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July 14, 2022

US recession probability, euro area trade balance, and global supplier delivery times

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Julius Probst
Arnaud Lieugaut
Patrick Malm
Karl-Philip Nilsson
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US labour market

Headline inflation rose to a new 40-year high this week, with the Consumer Price Index hitting 9.1% for June. This will put even more pressure on the Federal Reserve to go big on rate rises, hiking by 75bps or even more this month. This, in turn, will drive up unemployment – but as our first chart shows, the Fed still has a bit of wiggle room. 

While the US labour market has made a spectacular recovery after losing more than 20 million jobs in April 2020, employment remains below the pre-pandemic trend: about 3 million women and more than one million men are still missing from the labour force. 

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US recession probability

With inflation soaring, markets are pricing in continued rate hikes for the rest of the year. That’s raising the odds of a US recession to more than 25% over the next 12 months, according to a recession risk model from the Fed. The chart below includes the TED (Treasury-EuroDollar rate) spread – the difference between the interest rate on short-term debt and interbank loans – which often widens during periods of economic crisis.

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US recession indicator

Despite what the chart above shows, recent job growth numbers suggest that a recession is still some way off: non-farm payrolls in June increased by a more-than-expected 372,000. 

The Sahm Rule chart below identifies signals related to the start of a recession: when the three-month moving average of the national unemployment rate (U3) rises by 0.5 percentage points or more relative to its low during the previous 12 months. As you can see, we are nowhere near approaching a significant decline in the labour market. 

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Bank of Canada rate hike

North of the border, the Bank of Canada is also wrestling with inflation. This week, it raised its policy interest rate by 1% – the biggest hike since 1996 – to 2.5%, the highest since 2006. 

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Supplier delivery times

Supply-chain disruptions wrought by the pandemic and exacerbated by a swift global recovery that swelled demand for goods significantly extended delivery times over the past couple of years. But we are starting to see some improvement, as the Purchasing Managers’ Index heatmap below shows. Still, most countries have a reading far below 50, indicating a contraction of business conditions as reported by supply chain managers. 

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Household consumption as share of GDP

Europe’s biggest economy has outperformed many of its neighbours since the 2008 financial crisis. But that resilience comes with a trade-off: wage restraint. Weak wage growth helps to boost Germany’s competitiveness in the euro area, but it also discourages spending. 

In the chart below, we used Macrobond ratios to calculate household consumption as a share of GDP. As you can see, Germany has been following a downward trend for more than a decade.

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Euro area trade balance with Russia

The euro area’s trade balance with Russia has plunged in recent months as sanctions discourage exports to the country. The shrinking Russian economy is also curbing demand for goods. 

While the volume of imports from Russia has also fallen, their value has risen to a record thanks to high commodity prices. 

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Euro area trade balance with Russia, Norway and China

This next chart shows the correlation between the eurozone’s trade deficits with major trading partners and commodity prices. Whenever prices spike, the deficit with Norway and Russia – where the EU gets much of its gas and oil – widens. 

The trade deficit with China has also swelled over time as Asia’s largest economy cemented its position as a global manufacturing centre. A slowdown in China and a recovering euro economy further widened the gap this year.

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Euro area trade balance and euro-dollar exchange rate

Commodity prices are not the only factor behind the euro area’s plunging trade balance; the weakening currency is also to blame since many commodities are priced in US dollars. 

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Australia retail trade

Lastly, a look at Australia’s thriving retail trade. Sales rose for a fifth consecutive month in May, increasing 0.9% to a record A$3.4 billion. That’s despite soaring consumer prices that have prompted the Reserve Bank of Australia to lift its cash rate by 125 bps since May.

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