Based in Paris, BNP Paribas' Economic Research Department is composed of economists and statisticians:
« The Economic Research department’s mission is to cater to the economic research needs of the clients, business lines and functions of BNP Paribas. Our team of economists and statisticians covers a large number of advanced, developing and emerging countries, the real economy, financial markets and banking. As we foster the sharing of our research output with anyone who is interested in the economic situation or who needs insight into specific economic issues, this website presents our analysis, videos and podcasts. »
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Monetary policy influences the economy with long and variable lags. They should be considered when assessing the effects of past rate hikes on inflation and its drivers. Bank lending surveys may act as a leading indicator. Historically, tighter credit standards and weak expected credit demand were followed by slower growth of company investments and households’ housing investments. However, the relationship between credit demand and supply factors and household consumption is very weak. Considering the current relatively tight credit standards and weak expected credit demand, one should expect a negative impact on company investment and housing investments by households over the next several quarters.
The latest economic indicators updated on February 20, 2023 and the coming calendar
In the US, it seems that the expansion phase of the business cycle, the period of elevated inflation, the monetary tightening cycle and the ‘risk-on’ mindset in markets are all far from over. Ongoing relatively strong growth increases the risk that inflation would stop declining. Market commentators have started referring to such an outcome as the ‘no landing’ scenario. However, judging by the latest data, a ‘delayed landing’ seems the more likely one. Markets now expect a higher terminal rate whereby the policy easing would come later as well. The higher the terminal rate, the bigger the likelihood that the landing would be bumpy after all.
In the US, the ratio between the job openings rate and the unemployment rate remains very elevated. It is one sign amongst many of a very tight labour market. As growth slows down, this ratio should decline. Historically, this has been accompanied by slower wage growth. It can be argued that this time, this process may take more time due to labour hoarding, which should limit the increase in layoffs and hence the unemployment rate, and the high level of the vacancy rate, which should underpin the creation of new jobs. This means that there is a genuine risk of disinflation to be slow.
The latest economic indicators updated on February 13 2023 and the coming calendar
Despite the still hawkish messages from the Fed and the ECB, markets are already pricing in rate cuts later this year. What explains these seemingly premature rate cute expectations? They could reflect differences in views on the economic outlook, but it is unlikely these would be so big to justify current market pricing. Another explanation is that investors are rationally managing their risk exposure. Investors know that an unexpected dovish twist in central bank guidance would cause a rally in bond and equity markets. They also know that central banks have no incentive to already soften their guidance but that they have the option to surprise, like they have done in the past. The closer we get to the terminal rate, the bigger the likelihood that central banks would change their message
In the US, financial conditions have eased in recent months and weighed on the effectiveness of the Fed’s policy tightening. Jerome Powell recently gave the impression of not being too concerned, so markets rallied, and financial conditions eased further despite the hawkish message from the FOMC. In the Eurozone, another rate hike by the ECB and the commitment to raise rates again in March caused a huge drop in bond yields because markets expect we’re getting closer to the terminal rate. It reflects a concern of not being invested in the right asset class when the guidance of central banks will change: based on past experience, one would expect that bond and equity markets would rally when central banks signal that the tightening cycle is (almost) over
The latest economic indicators updated on February 6 2023 and the coming calendar
On an annualised basis, US GDP increased 2.9% in the fourth quarter compared to the third. This healthy increase implies only a mild quarterly slowdown. The result was also better than the consensus expectation. However, a detailed analysis shows causes for concern. About half of the increase in GDP reflects inventory rebuilding, although this comes after a negative contribution in the previous two quarters. Personal consumption expenditures have also contributed approximately half of the GDP increase, but investments in structures had a negligible impact and residential investments continue to act as a drag, suffering from high mortgage rates. Moreover, in the final quarter of 2022, GDP only grew 1.0% versus the same quarter of 2021
The latest economic indicators updated on January 30 2023 and the coming calendar
The state of the labour market occupies a central role in the analysis of the business cycle. Historically, the percentage of months over the past 12 months with nonfarm payrolls below the 200K threshold increases in the run-up to a recession. Today, this indicator stands at 0 percent. Although there have been many false signals, a significant increase in this percentage calls for vigilance, necessitating closer monitoring of other data as well to assess the risk of recession. An alternative approach consists of making the link between monthly payrolls and the unemployment rate. However, given the latest data on job creations, a swift increase in the unemployment rate sufficient to trigger a recession signal seems unlikely
The latest economic indicators updated on January 23, 2023 and the coming calendar
Despite the ongoing good pace of job creation and slower wage increases, which through its impact on inflation could influence future Fed policy, there is enough ambiguity in the recent data to fuel the debate on whether the US will end up in recession or not. The survey of professional forecasters points towards heightened recession risk and so do the inversion of the yield curve and the downtrend of the Conference Board’s index of leading economic indicators. If this index were to decline further, one would expect, based on the past relationship, a significant weakening in the monthly payroll numbers whereby the narrative that a recession is around the corner would gather force.
