Business cycle dynamics

This week’s chart pack focuses on macroeconomic indicators related to the business cycle. It covers prediction markets on which European leader will next leave office, credit impulse and global sentiment, global net fund flows, Germany business sentiment, US used car prices, US consumer expectations and US investment growth.

By 
Julius Probst PhD, with contributions from Arnaud Lieugaut, Patrick Malm and Karl-Phillip Nilsson
on 
March 25, 2022

This week’s chart pack focuses on macroeconomic indicators related to the business cycle. It covers the following data:

  • Prediction markets on which European leader will next leave office 
  • Credit impulse and global sentiment
  • Global net fund flows
  • Germany business sentiment
  • US used car prices
  • US consumer expectations
  • US investment growth 

Prediction markets

Similar to stock markets, prediction markets are useful aggregators of information and public opinion. Even as casualties and sanctions pile up amidst the war in Ukraine, prediction markets tell us that Russian President Vladimir Putin will unlikely leave office anytime soon. Instead, it appears that UK Prime Minister Boris Johnson would be the next European leader to go.  

Macrobond users, access the chart here

Credit impulse and global sentiment

‘Credit impulse’ represents the flow of new credit from the private sector as a percentage of GDP and is seen as a large driver behind economic growth. With central banks tightening policies, credit impulse is likely to turn negative, with obvious implications for global economic growth. 

In the chart below, we created a credit impulse measure for the three largest economies: US, China, and the eurozone, and set it ahead of the world Sentix indicator, a measure of global sentiment, by eight months. Based on the correlation we found, we should expect the Sentix indicator to significantly decline in the months ahead.

Macrobond users, access the chart here

Global net fund flows

The war in Ukraine has led to a significant risk-off moment in global equity markets. Net fund flow data per sector shows investors have grown more skeptical after a year of broad positive net flows along all asset classes. Among funds with global mandates – i.e., those with no regional restrictions on equity investments – only cyclical equity funds saw positive net flows in recent weeks. 

Please note this chart can only be accessed if you have a subscription to EPFR data.

Macrobond users, access the chart here

German business sentiment 

The Ifo Business Cycle Clock shows the cyclical relationship between Germany’s business situation and expectations. Even though the German economy contracted in Q4 2021 and is expected to shrink again in Q1 of this year, the Ifo clock still shows the economy in a boom phase as of February 2022, potentially indicating that Ifo surveys may not be the best leading indicator for economic activity.

However, the March value already shows a substantial decline in business expectations, moving the economy from the boom phase into the downturn quadrant in the graph. This is in line with many other macroeconomic indicators that currently show the German economy heading for a recession.

Macrobond users, access the chart here

The ZEW economic expectations indicator for the German economy, on the other hand, shows the largest absolute decline ever recorded, dropping from above 50 in February to almost -40 in March. This shows Germany is already facing a substantial economic slowdown this quarter that might turn into a severe recession, depending on how the war in Ukraine evolves and commodity price movements throughout this year. 

Macrobond users, access the chart here

US used vehicle inflation

A significant contributor to US inflation dynamics has been used car prices that had risen by more than 40% on a year-on-year basis in at the end of 2021. More recently though, we have finally seen some moderation in price dynamics and the monthly rate of changes have finally rolled over. 

At least used car prices will not significantly contribute to US inflation anymore going forward – we now have to worry about house and commodity prices.

Macrobond users, access the chart here

US consumer expectations

A recent paper by former Bank of England economist Danny Blanchflower shows that large declines in consumer expectations are always preceding a US recession.

The Michigan Survey consumer expectations have recently dropped like a stone. Relative to a long-term trend, we are now seeing a record decline that easily falls outside the standard deviation band.

Similar to the yield curve inversion, this is one more indicator that is flashing warning signs that the US economy is slowing down.

Macrobond users, access the chart here

US investment growth 

As we know, the Covid-19 shock does not factor into a standard business cycle. In fact, it caused the only US recession that saw household disposable income surge thanks to generous income support policies. Furthermore, real estate and stock prices have also held up well as the Fed and other central banks implemented large-scale asset purchase programmes to support financial markets.

Investment is usually one of the more volatile subcomponents of GDP. As our last chart shows, the investment to GDP ratio decreases significantly during recessions and also takes time to recover during the subsequent economic expansion. After 2008, for example, it took a decade for investment to recover. During Covid shock, on the other hand, investment did not fall at all and is currently at a decade high. This is obviously good news for future economic growth.

Tip: We have calculated investment as a share of GDP using our Macrobond ratios. You can use the change region function to apply the analysis to another country.

Macrobond users, access the chart here