BLACK FRIDAY SALE AT EDGE AND ODDS (Last call!)
I receive so many Black Friday discount offers from content providers, I feel bad not doing the same for my readers. So here it is:
- All new or past donators will now have free access to Edge and Odds and be allowed to double their donation, free of charge, yearly!
- Readers who subscribe to the Daily Edge will receive it daily in their mailbox, free of charge!
- That’s nearly 250 deliveries per year! There surely is something useful once in a while.
- And readers who recommend Edge and Odds to a friend will see their subscription extended indefinitely.
- That could be 2500 Daily Edges, maybe even more…who knows? It’s been 14 years already.
I know, not that big a deal, but that’s all I can do 
What’s a big deal to me is readers supporting the blog with donations. Lately, I have been very bad at taking the time to thank them personally.
Please forgive me Richard T., John M., Constantin Z., Richard B., Robert K., Joseph T., Joshua F., Jasec, Donald M., David M., Massimo B., Lawrence M., Stephen C.. I hope I forgot nobody. You are truly helping this blog survive during this not so transitory inflation period.
P.S. I hereby officially thank recent donators: Bill C., Jack H. and long time reader and donator Richard T.. Your support is very much appreciated.
Back to regular programming!
MAYBE YOU MISSED YESTERDAY’S IMPORTANT DAILY EDGE: “Very Weak U.S. Flash PMI”. You should read it…
Recession Watch: identifying recessions with uncertain data
Economists are not very good at forecasting recessions. In a blog post published almost four years ago, ‘The economist who cried wolf’, I analysed the IMF’s forecasting track record. I found that, of the 469 recessions that had taken place since 1988 across 194 countries, only 13 were correctly anticipated in the World Economic Outlook (WEO) published in the October of the preceding year.
Worse still, fewer than half were identified even by the October of the year in which the fall in GDP took place.
Moreover, economists were prone to cry wolf, just like the boy in Aesop’s fable, with the IMF predicting recessions in the following year where none subsequently occurred 24 times in the Spring WEO and 23 times in the Fall WEO. Research from the IMF, published in the same year as my blog post, finds that private-sector forecasts are no better. The authors summarise the problem in the following way: ‘Recessions are not rare: economies are in a state of recession 10-12 per cent of the time. What is rare is a recession that is forecast in advance.’
In its World Economic Outlook, October 2022: Countering the cost-of-living crisis, the IMF warned that global economic activity was experiencing ‘a broad-based and sharper-than-expected slowdown’. The global financial crisis and the COVID-19 pandemic aside, the IMF described its forecast for global growth as the weakest since 2001.
The consensus among private sector forecasters is now for a recession across much of Europe, with the euro area as a whole suffering two consecutive quarters of contraction, beginning this year, and the UK five consecutive quarters.
For the US, it is a close call, with the median projection in the latest Reuters Poll being for near-stagnation through the first half of next year, rather than outright contraction.
In our Global Outlook, Autumn 2022, finalised in early September, our central scenario saw a period of recession across all the major economies. The historical precedents for us were compelling. Falling real wages had pushed levels of consumer confidence in the US, the EA and the UK down to levels that in the past had always signalled recession.
If that were not enough, rates of inflation in the US and the UK had reached levels from which recession had been avoided only once – in 1952. Rates of inflation in the euro area, available over a shorter time period, had reached levels from which recession had never been avoided. As a net exporter of energy, the US terms of trade had improved over the past year. That put it in a fundamentally stronger position than the EA or the UK.
Put together with the fact that pandemic savings offered some protection against falling real wages, and with the Fed acting more decisively than either the ECB or the Bank of England to get inflation under control, we felt that the US stood the best chance of avoiding recession – though we gave it no more than a 1-in-3 chance.
The conventional wisdom has been that data revisions tend to be pro-cyclical: in a boom, initial estimates of growth tend to get revised up, and in a slump they tend to get revised down. There is a logic to this. Statistical agencies base early estimates of GDP at least in part on a survey of firms. They then need to scale up estimates of gross value added in their sample to match the number of firms in the country as a whole.
