Elevated inflation has dominated headlines over the past 12 months, and many now worry high prices along with the Russia-Ukraine war have delivered a big setback to the global economy. Last week the IMF reduced its 2022 and 2023 global growth projections, following the World Bank and other private forecasters.[i] But the latest economic data add to what many executives have recently said, leading us to conclude reality likely isn’t as dire as feared.
The Latest PMIs Still Say Growth
S&P Global’s April “flash” purchasing managers’ indexes (PMIs) implied ongoing economic growth in major developed nations. (Exhibit 1) Readings above 50 suggest expansion, although they measure only growth’s breadth, not its magnitude.
Exhibit 1: The Latest PMIs
Source: FactSet and S&P Global, as of 4/25/2022.
In our view, April’s expansionary eurozone readings are most interesting since many economists are on German recession watch. Should the Federal Statistical Office announce a Q1 GDP contraction on Friday, Germany will meet the popular definition of recession (two or more consecutive quarterly GDP contractions).
However, the latest data suggest that isn’t a foregone conclusion. Despite longer-running supply constraints, February industrial production rose 0.2% m/m—though this doesn’t capture much fallout tied to the war in Ukraine.[ii] However, PMIs offer a timely snapshot of general business conditions, and they have generally pointed positively as the war has raged. German manufacturing has remained expansionary even as businesses noted headwinds, including uncertainty tied to sanctions and supply issues. German services and retail sales activity have also held relatively firm—especially as COVID restrictions have eased—and the country’s composite PMI, which aggregates services and manufacturing, has registered growth throughout Q1.[iii] We will see what Friday’s data show, but this doesn’t look like a sharp contraction in the making for now.
The focus on German soft patches overshadows some bright economic spots. France, the eurozone’s second-largest economy, registered its strongest composite PMI since January 2018, and its services PMI hit a 51-month high.[iv] Economic reopenings across the Continent have boosted the eurozone’s services sector, and a return to pre-pandemic trends implies services-led growth—a positive for the services-heavy eurozone economy.
Though the Continent theoretically is most vulnerable economically to Russia-Ukraine war fallout, PMIs are compelling evidence of the eurozone’s resilience. If Europe doesn’t enter a recession due to the conflict and dislocations from sanctions, we think it is unlikely a global one manifests, either.
The Message From UK and Canadian Retail Sales
After US March retail sales hinted at consumer demand weathering high prices, the UK and Canada offered additional color. March UK retail sales fell on both a value and volume basis (-0.2% m/m and -1.4% m/m, respectively).[v] Volume estimates remove price change impacts, giving a better idea of how much “stuff” businesses sold. Though elevated prices likely influenced UK consumers’ spending, a look under the hood reveals some interesting nuance.
Non-store retail sales volumes (-7.9% m/m) detracted most, falling again after February’s -6.9%.[vi] The Office for National Statistics highlighted affordability concerns, as the statistics agency’s March survey found 54% of adults reported spending less on non-essentials.[vii] But February and March’s declines also follow strong December and January non-store sales, when Omicron concerns likely boosted online buying as shoppers stayed home.[viii] Fuel and food store sales volumes also unsurprisingly detracted. For the former, high prices are regulating demand for fuel, which is how markets work. For the latter, food store sales volumes have been slipping since November 2021, partially due to higher spending in pubs and restaurants as COVID restrictions relaxed.
Canadian retail sales paint a similarly mixed picture. Many worry high prices will crimp Canadian consumer spending, as Canadian CPI rose 6.7% y/y in March, a 31-year high and well above analyst expectations of 6.1%.[ix] An advance estimate showed March retail sales rose 1.4% m/m in value terms, but without volumes (which aren’t available yet), inflation’s impact isn’t clear.[x]
However, February retail sales (0.1% m/m in value terms, -0.4% m/m in volume terms) suggest Canadian retail trends are in line with other developed nations.[xi] Auto industry categories detracted due in part to shortages rather than non-existent demand—similar to what we have seen in the US.[xii] Positively, clothing stores’ sales volumes jumped.[xiii] Some provinces’ relaxing of COVID restrictions in February likely prompted some consumers to spruce up their wardrobes.
While it is fair to say higher prices are creating winners and losers, we don’t think it is accurate to pin March’s ho-hum retail sales numbers on elevated inflation alone—other forces are at work, including the shift to a post-COVID reality. Moreover, retail sales shed limited insight since they don’t reflect most services spending, which tends to be less economically sensitive and comprises a larger portion of total consumer spending.
US LEI’s Positive Message
One reason to be optimistic about US growth: a high and rising Leading Economic Index (LEI). The Conference Board’s US LEI rose 0.3% m/m in March, its 11th rise in the past 12 months.[xiv] Of the 10 underlying components, 7 contributed positively.[xv] The yield spread added 0.24 percentage point while average weekly jobless claims added 0.18 point.[xvi] Though the latter isn’t useful on a forward-looking basis—jobs data are lagging economic indicators—the former bodes well. The difference between the 10-year Treasury yield and federal funds rate gives a sense of banks’ net interest margins—reflecting new lending’s profitability. The wider the spread, the more incentive banks have to lend, which helps money move through the economy. Positively, that spread widened over the past three months, from 1.68 percentage points in January to 1.93 points in March.[xvii] Yet few have noticed this positive economic development—queuing up upside surprise potential.
No traditional modern recession began while LEI was high and rising. LEI has declined for several months before every US recession since World War II, with 2020’s lockdown-driven downturn—an unusual recession with no precedent—the lone exception.[xviii] With experts predicting a US recession around the corner, LEI’s growthy signals today are worth keeping in mind.
[i] “War Dims Global Economic Outlook as Inflation Accelerates,” Pierre-Olivier Gourinchas, IMF, 4/19/2022.
[ii] Source: Destatis, as of 4/26/2022.
[iii] Source: FactSet, as of 4/25/2022. S&P Global German composite PMI was above 50 from January – March.
[v] Source: Office for National Statistics, as of 4/25/2022. “Retail Sales, Great Britain: March 2022.”
[ix] “Canada Inflation Surges More Than Expected in March, Hitting 31-year High,” Julia Gordon, Reuters, 4/20/2022.
[x] Source: Statistics Canada, as of 4/25/2022.
[xi] See note ix.
[xiv] Source: FactSet, as of 4/25/2022.
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