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May 5, 2022

Forecast revisions show rising risk of higher inflation and lower growth

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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Global growth revisions

We start with two charts showing how the global economy is increasingly moving towards a more stagflationary environment as the commodity price boom sets off a global supply shock.

IMF forecasts for global GDP growth show some significant downward revisions for this year and next. 

While 2021 saw some good momentum as countries lifted lockdowns and began recovering from the pandemic-triggered recession, the outlook for the coming years now seems less bright.

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Global inflation forecast revisions

Meanwhile, inflation forecast revisions have been moving in the opposite direction. This is especially true for Eastern European countries heavily affected by the war in Ukraine and the resulting commodity price shock. 

Among large, advanced economies, the UK is suffering most; the IMF increased the country’s inflation forecast for 2022 by almost 6%.

But that pales in comparison to the figures for Turkey and Russia, which have been revised up by 40% and 20% respectively.

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Russia inflation forecast revisions

Taking a closer at the outlook for Russia, this chart displays different vintages of the IMF’s inflation forecast. While there had already been some upward revision before the start of the year, almost all of the increase since then happened after the start of the Ukraine war and the associated macroeconomic shock of western sanctions. 

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US construction starts

Revisions to US construction starts appear strongly correlated with house price changes. The chart below shows the difference between the initial release for construction starts and the first revision to that series. 

Upward revisions tend to happen when house price growth is strong, while downward revisions happen when the housing market is very weak, such as post 2008. 

We can see from the graph that recent revisions have come in negative. This – along with other leading indicators (see the next chart) – tells us that a potential correction in the US housing market could be around the corner. 

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US mortgage rates

Mortgage rates in the US recently surged to more than 5%, up from just 3% less than a year ago. Credit markets had clearly anticipated the Fed’s rate hikes. As the chart below shows, higher lending rates tend to coincide with slower house-price growth. With mortgage costs skyrocketing, we can expect prices to soon begin sliding.  

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China manufacturing and services

The next three charts were created with the slice function, which allows you to overlay different time periods for one series in one chart. 

The first shows the impact of China’s zero-Covid policy on manufacturing and services activity. This year, the PMI New Orders index, which measures incoming business orders for manufacturing, fell to a record low for April. Given China’s importance in global manufacturing, this will put further pressure on global supply chains and exacerbate inflation across advanced economies.

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US equities

US stocks are suffering as the Fed tightens monetary policy. The S&P 500’s year-to-date performance in 2022 is at its worse since 1939!

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US bond markets

Bond investors are not faring any better as interest rates rise across the board. The year-to-date performance of US government bonds has also been poor, with returns of -12% so far. It hasn’t been this bad since the mid-80s.  

The positive correlation between equities and bonds this year makes 2022 an outlier. 

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US mid-term elections: Impact of Roe vs Wade

And lastly, we turn to US politics. A leaked draft document revealed that the US Supreme Court will likely overturn the landmark 1973 Roe vs Wade ruling that made abortion legal across the US. This would make abortion rights a decision for individual states instead – an outcome the Republican party had fought years to achieve.

But this development does not sit well with many Republican voters, as our chart below shows. Prediction markets show a sharp drop in support for the GOP ahead of November’s mid-term elections. By contrast, bettors are predicting a boost for the Democrats as people rally behind women’s rights. 

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Revision History
This chart features Macrobond’s unique Revision History data which shows how key macroeconomic indicators have been revised over time
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