The latest economic indicators updated on January 16, 2023 and the coming calendar
The drop in gas prices, the decline in headline inflation and the improvement of survey data in December have created a feeling that for the Eurozone 2023 might be better than expected hitherto. The survey data bode well for the growth momentum at the turn of the year, which could create a favourable carry-over effect for GDP this year and some hope that lower inflation will mean fewer ECB rate hikes. However, caution is warranted. Inflation remains far too high and core inflation has moved higher in December. Moreover, survey data provide little or no information on the pace of growth beyond the first quarter of this year.
The global manufacturing PMI edged down in December on the back of a new, significant decline in the US and for the second month in a row an increase in the euro area where the improvement is broadbased.
The latest economic indicators updated on January 9 2023 and the coming calendar
Economic developments in 2023 will to a large degree be the result of the inflation shock of 2022 and the policy reaction of central banks that followed. Three developments look highly likely: disinflation -in terms of headline inflation- should gather momentum, central bank policy rates should reach their cyclical peak and activity should suffer from the rise in interest rates that started last year, implying that the euro area and the US should spend part of the year in recession. The list of uncertainties is long -the evolution of energy prices and the extent and pace of disinflation are key ones- but there are also several factors of resilience, implying that, all in all, the recession should be shallow.
2022 was a year of profound transformation, of shifting geopolitical and economic paradigms. Looking ahead, 2023 should see a change of direction in key economic variables. Headline inflation should decline significantly, central bank rates should reach their cyclical peak and the US and the euro area should spend part of the year in recession. 2023 can be considered as a year of transition, paving the way for more disinflation, gradual rate cuts and a soft recovery in 2024.
Outlook for GDP growth, inflation, interest rates and exchange rates
The latest economic indicators updated on January 2 2023 and the coming calendar
During the press conference following the latest governing council meeting, Christine Lagarde insisted repeatedly that moving to a 50 bp rate hike versus 75 bp previously did not represent a pivot, adding that rates still have to rise significantly and at a steady pace. Consequently, the likelihood of a terminal rate higher than 3.00% has increased, which explains the jump in bond yields. The large upward revision of the inflation projections is probably another factor behind the hawkish message. Forecasting inflation several years into the future is a difficult task, even more so in the current environment
From an economic perspective, 2022 will go down in history as the year in which elevated inflation made a surprising comeback forcing major central banks to start an aggressive tightening cycle. It is highly likely that in twelve months’ time we will look back at 2023 as a recession year, a year of disinflation, and a year in which official interest rates reached their terminal rate and stayed there. As usual, the list of ‘known unknowns’ is long. Energy prices might increase again after their recent decline, disinflation might be slower than expected, policy rates might peak at a higher level than currently priced by markets, and the recession might be deeper and longer than anticipated
The latest inflation data in the US were greeted by financial markets because inflation declined more than expected. However, upon closer inspection, the picture is mixed. On the one hand, there is mounting evidence of disinflation (easing of input price pressures, shorter delivery times, decline of goods price inflation) but on the other hand food inflation remains high and shelter is a major contributor to inflation. Prices in certain services rise at a fast pace due to rising wage costs. On balance, this implies that the Federal Reserve will continue to hike its policy rate in the near term and will keep a firm tone thereafter. It will be in no hurry at all to start easing. For that we will have to wait until 2024.