This week's charts focus on historical time series. See what our charts shown from global historic accounts plus inflation and equity data.
Macrobond has a large amount of historical time series. The first two charts use data from the historic UK national account gathered by the Bank of England. Using formula language, historic UK GDP with a more contemporary GDP series has been joined and a 20-year moving average for the growth rate has been calculated. Economists are increasingly concerned that secular stagnation is also affecting the supply side of the economy through slowing productivity growth. Brexit and the Covid-19 recession are worsening long-run fundamentals. Besides a short period during the Great Depression, the 20-year moving average of UK GDP growth has never been that low since the beginning of the Industrial Revolution before 1800.
The second chart displays the long-run correlation between nominal interest rates and money velocity. At low-interest rates, the opportunity cost of holding money decreases and thus also the velocity. This is also one of the reasons why the zero-interest-rate environment has not led to high inflation yet. Money velocity in the UK is at its lowest point ever.
Inflation is still on everybody’s mind, and rightly so, with inflation rates in many advanced economies staying above 2% while commodity prices and supply chain problems continue to be a problem. It is fair to say that inflation will stay higher for longer than what was widely anticipated at the beginning of the year. In the following document, we calculated the 1-year and 2-year annualized rates for inflation rates across advanced economies. The 2-year annualized rate has the advantage of taking out the base effect, which was particularly strong during the first year of Corona. However, even taking this into account, we can see that inflation is already significantly higher in the US than the Fed’s long-run target of 2% while in the Euro area price dynamics are more benign.
Be aware that FactSet charts only open in Macrobond if you have the add-on database
The FactSet/Macrobond forward P/E ratios show that equity markets have higher valuations right now, especially in the US. P/E ratios have increased quite significantly thanks to low-interest rates and massive Central Bank stimulus programs during the pandemic.
High valuations also show up in the forward price/book ratios with US market valuations being particularly stretched.
Of course, it is somewhat too simple to just compare equity markets across countries without accounting for the sectoral composition. The US equity sector has a very high weight when it comes to communication services, more than 25% of the total index, a much higher share than in Europe, for example. IT companies generally have much higher P/E ratios whereas utilities, energy, and financial services have lower P/E ratios.
And as one can see, both 5-year returns show that Technology companies have outperformed all other sectors by a wide margin, which can also explain US outperformance vis-à-vis the rest of the world in recent years.