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Outlook strengthens for US while it weakens for other major economies

Tom Moeller

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The Chicago Fed National Activity Index (CFNAI) rose 0.15 in March from 0.09 in February, revised from to 0.05. The index reached a four- year low of -0.81 in January. Smoothing out the monthly volatility, the index's three-month moving average rose to -0.19 from a downwardly revised -0.28 in February.

This index is expressed in standard deviation units from zero (with a value of zero defined as trend real GDP growth). Research at the FRB Chicago indicates that readings on the three-month average of -0.70 or below are consistent with the economy being in a recession. As a result, the three-month reading in March indicates that the US economy is on a positive growth path.

Movement in the four broad categories of indicators used to construct the index was mixed in March versus February. Production-related indicators contributed 0.11 point to the CFNAI in March after adding 0.13 in February. These were improved from a 0.39 January subtraction. The employment, unemployment & hours series added 0.04 point after subtracting 0.01 point in February. This was the first positive reading since November of last year. The sales, orders and inventories category held steady after subtracting 0.05 from the CFNAI one month earlier. The personal consumption and housing category’s contribution to the CFNAI eased to a 0.01 point subtraction after adding 0.02 in February.

The CFNAI Diffusion Index, which measures the breadth of the change in the component series and is also a three-month moving average, rose to -0.06 in March from -0.16 in February. It was the sixth consecutive reading in negative territory. A reading of zero indicates that all of the indicators are growing at their long-term average. If all of the underlying indicators in a given month are below their long-run averages, the diffusion index will equal -1. If all of the indicators are above their long-run averages, it will equal +1.

In March, 50 of the 85 individual indicators made positive contributions to the CFNAI, while 35 made negative contributions. Fifty indicators improved from February to March, while 35 indicators deteriorated. Of the indicators that improved, 16 made negative contributions.

The CFNAI is a weighted average of 85 monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. A positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.

These figures are available in Haver’s **SURVEYS** database.

**Generative AI: A Turning Point for Labor's Share?** From the Federal Reserve Bank of Philadelphia can be found [here](https://www.philadelphiafed.org/the-economy/generative-ai-a-turning-point-for-labors-share#:~:text=If%20AI%20is%20significantly%20more,2024%20issue%20of%20Economic%20Insights.).

- Index is positive for second straight month.
- Three-month average remains negative.
- Improvement led by labor market indicators.

Chicago Fed National Activity Index Increases in March

Robert Brusca

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Dutch consumer confidence improved in April, rising to -21 from -22 in March, continuing its slow but steady climb higher. The willingness to buy index also continues to make a steady climb; it improved to -13 in April from -14 in March and -17 in February.

**A strong six-month change:** The simple period-to-period changes (not annualized) show that most of the change in the index has come over the last six months. Over the last six months, confidence is up by 17 points compared to being up 16 points over 12 months; a 7-point gain has occurred over the last three months. For the willingness to buy, there’s an increase of 14 points over six months compared to a 17-point gain over 12 months, once again most of the improvement coming over six months. Since then, the improvement is evenly split as the index has improved by 7 points over the last three months.

**Climate:** The measure of climate from the Netherlands continues to improve; it rose to -34 in April from -35 in March and from a reading of -41 in February. Looking at its sequential changes, the bulk of its improvement has come over six months as well, where there's a 22-point gain which is larger than the gain that it made over 12 months; there's a gain of 14 points; however, the pace of gains obviously has slowed with only five points worth of gains occurring over the last three months.

Still, the message from the Netherlands is that we're seeing improvements and the improvements, while slow, continue to be steadily coming month-by-month. The last six months has been particularly good for the improvement in conditions in the Netherlands.

**Belgian compared**
We can compare the improvements in the Netherlands to Belgium’s consumer confidence index, a country from the same region and a member of the European Monetary Union. Belgian confidence deteriorated over six months, it fell by one point over six months, was unchanged over 12 months, and then showed more weakness recently by falling by 4 points over three months. The readings for the Belgian index show -6 in April, a deterioration from -5 in March with the March reading being unchanged from its value in February. These comparisons show that the Netherlands is having a much better recovery experience in 2024 than is Belgium, an economy that is traditionally linked strongly to the German economy.

**Queue standings across metrics-** We are evaluating these metrics in terms of their queue standings; on data since about 1990, we see that the Belgian data that are improving by less recently have the stronger queue standing over the entire period with a standing in its 54.5 percentile. This compares to a confidence ranking in the Netherlands at its 25.7 percentile, a willingness to buy standing in its 24.7 percentile, and the climate reading in its 30.6 percentile. Belgium has improved to a higher level than the Netherlands, but the Netherlands is currently experiencing a faster pace of improvement from a worse level of confidence than Belgium. These metrics are borne out over a shorter period as well. Since January 2020, the Belgian confidence indicator is up by 20 points while the Dutch confidence index is up by two points, the willingness to buy index is up by four points; Dutch confidence is weaker by three points.

