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July 28, 2022

Falling fast: EU gas levels, US CEO confidence and China consumer sentiment

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Germany business cycle

The ifo Institute’s business cycle clock displays the cyclical relationship between the current business situation and business expectations in Germany. The diagram below shows the cycle on a severe downswing, meaning companies have become less satisfied with their current situation and are expecting business to become much more difficult in the coming months.

The chart also compares the current business cycle with the one from 2008-2010. As you can see, the current cycle is set to complete more quickly than the one during the financial crisis. After a short-lived boom, it appears Germany is now heading toward recession again as high energy prices and a potential gas shortage weigh on the economy.

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EU natural gas inventory

Natural gas inventory levels continue to fall in the EU, with only four countries exceeding the European Commission’s target of 80%. Eastern European nations suffering the brunt of the consequences of the Russia-Ukraine war have the lowest fill levels – averaging around 50%. Record high energy prices will likely continue well into 2023 as a result.

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Global central bank tightening

Central banks globally are raising interest rates more sharply in a bid to tame surging inflation. This chart shows the number hiking rates by 50 to 100 basis points (green bars) has risen to a record.

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CEO confidence indicator

The Federal Reserve is among the aggressive rate raisers – and while such rapid tightening has yet to tip the US economy into recession, several data points are signaling a severe slowdown ahead.

This chart shows the link between the Conference Board CEO Confidence Index – a barometer of the health of the US economy based on the views of US chief executives (pushed forward by seven months based on the highest lead/lag correlation) – and the S&P 500 12 months forward earnings per share.

As you can see, CEO confidence typically starts falling before the start of each recession – followed by earnings per share. The question is whether this can serve as a leading indicator – or a self-fulfilling prophecy.

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A new model for u*

Economists Saez and Michaillat have come out with an alternative measure for the natural rate of unemployment, or u*. In a new research paper, they posit that the labour market is efficient when the number of vacancies (v) is equal to the unemployment rate (u) – a model based on the Beveridge curve and a labour market matching function. The natural rate estimate is thus simply the square root of u*v.

This chart uses the Saez and Michaillat estimator for u* based on the unemployment and vacancy rate. One can see that labour market conditions are currently tighter than ever. While this is consistent with other estimates for u*, such as this research paper from Fed economists, this metric may not be entirely reliable: the efficiency criteria are invariant to structural shocks and major transformations in the labour market, such as the leap in remote working.

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US employment growth outliers

The US reported negative GDP growth in both Q1 and Q2. So how come the economy is not in recession? One reason could be that Q1 GDP could be revised up later this year given that GDI (gross domestic income) has remained strong – not unlike retail spending, personal consumption expenditure (PCE) and the labour market.  

A better marker of recession could be large data discontinuities. The following chart shows non-farm payroll declines that are larger than one standard deviation. As you can see, these appear in clusters during and toward the end of recessions.

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China consumer confidence

Speaking of data discontinuities, China’s consumer confidence has plummeted to a record – by more than 11 standard deviations in a single month! – as the economy buckles under the government’s zero-Covid strategy.

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China GDP

The most recent Chinese regional GDP figures also show a severe deterioration – perhaps even underestimating the extent of the slowdown. As the table below shows, most Chinese cities and regions are now growing at less than 5% and significantly below the 10-year average.

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China property construction

China’s real estate market has also slowed dramatically. Construction starts and properties under construction have fallen by more than 20% year on year – much more than during previous economic downturns. This is especially worrying as Chinese real estate is the biggest global asset class by valuation.

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Rhine water levels

Lastly, we look at the impact of climate change on one of Europe’s most important waterways. The chart below shows water levels on the Rhine have fallen to a new low – a phenomenon that has increased in frequency over the last two decades. The low water levels threaten to disrupt shipments again, adding even more pressure on supply chains already suffering from pandemic-related delays.

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