time Gross settlement Express Transfer system) 2 balances – the net claims and liabilities of national central banks vis-à-vis the ECB that arise through cross-border payments settled in the central bank’s funds. They reflect banking flows between different nations.

For instance, when the Spanish central bank buys government bonds on behalf of the ECB from investors with a bank account in a different country, either inside or outside the euro area, that cross-border transfer would show up in the target balances as a liability for Spain. Conversely, when Germany’s Bundesbank receives more money than it is sent, it would record a positive target balance.

A significant contributor to higher TARGET2 balances is the ECB’s large-scale asset purchase programmes – firstly, after the European debt crisis, and now again following the pandemic. (Note that some of the TARGET2 trends simply reflect the fact that so many investors have bank accounts in the financial centres of Frankfurt, Luxembourg and Amsterdam.)  

However, outflows from one national banking system to another could also be a symptom of increased financial stress.

It’s important not to assume a direct link between TARGET2 balances and heightened risks to the currency union. Instead, one should unpack the reasons why cross-border claims and liabilities are increasing.

Hedge funds providing protection (relatively) in 2022

Hedge funds historically sought to “hedge” market risk, and most strategies have done just that in 2022 by outperforming equity benchmarks. This chart compares the returns from various hedge-fund strategies to the performance of the S&P 500. Note the large divergence between different strategies: macro hedge funds are the only ones that are in positive territory, while fixed income credit funds have suffered by almost as much as the benchmark equity index  during this year’s global bond market selloff.

China trade balance reaches new high

This chart shows that China’s trade surplus has surged above USD100 billion for the first time. This export strength contrasts with the general slowdown in the economy, as a deflating real-estate market is depressing domestic consumption and thus imports as well.

Tourists return to Thailand

Thailand experienced rapid tourism growth before Covid-19, with the number of visitors roughly doubling between 2010 and 2020. The pandemic put a complete stop to that. This chart of monthly visitors to the southeast Asian nation shows how the sector is finally recovering: the number is surging back towards one million – though that’s still just 25% of the pre-pandemic volume of tourists.

US seasonally adjusted vs non-seasonally adjusted GDP

Is the US in recession or not? This week we dig deeper into the debate by looking at a few charts on the state of the economy. 

A common definition of a technical recession is two consecutive quarters of negative growth. This chart debunks that interpretation. First, GDP series are often subject to major revisions. For example, since GDI growth has been positive in Q1, there is a good chance the GDP series will be revised upwards later this year. 

Second, the non-seasonally adjusted GDP figure shows relatively strong growth in Q2. It is thus far from certain whether the US economy has actually experienced two consecutive quarters of decline.

US NBER recession dating indicators

The US National Bureau of Economic Research relies on a wider set of indicators to determine whether the economy has entered a recession.

The NBER recession dating committee uses six main macroeconomic indicators:

• real personal income less transfers
• non-farm payrolls
• real personal consumption expenditures
• real manufacturing and trade sales
• household employment
• index of industrial production

As this chart shows, only real manufacturing and trade sales remain below their values in January. Other indicators, particularly employment, have recovered sharply since then. It is therefore extremely unlikely that the US economy entered a recession in the first half of the year.

Conference Board recession indicators

Here’s a third indicator showing the US is not yet in recession. 

The Conference Board Coincident Economic Index is based on four out of the six time series that the NBER uses to construct a recession signal. 

In the chart below, we have plotted the seven-year rolling drawdown (based on the typical length of an economic expansion in the US) for the four indicators. Drawdowns during a downturn typically exceed 5% or more. As you can see, all but one time series (manufacturing & retail trade) is still at around zero percent.

US labour market

Despite soaring inflation that has led the Fed to swiftly tighten monetary policy, the US economy has so far been protected by a strong labour market. But that too is now starting to change. 

This chart shows the number of job openings declined significantly last month – although it did start off at a very high base following the Great Resignation triggered by the pandemic. 

The Fed has been trying to cool inflation by reducing the number of job openings without killing jobs. While this has historically been impossible, things might be different this time. 

VIX vs yield spread business cycle

The following chart maps the business cycle of the VIX volatility index against the yield curve slope to show different macro regimes. Note how financial markets have cycled through all four financial market scenarios at least once since the 2008/2009 recession, indicating that we have completed at least one full business cycle during that time. The US economy remains in the higher-volatility / flatter-curve regime for now even after the spread widened at the beginning of the year.

Global house price indicators

With inflation rising across global economies, let’s now look at the impact this is having on house prices. 

This table displays five key housing indicators for 22 advanced economies. The data is ranked according to the OECD’s index of house price-to-income ratio, which is commonly used together with the house price-to-rent ratio as a key metric to determine affordability.  

You can see that housing in Canada, New Zealand, Portugal and the Netherlands are among the most overvalued, with relatively large housing price gains, both nominal and real. 

Moreover, countries with higher price appreciations are also recording larger credit growth – unsurprising given the feedback loop between the two. As macroeconomists Jorda, Schularick, and Taylor have shown in multiple studies, financial crises and asset price bubble bursts are almost always preceded by very high credit growth.   

US house prices vs long-run trend

The US housing market is also creeping towards overvaluation. 

