Global| Feb 24 2023Charts of the Week (Feb 24, 2023)
by:Andrew Cates
|in:Economy in Brief
Summary
Financial markets have been pricing in tighter-for-longer monetary policy settings in recent weeks thanks to some firmer-than-expected US data. And this is now reversing the shift from a hard to a soft landing consensus that had begun to form in January. Our charts this week, however, turn the focus back onto some of the more positive trends that have established themselves in recent times. We look, for example, at falling European energy prices (in chart 1), ebbing core inflation rates (in chart 2), and at an arguably more realistic consensus for US profits and interest rates (in chart 3). We then hone in on the punchy US fiscal policy impulse that’s being enacted for the coming years (in chart 4) and how this (relative to elsewhere) might be affecting interest rates and the US dollar (in chart 5). Finally - and from a longer-term perspective - we throw some light on how costs of various renewable energy sources have been falling over the past few years (in chart 6).
European energy prices The recent decline in European (and global) energy prices has been a key catalyst for the more upbeat mood that had – until recently – gripped financial markets. From their peak in August to the end of last year, Dutch TTF futures - a European-wide natural gas price benchmark - declined by 77%. And then, from the start of this year, prices have declined by a further 34% (see chart 1). This is clearly of huge significance for European economic and financial stability.
Chart 1: European natural gas prices and Germany’s electricity prices
Core CPI inflation Falling energy prices have of course helped pull down headline inflation rates in recent months but – via their impact on unit costs – they ought to alleviate core inflationary pressures as well. While incoming inflation data for January have offered some mixed signals so far, the trend in core CPI inflation has turned down in several major economies, including the US, Canada and the UK (see chart 2 below).
Chart 2: Core CPI inflation in the US, Canada and the UK
Consensus forecasts How financial markets evolve is, of course, in part a function of what’s being discounted, or, putting that differently, by what’s anticipated by the market consensus. Relative to the start of last year Blue Chip consensus forecasts for factors such as US profitability, inflation and long-term interest rates in 2023 have adjusted to reflect a weaker economic outlook and a higher inflation environment. At the start of 2022, for example, that Blue Chip consensus had pegged the growth of US profits in 2023 at +3.2% y/y. The consensus, in contrast, now anticipates a retreat of -1.5%. Equally, the CPI consensus for 2023 at the start of 2022, was centred on inflation of 2.3%. That forecast now stands at 3.2%.
Chart 3: The Blue Chip Consensus for US profits, inflation and 10-year yields
US fiscal policy Much of the day-to-day focus of investors and the financial press centres on monetary policy. But fiscal policy matters have also arguably been a big driver of economic and market outcomes in recent months. The US Inflation Reduction Act of 2022, in particular, could herald a renaissance in some sectors of the US economy. The latest figuring from the IMF on this matter is also instructive. The projected 1-year change in the cyclically-adjusted budget balance – a good gauge of an economy’s fiscal policy impulse – suggests a US fiscal loosening worth some 1.3% of GDP in 2023 and a further 0.6% in 2024. This contrasts with the fiscal policy of the G20 economies as a whole which are projected to see a fiscal tightening worth some 0.5% of GDP in 2023 followed by a marginal loosening worth just 0.1% of GDP in 2024 (see chart 4).
Chart 4: The US fiscal policy impulse versus the impulse in G20 economies
The US dollar and fiscal policy Textbook models of currency determination often reference the country’s monetary and fiscal policy combination. Tight money/loose fiscal policy combinations, for example, would, in theory, lead to currency appreciation via their impact on real interest rates. Loose money/tight fiscal policy combinations, in contrast, result in a depreciating currency. Insofar as the US is pursuing the former strategy, namely a tight money/loose fiscal policy combination, this sits neatly with the run up in US real rates (compared with Germany) and the US dollar in recent months and evidenced in chart 5 below.
Chart 5: US real yield differentials versus the real trade weighted value of the dollar
The green energy transition Much of that US Inflation Reduction Act concerns incentives to accelerate the transition to a clean energy economy. But it comes too as some major innovations in recent years have already arguably incentivised that shift. Those innovations have led to some steep declines in the price of solar energy and in wind power which is evidenced by some data from our New Energy Database (NED) for several regions in chart 6 below.
Chart 6: Energy generation costs from solar power and wind
Andrew Cates
AuthorMore in Author Profile »Andy Cates joined Haver Analytics as a Senior Economist in 2020. Andy has more than 25 years of experience forecasting the global economic outlook and in assessing the implications for policy settings and financial markets. He has held various senior positions in London in a number of Investment Banks including as Head of Developed Markets Economics at Nomura and as Chief Eurozone Economist at RBS. These followed a spell of 21 years as Senior International Economist at UBS, 5 of which were spent in Singapore. Prior to his time in financial services Andy was a UK economist at HM Treasury in London holding positions in the domestic forecasting and macroeconomic modelling units. He has a BA in Economics from the University of York and an MSc in Economics and Econometrics from the University of Southampton.
More Economy in Brief