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These comparisons also help to illustrate how there are different things going on within the European Monetary Union as different countries, even under the umbrella of the same monetary policy and geographically close, are experiencing different forces. Some economies have more reliance on their services sectors, some are more reliant on their goods sectors, and some, like Germany, had a much higher connection with countries where trade has been impaired such as Russia and China. Germany, with a relatively high exposure to international trade and the strong dependence on its manufacturing sector, has had a very difficult time making progress since COVID struck and then especially in the wake of the Russian attack on Ukraine, something that German economy really was not prepared for at all. The evidence from Germany, from its behavior judging from its resistance to put money into its defense sector, indicated that it thought that these kinds of expenditures were frivolous, and they refrained from doing them or minimized them, because they didn't believe they would experience aggression from Russia. When Russia invaded Ukraine and that proved to be wrong, it set German policy and priorities on their ear and caught Germany quite unprepared having focused its economy on a green agenda and having set its energy dependence on being supplied by Russia.

It's clear that the Dutch economy still has a way to go. The graphic shows it had a step down in activity before COVID struck, another step down after COVID struck and then a step down after the Russian invasion. However, around mid-2022, the Dutch economy began to make an improvement and it has continued improving on a relatively steady path interrupted only by a pause in mid-2023. Based on the changes in the confidence, climate, and willingness to buy indexes, it appears that there has been a slight slowing in the rate of improvement over three months compared to six months. However, right now, that slowdown appears to be relatively minor. With the ECB getting ready to provide an easier interest rate policy, perhaps there will be an added kick to the Dutch economy assuming that the ECB is able to follow through with this planned rate reduction around mid-year. Other central banks have experienced a slowdown in the rate of inflation progress. In the U.S., there appears to even be a backtracking in place and that put the Fed’s plans for rate reductions on the back burner. Assuming that doesn't happen in the European Monetary Union, the Netherlands should be facing some tailwinds as the year progresses courtesy of monetary policy.

Netherlands

Dutch Confidence Continues to Climb…Still in a Hole

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The U.S. Leading Economic Index fell 0.3% (-5.5% y/y) during March after a 0.2% February increase, revised from 0.1%, according to a report by The Conference Board. These two changes followed a 0.5% January decline. A 0.1% slip in March had been expected in the Action Economics Forecast Survey.

Five of ten components contributed negatively to the overall index in March including average weekly claims for unemployment insurance, the ISM new orders index, building permits, the spread between the 10-year Treasury and the Fed funds rate, and consumer expectations for business/economic conditions. The length of the average workweek, stock prices and the leading credit index contributed positively. New orders for capital goods and new orders for consumer goods made minimal positive contributions to the index change.

A 0.3% increase in the Coincident Economic Index in March followed a 0.1% February rise. These gains came after a 0.3% January decline. All four of the components made positive contributions to the coincident index in March, including personal income less transfers, industrial production, nonagricultural payroll employment and real manufacturing & trade sales.

The Lagging Economic Index held steady last month (+1.0% y/y) after increasing 0.3% in February and 0.6% in January. Two of the index’s seven components made slightly negative contributions last month, the average duration of unemployment and commercial & industrial loans outstanding. The six-month change in business inventories and the six-month change in labor costs made minimally negative contributions. The six-month change in the services CPI contributed positively, while banks’ prime rate and the ratio of consumer credit-to-income were unchanged.

The ratio of the coincident index to the lagging index is also viewed as a leading indicator of economic activity. This measure rose 0.2% in March, following two straight monthly declines. It was 0.7% below its most recent peak in December of last year.

The Conference Board figures are available in Haver's **BCI** database; the components are available there, and most are also in **USECON**. The expectations are in the **AS1REPNA** database. Visit the Conference Board's [website](https://www.conference-board.org/) for coverage of leading indicator series from around the world.

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- Drop in leading index follows first rise in two years.
- Coincident Indicators exhibit strength.
- Lagging index holds steady after two monthly increases.

U.S. Leading Economic Indicators Resume Decline in March

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Global inflation trends have been in concert for major money center countries/areas- excluding Japan, of course. Inflation flared after Covid struck and in the wake of the Russian invasion of Ukraine. It continued to ramp up more than central bankers thought. Interest rates were raised from very low levels- the U.S. led the pack in terms of rate hike speed, getting its key rate up to its prevailing inflation rate in record time after a long period of being asleep at the switch. It said it stood prepared to hold rates ‘higher longer.’ Then the next unexpected thing happened; inflation fell sooner and more sharply than expected and it did this globally, not just in the U.S.  However, we are now into phase three of this process: inflation went up more and longer, inflation then fell more and faster and now inflation is off peak but not back were we want it—and it is looking stubborn. This is more or less a global money center country/area description of inflation. Inflation that went through its boom-bust phase, as you clearly see from the sequential growth rates of the German PPI is now up from its lows. The headline price level is falling but losing momentum. The core PPI is only falling in its ‘legacy’ 12-month rate.

