Stylised facts are recurring patterns between economic variables and between economic variables and financial markets. They are conditioned by the economic environment and shape expectations of households, companies and investors. They are also used when producing economic forecasts. In the current cycle, there is doubt whether certain stylised facts still apply.
In the US, the economy is still growing despite a significant yield curve inversion and aggressive rate hikes. In the Eurozone, the labour market thus far has been resilient notwithstanding the actions of the ECB.
Moreover, financial market investors are undeterred by the talk by economists about recession risks. Several factors help to put these, at first glance puzzling observations, into perspective. Supply shocks have created major order backlogs, sectors such a leisure and hospitality still benefit from pent-up demand, pandemic-era income support has underpinned spending and the much-needed energy transition is boosting investments.
Consequently, it seems that the old reference points have been lost, which complicates the task of economic forecasters, hence the insistence of ECB President Lagarde in recent speeches on the need to be humble when making forecasts. In markets, it may lead to a shortening of the investment horizon. Markets would also experience jumps in volatility should the old stylised facts make a comeback.
