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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
Food prices and political instability
Food and commodity prices continue to soar, exacerbated by the war in Ukraine. Historically, rapidly rising food prices have led to political instability in emerging markets. Analysts have even established a connection between food price surges and the Arab Spring anti-government protests that started in Egypt in 2010.
Commodity price shocks can therefore cause political violence and our chart below appears to back that theory. It shows a correlation between global food prices and fatalities from terrorism.
Surging electricity prices
Electricity prices have also surged as the war in Ukraine triggered an explosion in gas and oil prices. Our next chart compares electricity futures from one week before the Russian invasion to today for Germany, France and the Nordics.
While spot prices have risen across continental Europe, they are somewhat lower in the Nordics. The difference is particularly striking for Germany and France, indicating very elevated electricity prices for the next several months.
Demand for commodities
Other commodity prices are also on the up. The following chart shows the number of commodities in so-called backwardation, meaning the spot price is higher than the futures price. This can occur when current demand for an asset outstrips that for contracts maturing in coming months through the futures market.
The table below shows long, short and net positions for several commodities. As you can see, the positioning has shifted substantially towards long positions, showing rising demand.
Investors have also been raising their long positions in the grain market in anticipation of higher prices. With Russia and Ukraine among the world’s largest wheat producers, the conflict has the potential to drive up prices significantly this year.
Oil price shocks and recession
To surging oil prices now and the price of West Texas Intermediate now exceeds USD125 a barrel, a peak that was last reached in 2008. Negative supply shocks typically raise the risk of recession since they lead to higher inflation and lower growth. As our next chart shows, almost every post-war recession in the US was preceded by an oil price surge.
Bernanke, Gertler, and Watson explained in an influential paper that it’s not oil price shocks on their own that lead to lower output, but rather, the contractionary monetary policies in response to higher inflation. That is, the Federal Reserve usually responds to a commodity price shock by hiking rates, which puts additional downward pressure on output. With inflation already above 7%, it is hard to see how this time could be different.
US economy overheats
In general, monetary policy has been too expansionary since last autumn. Nominal GDP is way above its pre-pandemic trend, indicating that the current high inflation rate in the US is not just a supply-side and commodity problem, but also a result of excessive nominal demand.
Moreover, a survey of professional forecasters now expects nominal GDP in 2022 to grow above 8.5% -- a much higher rate than before the pandemic. David Beckworth’s nominal GDP gap, a measure of actual nominal GDP relative to potential, has also recently turned positive and is now at 3%, another sign of an overheated US economy.
Inflation expectations surge
This chart compares the market-implied change to the federal funds rate – the interest rate that banks charge each other – over the next 12 months together with the expected change in inflation based on a University of Michigan consumer survey.
It shows markets still expect about five rate hikes through the end of this year given the high inflation readings from the last few months.
While inflation might surprise again on the upside due to surging commodity prices, growth might disappoint. This could put the Fed in a difficult situation as it try to strike the delicate balance of restraining inflation without choking off economic recovery.
Mortgage rates rise
While the Fed’s policy rate is still at zero, there is little doubt that policymakers will hike rates several times throughout the year to fight high inflation. Moreover, corporate borrowing rates and mortgage rates have already increased ex-ante in anticipation of higher rates in the future.
As this chart shows, the average 30-year US mortgage rate has more than doubled from a low of 1.5% in 2021 to about 3.75% right now. As borrowing costs surge, mortgage applications have fallen, which means the hot housing market may finally start to cool.
Population growth and real interest rates
Our last chart shows the link between population growth and real interest rates in the US. You can see that as population growth slowed significantly in recent decades, real interest rates also turned negative. While 2021 is very much an outlier due to surging inflation, it is unlikely that the US and other advanced economies will experience a positive real interest rate environment in the years to come.
However, for most other economies, the correlation between population growth and real interest rates is less clear cut. For small countries, real interest rates are determined by global factors instead of domestic variables.
Spike in global geopolitical risk
Russia’s invasion of Ukraine has triggered the biggest spike in global geopolitical risk since the September 11 terrorist attacks in 2001.
Ruble crashes
A slower than expected advance into Ukraine, economic and financial sanctions by Western nations, and the increasing isolation of Russia are all taking their toll on the country’s currency. The ruble plunged almost 23% on 28 February, the biggest one-day drop since Russia defaulted on its loans back in August 1998.
Moreover, with Russia’s central bank cut off from global financial markets, it is unable to use its huge store of foreign currency reserves to stabilise the value of the ruble.
The ruble and Putin’s approval ratings
Now let’s compare the currency’s movement with approval ratings for Russian President Vladimir Putin.
