Six spooktacular charts on the global economy

Away from the drama in the UK, global markets are inspiring delight and despair in equal measure. Below are six charts – three ‘tricks’ and three ‘treats’ – that reflect some of the contrasting forces shaping the macroeconomic landscape today.

Trick 1: US business confidence

Business surveys are mixed in the US, but most point to deteriorating confidence amid the rapid tightening of monetary policy.

We believe this kind of rapid fall in confidence makes a recession significantly more likely.

Source: OECD (2022), Business Confidence Index (BCI), accessed 21 October 2022

Trick 2: Chinese consumer confidence

Having been impacted by Beijing’s zero-COVID policy, Chinese consumer confidence has fallen sharply.

Given the importance of China for the global economy and the potential credit risks created by China’s highly leveraged economy, this big fall in consumer confidence increases overall economic risk levels globally.

Source: LGIM, as at 5 October 2022

Trick 3: House prices are falling

The ‘race for space’ as people spent more time at home, combined with low interest rates, led to a sharp rise in house prices during the pandemic. With rates now rising rapidly, we are starting to see a reversal in several housing markets.

There’s good historical evidence that housing cycles can be a threat to financial and macroeconomic stability. To learn more about which housing markets we feel are most vulnerable to rising rates, read our recent blog on the subject.

Source: Macrobond, as at 1 September, 2022

Treat 1: Supply chain pressures are easing

Shipping costs and semiconductor prices are falling, with overall supply chain pressures seeing significant easing.

Goods prices were flat in the US September CPI, and we expect persistent deflation in goods prices to emerge in the months ahead – easing pressures on inflation-constrained consumers.

Source: Federal Reserve Bank of New York GSCPI, as at 30 September 2022

Treat 2: Commodity prices are falling

Oil prices are off recent highs and the cost of food is falling. The chart below shows US industrial commodities rather than broad commodities as this is a closer representation of US input costs, and hence US inflation.

If lower commodities prices become a sustained trend this will bring wide-ranging benefits for the global economy.

Source: LGIM, Bloomberg, as at 30 September 2022

Treat 3: Inflation expectations are anchored

The US five-year breakeven inflation rate indicates longer-term inflation expectations remain anchored, showing investors believe the end of persistent inflationary pressure is in sight.

Upside inflation surprises have weighed on markets all year, but we believe US core inflation likely peaked at 6.6% year-on-year in September. As inflation and growth fall, so too could bond yields.

Source: LGIM, Bloomberg, as at 30 September 2022