Charts of the Week: Not Too Shocking

US inflation drivers This week’s US CPI report for February was not as friendly for the Fed as many US economists had anticipated. The re-acceleration in core CPI inflation over the past 3 months, thanks, in large part, to stubbornly high levels of service sector inflation will certainly be of some concern. A closer examination reveals that a significant portion of this stubborn inflation in the service sector can be traced to the shelter component. Specifically, the cost of shelter, which rose by 5.7% in the year to February, accounted for more than 60% of the 3.2% year-on-year increase in the headline CPI.

The UK labour market In contrast to the data for US Inflation, this week’s news about the state of the UK labour market was weaker-than-expected. Underlying details revealed that employment fell a little, and that the unemployment rate climbed a little. Particularly encouraging for the BoE, however, was the evidence revealing that vacancies are falling a little faster and that wage growth has been slowing (see chart 2). Private sector regular pay specifically fell by 0.1% m/m in January. This is the second time in recent months that pay has fallen, a rare occurrence over the past few years.

Japan’s productivity growth This week’s revised GDP data revealed that Japan has now managed to avoid a technical recession in H2 2023. That was previously the message from earlier estimates suggesting two consecutive contractions in output in Q3 and Q4. But subsequent data revealed a much stronger gain in capital expenditure than had previously been estimated. This development bodes well for the sustainability of Japan's economic revival in the coming months. Moreover, recent updates on the supply side contributions to Japan's GDP growth over recent years also offer some optimism. As indicated in chart 3 below, a revival in productivity growth (albeit from a weak base) has played a key role in the economy's post-COVID recovery, mitigating the negative impacts of a decelerating and ageing population.

China’s EV penetration China has firmly positioned itself as a leader in the global electric vehicle (EV) market, in recent years, with an impressive penetration rate relative to its peers. As the world's largest automotive market, aggressive policies to promote EV adoption, including substantial subsidies and investment in charging infrastructure, have certainly fostered a big surge in EV sales. Those sales outstripped the sum of EU registrations and US sales in 2022. And they subsequently surged in 2023, by 28.5% y/y, to 8.8 million units (see chart 4).

Consensus growth forecasts In our next exhibit this week, we examine the evolution of the Blue Chip consensus regarding the global economic outlook for 2024. We begin with an analysis of growth expectations and specifically the changes in GDP forecasts for 2024 over a 14-month period—from January 2023 to March 2024—that have unfolded for a selection of both large developed and developing economies. Chart 5 below highlights that, for the majority of these economies, growth expectations for this year have diminished over the last few months, with significant reductions observed in major economies or regions such as the euro area, China, and Japan. In contrast, growth expectations for the United States have improved significantly, while modest improvements have occurred for Mexico and India.

Economic shocks and their impact on consensus forecasts In our concluding exhibit, we juxtapose the changes in growth expectations for 2024, as depicted in Chart 5 above, with corresponding shifts in inflation expectations. More precisely, Chart 6 below contrasts the 14-month change in the GDP growth consensus against the shift in inflation expectations for 2024. This comparison offers a straightforward, yet insightful, method for grasping the nature of the shocks affecting each economy. It could accordingly be a useful framework for understanding how these economies might now subsequently evolve in light of how policymakers have responded to these shocks in their calibration of monetary and fiscal policy.

Delving deeper, in the northwest corner of the exhibit, we find several economies whose prospects for growth and inflation have been downgraded in recent months. This trend aligns with the effects of a negative supply shock on an economy. Conversely, the economies located in the northeast corner of the chart, including the United States, have experienced upward revisions to their growth and inflation forecasts for this year. Such adjustments are indicative of the influence from a positive demand shock. Meanwhile, a few economies—most notably China—are situated in the southwest corner of the chart. This is where forecasts for both growth and inflation have been revised downward, suggesting the impact of a negative demand shock.