We can see the ruble has lost more than half its value against the US dollar in the last decade alone – with Russia’s invasion of Crimea triggering the previous plunge, and the push into Ukraine setting off the latest.
Interestingly, Putin’s approval ratings surged at the start of each invasion. Could Putin be using war to stabilise his political position domestically?
Russian attitudes to Ukraine
Meanwhile, public opinion polls of Russian residents show an increase in ‘negative attitudes’ towards Ukraine.
Previous opinion polls also showed a large shift in sentiment against Western nations following the invasion of Crimea, with negative attitudes towards the US and EU increasing substantially.
US investors shed Russian securities
Now let’s look at the impact of the Ukraine conflict on Russian securities.
The following chart displays the bilateral portfolio position between the US and Russia. We can see that US investors are starting to liquidate holdings of Russian stocks and bonds as financial sanctions take hold.
Meanwhile, US securities held by Russian residents are falling again after already taking a dive in 2018, when a vast majority of Treasuries were sold – partly as a result of US sanctions imposed on Russia that year.
Russian inflation outlook
This next chart uses some of the high-frequency data we have on Russian inflation. The statistics office provides weekly estimates for consumer prices and a number of subcomponents.
Using slice analysis, we can track changes to Russia’s Consumer Price Index data throughout the year for every year since 2012. While the average price increase has been around 6%, variations have been wide. For example, Russia experienced a much higher inflation rate in 2015 when the ruble depreciated in the aftermath of the Crimea invasion. For 2022, we can already see that the CPI is likely going to increase more quickly than previous years on average.
Another predictor of Russian inflation
We can also use rolling regression to calculate the expected inflation rate.
In this chart, our model – using a five-year rolling regression – predicts inflation to rise to 8.73%. While the regression coefficient was much higher in the 2000s, even with a coefficient of 0.1, a ruble depreciation of about 50% could lead to a 5% increase in the inflation rate in the short to medium term.
Dependence on Russian oil
Russia and Ukraine are not the only economies suffering from the conflict. European countries that rely on Russian oil are also set to struggle.
The chart below shows Germany is most dependent on Russian energy, which could spell trouble for the German economy as commodity prices surge and trade with Russia is disrupted. The Bundesbank expects Q1 growth to be negative, which puts Germany into a technical recession.
Gas shortage
The energy crisis looming for Western Europe started even before Russia-Ukraine tensions boiled over. Our last chart shows fill levels for two of the largest gas storage facilities in Western Europe: UHS Rehden and UGS Bergermeer, both operated by Russia’s Gazprom, the world’s largest natural gas company.
As you can see, Gazprom had already stopped re-filling both tanks throughout 2021, and gas storage is now at a record low. Good thing the weather is starting to warm…
Plunging shipping costs
The Baltic Dry Index is one of the most popular indicators for analysing the shipping market. It tracks the freight cost for dry bulk shipping, i.e., commodities, and as cargo ship supply changes little over the short-term, the Baltic Dry is commonly used as a leading indicator for future demand.
This chart shows a significant decline in the index over the last few weeks. Given the reduced number of vessels anchored and at berth at Los Angeles harbour, this seems to indicate that supply chain problems are finally being resolved. Or maybe excess demand is easing as economic activity weakens.
Armed conflicts and US equities
In this next chart, we performed a slice analysis on the S&P 500 to show equity performance following after the start of armed conflicts. As you can see, equity indices typically start declining even before fighting breaks out – not surprising since stock markets tend to be forward-looking. What’s interesting here, however, is that the conflicts over recent decades have had little impact on US equity markets in the short term. We shall see whether the trend holds as Russian troops pour into Ukraine…
Russia and Ukraine lead fall in global equities
With global equities, on the other hand, we can see a noticeable price correction since the start of the year – with Ukraine and especially Russia seeing the biggest declines. The Russian economy had already been underperforming for a long time and impending sanctions from the West will likely squeeze it further. Also bear in mind that despite being a formidable military power, Russia’s economy is smaller than that of Texas.
Investors short the ruble
Futures positioning shows investors are taking large net short positions in the Russian currency. The conflict with Ukraine will further push down the value of the ruble, which has already declined by some 8% since October 2021.
Ukraine and Russia lead jump in yields
Yields have been rising across all emerging markets, thanks partly to rising interest rates. But again, Ukraine and Russia are leading the phenomenon.
The table below, based on JPMorgan indices, shows the year-to-date value change ranging from just 25bps in Turkey to almost 400 bps for Ukraine.
Emerging markets trade
Delving deeper into emerging markets, the following chart ranks them by trade openness: the sum of imports and exports divided by GDP.
