Energy is playing a critical role in the cost of living crisis that presently engulfs the world economy. Hardly a day goes by in the UK, for example, without a newspaper carrying headlines that concern spiraling fuel prices and how this is magnifying inflation tensions on the one hand and draining household purchasing power on the other. The latest raft of European inflation releases certainly attest to the outsized role that energy prices have played in driving consumer price inflation to recent highs. The consumer price of energy, for example, specifically accounted for between 40 and 45% of the respective y/y gains in the UK and Eurozone consumer price index in July (see figures 1 and 2 below). Nearly half of Europe's inflation problem, in other words, can be traced to energy.
Introducing
Andrew Cates
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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.
Publications by Andrew Cates
Global| Aug 24 2022Energy, Energy, Energy
by:Andrew Cates
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- Global| Jul 14 2022
The Over-shooting Dollar and Some Implications
The strength of the US dollar and by extension the weakness of other major currencies in recent weeks has generated a great deal of comment. Heightened global risk aversion and an investor preference for the relative safety of US assets is one reason for the dollar's ascent. But relative growth and inflation fundamentals and their implications for interest rate differentials have also been key.
The outsized degree to which the dollar has climbed based on relative growth fundamentals alone, however, is noteworthy. As figure 1 below suggests, the US dollar has advanced by much more than the incoming US data-flow would suggest. This could be because US inflation has been more broadly-based compared with other major economies (where higher food and energy prices have been principal drivers). And this has caused the Fed - in the face of a weakening economy – to signal a more active inflation-fighting monetary policy campaign relative to, say, the BoJ or the ECB.
Figure 1: The US dollar is decoupling from relative growth fundamentals
by:Andrew Cates
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- Global| Jul 05 2022
Mid-Summer Stagflation Update
This is a transcript of a brief webinar that we have posted on stagflation risks.
As a reminder we have been recommending that a neat way to keep tabs on those risks would be to look at the spread between global growth surprises and global inflation surprises. If that spread has been in negative territory for some time it would suggest that growth expectations have been ebbing or that inflation expectations have climbing and possibly both and with attendant increased risk of a stagflation combination
So where are we now? As the charts in figures 1 and 2 below suggest we have seen a higher risk of a global stagflation scenario emerge of late insofar as our indicator as plunged into deeper negative territory in the past few weeks. And that in turn can mostly be traced to a steady drumbeat of downbeat news on the global growth front.
Figure 1: An updated stagflation stress indicator
by:Andrew Cates
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- Global| Jun 16 2022
A More Challenging Consensus
The latest June survey of Blue Chip professional forecasters is an uncomfortable read. Further downward revisions to growth expectations for 2022 have been accompanied by further upward revisions to inflation forecasts. That’s an unpleasant combination, suggesting stagflation risks are high and rising. That many policymakers moreover are now more actively engineering a tighter monetary policy in order to check inflation leaves global growth forecasts subject to further downward revision. The still-large - and growing - disconnect between forecasts for consumer spending growth and real household income growth in the meantime offers a stark reminder that the growth portion of the stagflation equation are subject to intense downward pressure at present. In other words, global recession risks are rising sharply.
These conclusions are reinforced in the charts below.
The evolution of consensus GDP growth forecasts for 2022 is shown in figure 1 below. These have been revised sharply lower over the last several months and most notably in large economies such as China, the US and the Euro Area. Their synchronized nature moreover hints that these revisions can be traced to global, not domestic, factors.
Figure 1: The evolution of Blue Chip forecasts for GDP growth in 2022
by:Andrew Cates
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- Global| May 27 2022
The Blame Game
Bank of England policymakers have been slammed by UK newspapers in recent days for 'being asleep at the wheel'. Spiralling inflation, a 'cost-of-living crisis', a borrowing binge and an overheating labour market are being specifically pinned on lax UK monetary policy. And last week's UK data flow showing a further big jump in inflation, a steeper than expected drop in the unemployment rate and a record high for job vacancies have added more grease to the media's wheels.
But are these criticisms really justified? Well the answer is not quite, and for a number of reasons. The most straightforward reason being that these criticisms are not just being levelled at the BoE. They're also directed at the Fed, the BoC, RBA, ECB, and at many other central banks besides. In other words, many of these issues are globally-rooted and don't have their origins in lax domestic monetary policy.
Global roots
On the other hand, perhaps all of these central banks have been similarly asleep at the wheel during this period? Global monetary policy settings may have been far too loose for too long, particularly during the pandemic period. This could have generated too much money, excessive private sector leverage, and soaring demand. This could have now yielded outsized price pressures, wage price spirals thanks to overheating labour markets and dislodged inflation expectations to boot. If this isn't a wake-up call for policymakers to tighten monetary policy swiftly and aggressively and squeeze these excesses out of the system, then what is?
However, this global narrative and policy prescription doesn't quite hit the nail on the head either. There's no evidence – at the global level – for rampant money supply growth, for excess private sector leverage, or for economic activity more generally that's overheating. Price pressures have been, and still are, emerging due to acute supply side shortages that can mostly be traced to the pandemic or, more recently, to the conflict in Ukraine and China's zero COVID policy. And while a recovery in global demand has admittedly amplified these pressures, it has been fiscal policy – not monetary policy – that's been playing the supporting role.
All things considered, if that analysis is accurate, shouldn't monetary policy now play a bigger role in ameliorating these price pressures and, at the very least, preventing a bad situation from getting worse? This scribe is dubious. If loose and unorthodox monetary policies throughout the post-financial-crisis era failed to generate any consumer price inflation, and isn't really responsible for high inflation levels at present, why on earth should we expect tighter monetary policy to play a restraining role now?
