Quarterly Global Economic Update
With major economies weakening, is the US economy really as strong as it seems?
A download link to my 32-page Quarterly Global Economic Update can be found at the bottom of this post/email.
Included immediately below, is the front-page summary from the report.
I hope that you enjoy reading and find significant value in this report!
Disinflation seen the world over, but some countries are lagging behind
On a 6-month annualised basis: US headline/core PCE inflation is 2.0%/1.9%; eurozone headline/core inflation is 2.4%/2.2%; Tokyo’s headline/ex fresh food & energy inflation is 1.7%/2.3%; and Australia’s headline/ex volatile items & holiday travel inflation is 3.5%/3.7%. China is seeing outright deflation (headline: -0.8% YoY).
Australia’s CPI growth stands out from this pack, with its M3 money supply growth also relatively elevated (6-month annualised change: 7.1%).
US GDP sees strong growth as other major economies weaken — but perhaps the US economy isn’t as strong as it may seem
In spite of Fed tightening, US GDP growth accelerated in 2H23, with quarterly annualised growth averaging 4.1%. At the same time, many other economies are languishing: eurozone GDP grew by just 0.14% YoY in 4Q23; Japan’s GDP growth has slowed to 1.0% YoY amidst two consecutive quarters of negative growth; and Australia has seen three consecutive quarterly declines in real GDP per capita.
Despite a slate of strong US economic indicators, there are also many contradictory data points that suggest a weak/recessionary economy. Key points include: GDI being YoY negative, full-time employment falling by 1.5m in December and average weekly hours falling to GFC levels.
Policy implications
Should future US economic data emphasise a strong economy, the Fed’s currently projected three 25bp rate cuts for 2024 is unlikely to change materially. More material cuts would likely require future economic data to emphasise a weakening economy. A falling RRP facility and large net T-bill issuance continues to provide a material stimulatory offset to Fed tightening.
Weak GDP growth and major disinflation could see the ECB cut rates by its June meeting. With M2 growth fading, disinflation strengthening, and GDP growth weakening, any further BoJ tightening may be relatively muted or skipped altogether. While Chinese stimulus has been relatively muted, with M2 growth slowing amidst headline CPI deflation, the risk of a more significant deleveraging could see more material stimulus delivered during 2024.
While a resurgence in M3 growth and elevated inflation suggest that further tightening may be needed, the RBA is now in a bind, as falling real GDP per capita and a material weakening in employment indicators suggest the potential need for rate cuts. An awkward RBA pause may be on the cards for an extended period of 2024.