Hong Kong and Singapore are the most open by far but it’s interesting to see that Russia is more open than other large economies such as China.
Eastern European markets losing out
Eastern European economies obviously have the largest exposure to Russia and are set to suffer most from the conflict in Ukraine given their historic trade and financial links.
With Western sanctions about to make it harder for Russia to access global capital markets, it is interesting to see Eastern Europe’s “vulnerability” to foreign investment in general. As the chart below shows, the percentage of public debt held by foreign investors has fallen considerably over the years, particularly in the last two.
Economic activity slows in emerging markets
Even before the start of the Russian-Ukraine conflict, there have been signs of weakening economic activity across emerging markets. Manufacturing PMI data shows the extent of the slowdown in the last three months.
The slowdown is also visible in high-frequency data.
The OECD’s weekly economic indicator, based on Google trends data and machine learning, is a good tracker of economic activity.
In the chart below, we show the two-year change in weekly economic activity compared to eliminate the potential one-year base effects that could distort the picture. In the bottom pane, we show the difference compared to a hypothetical non-pandemic world.
As you can see, weekly economic activity is showing a slight decline across four key emerging economies: Brazil, India, Russia and South Africa.
Water stress in emerging markets
Aquastat data measures water stress – a situation where there is not enough water of sufficient quality to meet the demands of people and the environment – around the world. As the table below shows, it is most severe and reaching dangerously high levels in some major emerging markets, most notably South Africa, China, India and Pakistan. Agricultural production is using up the most resources by far.
Air quality in China and Japanese carbon emissions
Besides water stress, many emerging markets are also suffering from pollution and other environmental disasters. China’s air quality in some of the main cities is notoriously bad, especially in winter. Low values of the index mean better air quality. Lockdowns during the pandemic have slightly reduced the amount of pollution – extreme values have been significantly lower throughout 2020 and 2021.
Household greenhouse gas emissions in Japan have been fairly constant over the past two decades. Power emissions increased sharply for a couple of years right after the Fukushima disaster as many nuclear power plants were temporarily shut down. Total national emissions, however, have been on a very slight downward trend for several years.
Germany’s energy mix and electricity prices
Germany’s energy production has seen some considerably changes since the early 2000s. Renewables have largely increased in importance, with their share rising from less than 10% some 20 years ago to about 30% today. Meanwhile, nuclear energy production has gone down significantly, especially after the Merkel government decided to phase it out back in 2014.
As a consequence, some of the missing electricity production had to be generated through dirty coal power plants, meaning that Germany’s overall emissions actually increased in the late 2010s despite its uptake of renewables.
Exacerbating the energy crisis gripping Europe is the Russia-Ukraine conflict and the threat of a Russian invasion. Gas and oil prices recently surged to record highs. This chart shows how the natural gas price is affecting electricity prices in Germany – already among the highest in the world – with a correlation of more than 95%.
Russia-Ukraine conflict
Gas supplies from Russia to the Ukraine and Belarus have declined sharply throughout the year and are much lower than just a few months ago. There are fears Russia could further reduce gas exports to put pressure on Eastern European economies, and Ukraine in particular.
The geopolitical risk index shows how economic policy uncertainty has surged for Ukraine amidst the fear of a potential Russian invasion.
Consequently, Ukraine’s gas reserves are being depleted at a rather rapid pace. As the following chart shows, daily withdrawals have roughly halved the country’s reserves since October 2021.
While Ukraine’s exports to the EU and Russia have increased markedly over the last 12 months as the global economy recovers, trade with Russia will obviously take a hit if the Russia-Ukraine crisis escalates further.
While Russia’s import prices are relatively stable, export prices fluctuate quite wildly. This is to be expected as the country is one of the largest commodity exporters in the world – for oil and gas in particular – and commodity prices are volatile.
Consequently, Russia’s terms of trade – the ratio of export to import prices – also fluctuate over time. This is also affecting the nominal exchange rate. As commodity prices decline and the terms of trade deteriorate, so does the value of the ruble and vice versa.
As commodity prices surge this year, Russia’s terms of trade have increased significantly. However, the exchange rate has yet to recover amid the Ukraine conflict and the imposition of sanctions.
The following chart compares Russia’s export and import prices and terms of trade with the broad nominal exchange rate.
The following table ranks Russia’s top trading partners by exports. With the exception of China, Kazakhstan and Turkey, Russia’s top trading partners are Europe and the US.
Remember that Russia’s nominal GDP is rather small, roughly the size of Belgium plus the Netherlands at current market exchange rates. If western nations impose sanctions, it could obviously hurt the Russian economy. However, European countries have little incentive to further escalate the crisis as record high energy prices are already hurting consumers across Europe.