In a boom, the total number of firms will tend to be growing faster than the statistical agency’s working assumption, giving a downward bias to initial estimates of growth. In a slump, the number of firms nationwide will tend to be growing more slowly than the statistical agency’s working assumption, or perhaps falling outright, giving an upward bias to initial estimates of growth.
In our own analysis, we find evidence of pro-cyclical revisions to initial estimates of growth in the UK, but only up until the global financial crisis. Before 2010, there was a strong, positive correlation between the final estimate of the change in GDP growth from one quarter to the next, and the revision to the initial estimate of GDP growth. But since 2010 that correlation has gone away.
In the US and the EA, by contrast, we find that pro-cyclical revisions to initial estimates of GDP growth have persisted, at least until the eve of the pandemic.
More specifically, using all available data from 2010 up to 2019, we find that the economic cycle can explain 55% of the revisions to US GDP growth and 61% of the revisions to EA GDP growth. For what it’s worth, if we take our model of EA revisions at face value, then in a world where true EA GDP growth was actually zero in Q3, then given the pace of the implied slowdown, our best guess is that the initial estimate of GDP growth would have an upward bias of 0.2 percentage points. The initial estimate of EA GDP growth in Q3 was, of course, 0.2%.
In our Global Outlook, Autumn 2022, we argued that, while non-farm payrolls data were a lagging indicator of economic activity, their timeliness meant they might still provide a useful cross-check on whether the US had entered recession. As the chart shows, the monthly change in non-farm payrolls tends to flip from around +240,000 in the month when activity peaks, to around ‒210,000 in the first month of recession.
But our next chart, which shows a smoothed measure of revisions to the initial estimate, casts some doubt on the usefulness even of non-farm payrolls as an arbiter of recession, at least in the short term. In the period following the dotcom bust, and again during the global financial crisis, initial estimates of the change in non-farm payrolls were revised down significantly.
The yield curve is thought by many to provide a useful leading indicator of the macroeconomic outlook. As our final chart shows, the slope of the US yield curve tends to turn negative some six to nine months before the peak in economic activity. As the green line in our chart shows, the US yield curve has flattened dramatically since the summer, with the ten-year yield lying some 15 basis points below the three-month bill rate on average through November to date. That would be consistent with the USentering recession early next year.
Where does this leave us, in terms of the current outlook? For now, we persist in our judgment that a recession in the European single currency bloc is almost inevitable, despite the stronger-than-expected initial estimate of EA growth. Indeed, given the tendency for early estimates of EA growth to be revised pro-cyclically, it may well have entered recession in Q3. Nevertheless, signs that EA economies have managed to substitute away from Russian gas to a greater degree than we had imagined, means the recession may be less severe than we had at first imagined.
We had always assigned a greater weight to the notion that the US might escape recession, and we may raise the weight we attach to that scenario in our Global Outlook, Winter 2022, due to be finalised on 2 December. As for the UK, initial estimates suggest the economy contracted in Q3, and we expect it will do so again in Q4.
Global Growth to Be as Weak Next Year as 2009, IIF Forecasts
Global growth is expected to slow to 1.2% in 2023, economists including Robin Brooks and Jonathan Fortun wrote in a note Thursday. When adjusted for base effects, that’s as weak as it was in 2009.
“The severity of the coming hit to global GDP depends principally on the trajectory of the war in Ukraine,” the analysts wrote. “Our base case is that fighting drags on into 2024, given that the conflict is ‘existential’ for Putin.”
The slowdown will be led by Europe, which is impacted most by the war, according to the IIF. The Eurozone economy will shrink by 2% following sharp declines in consumer and business confidence. In the US, the IIF expects gross domestic product to rise 1%, while Latin America is the “positive standout,” expanding 1.2%, as commodity exporters reap the benefits of high food and energy prices.
The single biggest driver for the global economy next year will be China, where loosening Covid restrictions are likely, according to the Washington-based IIF. (…)
Chinese Banks’ $178 Billion ‘Medicine’ for Developers Won’t Cure All Ills China’s state-owned banks are showering the country’s real-estate developers with loans and other promises of financial support, moves that will prevent the beleaguered industry from spiraling into a full-blown crisis.
