Global data performing as expected; Eurozone lags, Japan leads

Global economic on net are exactly hitting consensus forecasts, producing a zero reading on the Relative Performance Index. But readings among individual economies show the usual variation with the Eurozone closing out a generally disappointing year at 23 on the index and when excluding prices (RPI-P) at minus 32 to indicate surprising weakness for both the real economy and for inflation. Having begun 2023 contemplating how high interest rates might rise, markets may soon focus on how many cuts the European Central Bank will deliver in 2024.

UK economic activity had a more balanced year versus expectations; the RPI will end 2023 at minus 7 and the RPI-P at plus 4 showing that forecasters have been in the right ball park. Speculation about monetary easing in the UK is less aggressive than across the Channel but with inflation in particular well below official and market projections, a cut in Bank Rate is just a matter of time.

In Switzerland, much of 2023 was characterized by unexpected weakness in economic activity that, however, had little impact on the Swiss National Bank which has been determined to cool inflation. More recently, the real economy has outperformed forecasts with the RPI-P at a solid 35. However, importantly, the overall RPI is just 4 and the sizeable gap between the two measures means that inflation is undershooting predictions. It will be the shortfall here that is key to interest rate expectations for 2024.

In Japan, economic shocks over the year have shown an upside bias, but, on average only modestly and not sufficiently so to force the Bank of Japan to abandon its ultra-loose monetary stance. With the RPI currently at 31 and the RPI-P at 40, economic activity is on track to close out the year rather hotter than predicted. Accordingly, subject to the coming week’s data, overall conditions are likely to be supportive of speculation that the BoJ will finally tighten in the second quarter of the new year.

At 7 and 20 respectively, the latest Chinese RPI and RPI-P flatter to deceive as the economy has underperformed for much of the year. Despite a series of sizeable fiscal packages, the central bank may yet be forced to cut again, a prospect made more likely by what should be diminishing pressure on the local currency due to monetary easing overseas.

Canada’s RPI is near zero at plus 1 but when excluding prices it falls to minus 16 indicating that inflation has been higher than expected which will not please the Bank of Canada. US readings are neutral for both, at plus 2 and plus 7 to indicate that data are unfolding as expected, yet whether this means the Federal Reserve will be cutting rates sooner than expected has yet to play out.