Macro Radar

Taking the pulse of economic activity

Economic activity data have frequently been surprising on the upside lately while inflation has not receded as rapidly as hoped. Although the risk of an imminent recession has diminished, postponed does not mean canceled, particularly since central banks threaten to overtighten the interest-rate screw.

Upside macro surprises

The US Economic Surprise Index rose in February to its highest level since summer of last year. Labor market data for January (unemployment rate at a 54-year low) and retail sales figures numbered among the surprises to the upside. Meanwhile, growth projections for 2023 have been revised upward again. The risk of an imminent recession appears to have been averted. The Conference Board’s index of leading economic indicators – a key recession signaler – is also showing an easing of recession tension: four of the index’s ten subcomponents have risen over the last six months. In the past, recessions consistently were over at this point. Nevertheless, a recession later on (i.e. next year) isn’t yet entirely off the cards, in our view.

No landing?

The recent increasingly propounded “no landing” scenario, under which inflation in the USA stays lastingly elevated because the Federal Reserve does not raise interest rates high enough, is improbable in our opinion. There will either be a soft landing on the back of rapid disinflation in the months ahead coupled with a quick cessation of rate hiking, or there will be a hard landing because inflation proves too sticky and US central bank- ers can’t or won’t stop raising interest rates until they have sufficient evidence that inflation is approaching the 2% mark. The last few weeks of robust economic data and stubborn inflation tend to point to the latter scenario. A monetary policy mistake by the Fed remains one of the major macroeconomic risks this year.

First too accommodative, soon too restrictive

The European Central Bank also runs a risk of overtightening the interest-rate screw in the months ahead. ECB President Christine Lagarde has repeatedly sent a clear message in recent weeks that a practically already telegraphed 50-basis-point policy rate hike for the Eurozone in March will be followed by several additional ones. Speculation, in the meantime, now ranges to a policy-rate projection of up to 4%. There is still a short window of opportunity left to pivot to a less restrictive monetary policy course. The disclosure of new inflation forecasts at the ECB meeting in March (or in June at the latest) could present an occasion for such a pivot. We think that the ECB is overestimating the elevated inflation’s stickiness (it sees inflation still at an average of 3.4% in 2024).