The August 2021 edition of Numera Analytics’ Global Macro Perspectives report features in-depth commentary of the key macro themes shaping the global economic outlook, as well as our latest country and regional views on growth, inflation and exchange rates.
The July 2021 edition of Numera Analytics’ Global Macro Perspectives report features in-depth commentary of the key macro themes shaping the global economic outlook, as well as our latest country and regional views on growth, inflation, and exchange rates.
Claims that US inflation no longer responds to cyclical unemployment are misguided. New research by Numera Analytics shows job market gains have so far been offset by weak global conditions, an increasingly important driver of consumer prices in advanced economies. As global headwinds dissipate, rising import prices and strong aggregate demand will drive up headline inflation.
In our view, the current debate is much too focused on simple correlations between inflation and the unemployment rate. A weaker correlation has led many observers to declare the “death” of the Phillips curve. But correlations are just the outcome of complex shifts in underlying drivers. We find globalization has made US CPI inflation more responsive to the international environment, amplifying the effect of global macro shocks on consumer prices. Our findings have major implications for monetary policy. If inflation is less sensitive to domestic conditions, stabilizing inflation may come at the cost of higher debt burdens or larger output fluctuations. For macro investors, the results also imply anticipating future changes in interest rates and asset prices requires a better grasp of global economic conditions.
This special research note was written by Joaquin Kritz Lara, head of Macro Research and Senior Economist at Numera Analytics.
With the International Monetary Fund bumping up its forecast for global economic growth and the markets continuing to experience a ‘Goldilocks’ rally – synchronized expansion with limited inflation – global conditions call for cautious optimism. But what do the fundamentals for global production and manufacturing tell us about future price developments?
Our Industrial Production report, which is the timeliest release for global production figures, supports the positive notions. Global industrial production grew 3.6% year-on-year in August in a further sign of the dynamism of the global economy. Additionally, production growth is being experienced in 19 out of 25 of the world’s largest economies. These are positive signs which support the upbeat mood of central bankers during the recent IMF and World Bank meetings in Washington.
Global manufacturing treads a similar path with factory output climbing 4.1% year-on-year, again supported by strong growth rates in both advanced and emerging markets. Based on our output gap analysis, tight operating conditions have started to exert upward pressure on producer prices. As the September results roll in, we expect global PPI inflation to come in at 0.5%, an increase of 4% year-over-year. This begs the question, are the three bears finally coming to awaken Goldilocks?
Global manufacturing production rose 4.0% year-on-year in July, the strongest increase since April 2014. Although most of the gain was explained by stronger productive capacity (potential output was up 3.0%), cyclical factors were also at play. The output gap, a measure of market tightness in the manufacturing sector, hit a 28-month high in July. Strong demand conditions fuelled an uptick in producer price inflation, which had eased in May and June as a result of weak commodity prices.
World industrial activity continues to trend upwards, growing 3.6% year-over-year in July. Industrial production is up 3.2% after seven months, well above the 1.6% rate of growth recorded in 2016. Underlying the improvement in industrial production is stronger demand for manufactured goods, which is also contributing to higher merchandise trade flows. World manufacturing production was up 3.5% through July, with sturdy rates of growth recorded in most large economies. Perhaps the one major exception is the United States, where the pickup in activity primarily reflects a rebound in mining output (+5.6% year-to-date).