More appropriate policy tools
Fighting the current combination of weak growth and high inflation with higher interest rates will not restore the supply fabric of the world economy not least now that most governments are tightening their fiscal stance at the same time. Surely a far more apt policy response (which admittedly the UK government is leaning toward) would be to use the levers of fiscal policy to alleviate supply-side shortages (e.g. in energy markets), increase an economy's production capacity and shore up the purchasing power of households and companies. By raising the cost of borrowing, tighter monetary policy will impede a supply side investment drive and further derail private sector purchasing power. As such, central banks may well make a bad situation even worse if they were to more actively respond to the pressures facing them from so many opinion formers in the media.
In what follows, we take a look at a few charts accompanied with (mostly) brief commentary reinforcing these messages.
The first chart in figure 1 below shows the strong link between commodity prices and consumer price inflation in the advanced economies over recent years. In short, consumer prices have been rising because input cost pressures have been rising.
Figure 1: Higher commodity costs have pushed up consumer price inflation
by:Andrew Cates
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- Global| Apr 28 2022
Some Global Inflation Perspectives
Central bankers would be the first to admit that domestic monetary policy is a blunt tool for steering economic growth and inflation. Alan Greenspan famously observed that setting policy can be like driving a car while looking in the rear-view mirror. He noted too that arriving sufficiently early “in order to take to away the punch bowl just as the party gets going” is often equally, if not more, challenging.
To extend these metaphors a little further a big problem at present concerns the image in that rear view which is shrouded in fog. In the meantime there is much uncertainty about how many guests have arrived at the party. Even more debatable is whether the punch bowl that's been provided actually contains any punch!
To elaborate on this let's look at a few charts. The first of these suggest the world economy's current inflation tensions are mainly rooted in global supply-side factors. Specifically figures 1 and 2 below show that higher commodity prices in recent months have been mostly responsible for the burst of positive global inflation surprises. That's incidentally as true in the US as it is in, say, Australia. Insofar as higher commodity prices are rooted in global supply-chain bottlenecks that have been choked by both the COVID pandemic and the Russia/Ukraine crisis combatting these inflation tensions via tighter domestic monetary policy will be challenging to say the least.
Figure 1: Inflation surprises in the G10 have been heavily driven by moves in commodity prices
by:Andrew Cates
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- Global| Apr 22 2022
Some Techno-Optimism
The headlines remain full of negative news about the conflict in Ukraine, a cost-of-living crisis and lingering COVID-related issues not least in China. These factors are derailing consumer and business confidence on the one hand but aggravating inflation tensions on the other. And central banks are accordingly facing an acute dilemma with attendant risks of a policy error extremely high.
One feature of the global economic scene, however, that is arguably receiving less attention than it should concerns the growing desire of companies to invest in new technology and the positive impact from this on productivity growth. As we discuss below the latest dataflow suggest global demand for technology products has been strong, that capex intentions remain firm, and that trends toward technology innovation - and productivity growth - have exhibited ongoing improvements.
On the demand front we can see the evidence for this from surging orders from US companies for capital goods (see figure 1 below) and from surging exports of trade and technology bellwethers such as South Korea and Taiwan (figure 2).
Figure 1: US capex orders continue to strengthen
by:Andrew Cates
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- Global| Apr 06 2022
Commodities, Shipping Costs, Inflation and Yields
Supply chain bottlenecks, disrupted trade flows and commodity price tension have been key hallmarks of the macroeconomic scene for some months now. But are these factors now moving into reverse? High frequency indicators of shipping costs – such as the Baltic Dry Index – certainly suggest this may be the case (see figure above).
This index has enjoyed a fairly tight correlation with indicators of real economic activity in commodity markets in recent years. And unsurprisingly it has equally enjoyed a tight correlation with global inflation surprises. Indeed its steep decline over the last six months presages a period in coming weeks where inflation outcomes could elicit far fewer positive surprises and even a few negative surprises.
This, in turn, could clearly be of some importance for policymakers and interest rate expectations in the period ahead. Indeed a relationship that may be worth watching closely against this backdrop is the evolution of activity in commodity markets and US Treasury yields (see final figure below).
by:Andrew Cates
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- Global| Mar 25 2022
Does the Consensus Add Up?
Economic forecasters have been paring back their expectations for households' living standards for several months now. Soaring prices for energy and food combined with a fading impulse from COVID-related fiscal support together - more recently - with higher borrowing costs have severely derailed households' disposable income growth in most major economies. At the start of last year, the Blue Chip consensus of US forecasters was centred on an advance in real household incomes of 1.1% in 2022. In the latest survey from March this year those same forecasters are now expecting real incomes to plunge by 3.5% (see figures 1 and 2 below). Similar arithmetic applies to consensus forecasts elsewhere.
Figure 1: The evolution of consensus forecasts for 2022 for US consumption and real income growth
by:Andrew Cates
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- Global| Mar 15 2022
Crumbs of Comfort in Productivity Trends
Figure 1: Average unit wage cost inflation in developed economies
by:Andrew Cates
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- Global| Mar 11 2022
More Stressed and Under-confident
Figure 1: Latest sentix survey suggests incoming economic data could disappoint
by:Andrew Cates
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- Global| Mar 01 2022
Monitoring the Impact of the Russian/Ukraine Conflict
Figure 1: Heightened default concerns and a big interest rate response in Russia
by:Andrew Cates
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