Charting the Global Economy: Mexico, Iceland Amp Inflation Fight
(Bloomberg) — Central bankers in Mexico and Iceland stepped up their effort this week to quash inflation, boosting interest rates further into restrictive territory.
Mexico stunned markets by increasing rates by half a percentage point to a record 11%, in a move by the central bank to outpace the Federal Reserve that no top economist projected. Officials in Iceland accelerated monetary tightening, adding a half-point hike to what is already western Europe’s highest interest rate.
Policymakers in Australia were also quite hawkish, with the central bank boosting its forecast for core inflation this year as it tries to ensure the economy avoids a wage-price spiral.
Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy:
India’s central bank slowed the pace of its repurchase-rate hike to 25 basis points, but hopes of a pause dashed after Governor Shaktikanta Das said a change in the current stance would need a decisive moderation in prices. Officials in Sweden and Serbia hiked rates, while those in Poland, Uganda, Romania, Russia and Peru stood pat.
The UK avoided a recession last year by the narrowest of margins. Gross domestic product was unchanged in the fourth quarter following a revised 0.2% decline in the previous three months. The economy was still 0.8% smaller than it was at the end of 2019, making the UK the only Group of Seven country that has yet to fully recover output lost during the pandemic.
German factory orders grew more than anticipated in December in the latest sign that Europe’s largest economy will get through the winter without seeing a slump.
Japanese workers’ nominal wages in December rose at the fastest pace since 1997, an acceleration in gains that may fuel speculation the central bank will consider shifting policy after Governor Haruhiko Kuroda steps down in April.
China’s consumer inflation accelerated last month as the country reopened and the Lunar New Year holiday spurred demand, although gains remain muted enough for the central bank to keep easing monetary policy to support the economy’s recovery.
The US trade deficit widened to a record last year on a surge in imports as American companies scrambled early on to ensure they had enough merchandise on hand to meet demand. This year, however, global trade is expected to decelerate after central banks aggressively raised interest rates to combat an inflation surge owed in part to strong demand.
Don’t count the US consumer out just yet. Two sets of data out Friday raised hopes that the pullback in household spending at the end of last year was just a blip. In the first month of 2023, Americans ramped up purchases of services — everything from restaurant meals to health care — while businesses went on a surprise hiring spree.
Talks for a new labor pact between West Coast dockworkers and their employers are stretching into a 10th month, but with no agreement in sight and volumes dropping, patience is wearing thin. A volume slowdown is lowering urgency on the new deal for 22,000 dockworkers, according to people working in the logistics industry. Shipping costs have also plunged.
A daunting economic landscape will exacerbate the humanitarian catastrophe wrought by a pair of earthquakes on Turkey, as early estimates of the damage point to mounting inflation and budget risks on the nation’s $819 billion economy. Public spending may be equivalent to 5.5% of GDP, according to an initial estimate from Bloomberg Economics.
Chile’s consumer prices rose well above forecast in January, just as the central bank was turning more hawkish, conditioning eventual interest-rate cuts on stronger evidence that inflation is easing toward target.
–With assistance from Philip Aldrick, Andrew Atkinson, Laura Curtis, Toru Fujioka, Colleen Goko, Netty Ismail, John Liu, Matthew Malinowski, Reade Pickert, Olivia Rockeman, Anup Roy, Augusta Saraiva, Srinivasan Sivabalan, Alexander Weber, Erica Yokoyama and Lin Zhu.
US revises down last quarter's economic growth to 2.6% rate – ABC News
WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.
The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.
The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.
The report suggested that the economy was losing momentum at the end of 2022.
Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.
More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.
Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.
The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.
The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.
Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.
The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.
“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”
They added: “We expect a recession to hit in the second half of 2023.”
In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.
Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.
Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg
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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 Bloomberg
Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail
All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?
Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?
Here are some examples of the puzzling behaviour of economic statistics of recent months.
An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.
Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.
Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.
Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.
And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?
And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.
It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.
For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.
As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.
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