The fresh commitments from state-owned banks, coupled with a recent expansion of a government-sponsored bond guarantee program, are designed to help developers remain in business and finish construction on their projects. The actions would help resolve real-estate companies’ near-term liquidity pressures, but the much bigger challenge is regaining the trust of ordinary Chinese citizens and home buyers. (…)
To achieve that, homes that were presold first need to be delivered to buyers. The heightened concerns about developers defaulting—which created a negative feedback loop—also have to be alleviated, he added. (…)
“The real bottleneck now is the current pandemic situation in China and the zero-Covid strategy,” said Ting Lu, chief China economist at Nomura in Hong Kong. “As long as that policy exists, the financing-side supporting measures are medicines that can alleviate symptoms, but cannot cure the disease,” Mr. Lu said. (…)
So far, more than 30 developers have defaulted on their dollar-denominated bonds. (…) The yield on an ICE BofA index of noninvestment grade dollar bonds issued by Chinese companies was recently at 29% versus around 32% before the property-easing measures were unveiled. (…)
Just before the downturn, Chinese developers were selling around 14 million apartments annually—but a chunk of those were a result of speculative buying, he said.
Mr. Xing said he expects sales to eventually settle at around 10 million units a year, which he said would reflect the natural pace of people joining together to make up households and urbanization in China. (…)
Signs are growing in China that local government debt burdens are becoming unsustainable.
China’s 31 provincial governments have a stockpile of outstanding bonds that’s close to the Ministry of Finance’s risk threshold of 120% of income. Breaching that line could mean regions will face more regulatory hurdles to borrow, hampering their ability to drive up economic growth.
In addition, local authorities will face a massive maturity wall over the next five years as bonds worth almost 15 trillion yuan ($2.1 trillion) — more than 40% of their outstanding debt — fall due.
While there’s little risk of provincial governments defaulting, they will run into increasing difficulty in repaying their debts. More and more bonds will need to be sold to roll over maturing ones rather than to finance new spending and as a result, investment growth may suffer.
A major cause of the financial squeeze is the property crisis. Revenue from land sales — which in the past made up about 30% of local governments’ income — has plummeted. On top of that, trillions of yuan in tax breaks were doled out to businesses to help them cope with the economy’s slowdown over the past few years.
The central government recently acknowledged for the first time concerns about special local bond repayment risks, urging Shenzhen, the technology hub that neighbors Hong Kong, to consider setting up a provision fund to prevent debt payment risks. Shenzhen’s finances are in better shape than many other cities or provinces, and it’s a sort of test area for fiscal reforms. (…)
China set the risk threshold for provincial debt at 120% of their “comprehensive financial resources” — widely regarded as the combined income from the general public budget and the government fund budget, as well as transfer payments from the central government. (…)
Provincial debt jumped to 118% of income by the end of September from 83% in 2019, according to Bloomberg calculations based on official data. (…)
To bring overall borrowing below the threshold, high-risk regions will be required to curb the size of their investment projects, cut public spending, and dispose of assets, according to a report by the Ministry of Finance. Some provinces, such as Anhui in central China, have already moved to ban risky areas from adding new debt. (…)
If the central government issues more general bonds to fund infrastructure projects, it would have to let the official fiscal deficit balloon from its current levels of about 3% of gross domestic product. The official deficit has been kept low because the government is cautious about expanding general bond sales, preferring to allow provinces to issue more and more special notes.
Standard Chartered’s Ding estimates the broad fiscal deficit will reach 7.3% of GDP this year if special local bonds are included.
“Such a high ratio is unsustainable,” he said.
There were 31,987 new infections reported for Thursday, up from Wednesday’s record of 29,754. The southern city of Guangzhou reported more than 7,500, while cases in the metropolis of Chongqing topped 6,000. The capital, Beijing, saw daily infections exceed 1,800 with the record tally and lockdown-like restrictions sparking panic buying in parts of the capital. (…)
In Beijing supermarket delivery apps are being overwhelmed after residents across Chaoyang, its biggest district, were told not to leave their homes unless necessary. Grocery outlets in the district are also no longer taking orders. (…)
This controlled economy seems to be out of control…