The following chart displays real residential prices alongside a long-run trend based on the Hodrick–Prescott (HP) filter and a standard deviation band to show large under/overvaluations based on the divergence from trend. 

As you can see, house prices were clearly above trend until the 2008 financial crisis and US recession sent them crashing and remaining below trend for several years. That changed when the Covid-19 pandemic and the resulting shift to remote working turned housing into a more valuable commodity – sending prices above trend for the first time in more than a decade. 

US and Sweden: House prices vs disposable income

Despite strong price growth, the US is one of the few advanced economies where house prices have not significantly outperformed disposable income over the long run, with both series rising in tandem.

Prices in Sweden, on the other hand, have surged well beyond disposable income over the last decade.

Hong Kong Phillips curve

The Phillips curve depicts the relationship between the inflation rate and unemployment rate. Generally, the pattern differs by country and macroeconomic regime, with downward sloping of what is essentially a ‘supply’ curve appearing only in economies affected by unexpected demand shocks, as economist Matthew Rognlie explained in this paper.

Hong Kong is providing a natural test for this hypothesis. Since its currency is pegged to the US dollar, the city’s monetary authority must follow the Fed’s interest rate policy, regardless of domestic economic circumstances. This has repeatedly exposed the Hong Kong economy to unexpected demand shocks, which is why the Phillips curve works better as an indicator for Hong Kong than for most other countries. 

Semi-conductor inventories

The global semi-conductor shortage that has halted production lines and intensified focus on disrupted supply chains over the last couple of years appears to be ending. 

Our last chart shows inventories surging in major chip exporters South Korea and Taiwan as a global economic slowdown reduces demand. 

Germany business cycle

The ifo Institute’s business cycle clock displays the cyclical relationship between the current business situation and business expectations in Germany. The diagram below shows the cycle on a severe downswing, meaning companies have become less satisfied with their current situation and are expecting business to become much more difficult in the coming months.

The chart also compares the current business cycle with the one from 2008-2010. As you can see, the current cycle is set to complete more quickly than the one during the financial crisis. After a short-lived boom, it appears Germany is now heading toward recession again as high energy prices and a potential gas shortage weigh on the economy.

EU natural gas inventory

Natural gas inventory levels continue to fall in the EU, with only four countries exceeding the European Commission’s target of 80%. Eastern European nations suffering the brunt of the consequences of the Russia-Ukraine war have the lowest fill levels – averaging around 50%. Record high energy prices will likely continue well into 2023 as a result.

Global central bank tightening

Central banks globally are raising interest rates more sharply in a bid to tame surging inflation. This chart shows the number hiking rates by 50 to 100 basis points (green bars) has risen to a record.

CEO confidence indicator

The Federal Reserve is among the aggressive rate raisers – and while such rapid tightening has yet to tip the US economy into recession, several data points are signaling a severe slowdown ahead.

This chart shows the link between the Conference Board CEO Confidence Index – a barometer of the health of the US economy based on the views of US chief executives (pushed forward by seven months based on the highest lead/lag correlation) – and the S&P 500 12 months forward earnings per share.

As you can see, CEO confidence typically starts falling before the start of each recession – followed by earnings per share. The question is whether this can serve as a leading indicator – or a self-fulfilling prophecy.

A new model for u*

Economists Saez and Michaillat have come out with an alternative measure for the natural rate of unemployment, or u*. In a new research paper, they posit that the labour market is efficient when the number of vacancies (v) is equal to the unemployment rate (u) – a model based on the Beveridge curve and a labour market matching function. The natural rate estimate is thus simply the square root of u*v.

This chart uses the Saez and Michaillat estimator for u* based on the unemployment and vacancy rate. One can see that labour market conditions are currently tighter than ever. While this is consistent with other estimates for u*, such as this research paper from Fed economists, this metric may not be entirely reliable: the efficiency criteria are invariant to structural shocks and major transformations in the labour market, such as the leap in remote working.

US employment growth outliers

The US reported negative GDP growth in both Q1 and Q2. So how come the economy is not in recession? One reason could be that Q1 GDP could be revised up later this year given that GDI (gross domestic income) has remained strong – not unlike retail spending, personal consumption expenditure (PCE) and the labour market.  

A better marker of recession could be large data discontinuities. The following chart shows non-farm payroll declines that are larger than one standard deviation. As you can see, these appear in clusters during and toward the end of recessions.

China consumer confidence

Speaking of data discontinuities, China’s consumer confidence has plummeted to a record – by more than 11 standard deviations in a single month! – as the economy buckles under the government’s zero-Covid strategy.

China GDP

The most recent Chinese regional GDP figures also show a severe deterioration – perhaps even underestimating the extent of the slowdown. As the table below shows, most Chinese cities and regions are now growing at less than 5% and significantly below the 10-year average.

China property construction

China’s real estate market has also slowed dramatically. Construction starts and properties under construction have fallen by more than 20% year on year – much more than during previous economic downturns. This is especially worrying as Chinese real estate is the biggest global asset class by valuation.

Rhine water levels

Lastly, we look at the impact of climate change on one of Europe’s most important waterways. The chart below shows water levels on the Rhine have fallen to a new low – a phenomenon that has increased in frequency over the last two decades. The low water levels threaten to disrupt shipments again, adding even more pressure on supply chains already suffering from pandemic-related delays.