The recent ease of inflation reduces the pressure of monetary tightening. A year-end rally has begun. But if inflation is really coming down, this also means aggregate demand is weak enough for the goods market to be a buy-side market where sellers have to step back in pricing. But inflation is not coming down quickly. Instead, core inflation, such as the services component, stays high at around 4 percent without much change over recent months. The recent decline in headline inflation was largely a result of non-core components and a high base effect.
While price growth has little change, quantity growth has. In the face of high production (borrowing) costs under high interest rates, producers decrease the quantity produced or increase the selling price. But the latter has already been observed in the past year or two, where further increases in prices would likely result in a cliff fall of demand. Even without being driven by further weakening in demand, supply is being held back as producers might be making no profit or even negative profit. Some countries do show GDP contraction in the latest data release.
To those with a large share in the secondary industry, this already means a recession. In fact, manufacturing PMI being persistently below 50 percent for months is a clear signal. Another signal is the global trade. The accompanying chart shows the goods exports year-over-year growth for four major exporters, two emerging and two advanced. One can see clearly that all show a similar trend over the past few years. This strongly suggests that global (common) shock has been dominating while country (specific) shocks do not control the direction of ups and downs.
Therefore, one should be careful about the casual arguments of an individual country’s discrepancies. Very often, market analyses tend to pay heavy attention to individual countries’ characteristics to argue for what they intend. Examples like saying China has housing and debt crises and then evidencing these with its bad export data. No, the story does not go like this. The accompanying chart shows clearly that exports are bad everywhere regardless of whether there is a crisis or not. Instead, one should admit honestly that this is a global phenomenon under a common shock.
The implication of this is, as it was in the past, that recession will be a global phenomenon. The recent discrepancy in economic figures does not mean countries are having different business cycles. Rather, those heavy in the secondary industry might have a steeper fall while others might have less. Since boom is defined by trough to peak while bust (recession) is defined by peak to trough, the timing of recession might not differ a lot across countries, given their timing of peaks and troughs are similar. Look at the chart again, these four places verify this point.
Country-specific characteristics would be seen from other variables like unemployment. The change of flow variables (like GDP or exports) is unlikely to differ much across the globe. This has been true in the past and will be true in this upcoming cycle.
KC Law, Ka Chung