German PPI inflation falls by 2.8% over 12 months, falls at a 3.4% annual rate over six months, and falls at a 1.2% rate over three months. Core PPI inflation falls by 0.7% over 12, months then rises at a 0.7% annual rate over six months and three months. The core points the way for trend.

The NSA (not seasonally adjusted) sequential data show acceleration across and three major PPI sectors: consumer goods, investment goods and intermediate goods. Prices only fall over 12 months for intermediate goods. All other sectors trends show increases by period and all show acceleration in progress.

German CPI data show higher inflation over three months than over 12 months for the headline and the core with a dip in between – not a steady state acceleration but a clear hint at where things are headed and with German inflation rates clearly above the EMU-wide 2% mark.

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**Summing up**
Inflation is now a major issue. Growth is struggling but depending on the country it is limping by and showing some signs of improving. While that is good for growth, it can’t be good for over-the-top inflation. Inflation does not just need to stabilize; it needs to fall. PPI inflation is running below the ECB target pace for the euro area (a target that applies to the HICP), but PPI inflation does not include the service sector where the inflation problem resides in its greatest intensity. The PPI does not have a target or even a specific benchmark. The key to the future will be service sector inflation that is high and falling slowly. The trends for inflation in the PPI and CPI are going to be trends we will have to watch closely. Of course, the official target is for the HICP and for the euro area-wide HICP; the ECB has no targets by country or for other price indexes. But every new report matters. The German HICP report carries a great weight in the ECB scheme of things. Right now, it appears that inflation progress is slowing and may even be backtracking. If so, the outlook for rate cuts, that is still widely held, could be in jeopardy.

Germany

German PPI Stops Falling and Flatlines – Is That Good Enough?

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Sales of existing homes fell 4.3% (-3.7% y/y) during March to 4.19 (SAAR) million from an unrevised 4.38 million in February. January sales also were unrevised at 4.0 million. Sales remained increased from the low of 3.85 million in October 2023. The Action Economics Forecast Survey expected March sales of 4.13 million units. The sales figures are based on closings of sales signed in earlier months.

The median price of all existing homes (NSA) improved 2.5% (4.8% y/y) to $393,500 after rising to $383,800 in February. Prices remained 4.9% below the June 2022 peak of $413,800. The median price of an existing single-family home in March improved 2.4% (4.7% y/y) to $397,200 after rising 1.3% in February. The median price for condos & co-ops surged 4.2% (5.8%) to $357,400 after rising 1.0% in February.

Single-family home sales fell 4.3% (-2.8% y/y) last month to 3.80 million units after rising 10.3% February. Sales remained 35.0% below their high of 5.85 million in October 2020. Condo and co-op sales declined 4.9% (-11.4% y/y) to 390,000 after rising 2.5% in February. Sales have declined 47.3% since the January 2021 high of 740,000.

Sales declined throughout most of the country last month. Sales in the West fell 8.2% (-3.7% y/y) to 780,000 after rising 16.4% in February. Sales in the Midwest weakened 1.9% (-1.0% y/y) to 1.01 million last month after rising 8.4% in February. Sales in the South declined 5.9% (-5.0% y/y) in March to 1.90 million after rising 9.8% in February. Sales in the Northeast rose 4.2% (-3.8% y/y) to 500,000 after holding steady for three straight months.

The number of existing homes for sale (NSA) rose 4.7% (14.4% y/y) to 1.1 million in March after rising 5.0% in February. The supply of homes on the market at the current selling rate (NSA) rose to 3.2 months from 2.9 months in February. The record low in supply of 1.6 months was reached in January, 2022. These figures date back to January 1999.

The data on existing home sales, prices and affordability are compiled by the National Association of Realtors. The data on single-family home sales extend back to February 1968. Total sales and price data and regional sales can be found in Haver's **USECON** database. Regional price and affordability data and national inventory data are available in the **REALTOR** database. The expectations figure is from the Action Economics Forecast Survey, reported in the **AS1REPNA** database.

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- Sales retreat from twelve-month high.
- Home prices rebound to seven-month high.
- Sales decline in much of country.

U.S. Existing Home Sales Decline in March

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The Federal Reserve Bank of Philadelphia reported in its April survey of manufacturing activity that the Current Activity Diffusion Index jumped to 15.5 this month from 3.2 in March and 5.2 in February. An index reading of 0.9 had been expected in the Action Economics Forecast Survey. The Philly Fed survey responses were collected from April 8 to April 15.

The ISM-Adjusted Composite Index, calculated by Haver Analytics from the survey results, improved to 49.8 this month from 48.0 in March. It was the highest level since August 2022, but remaining below 50, it still suggests a net contraction in activity. It compared to a March 2023 low of 39.6.

Changes in the individual series were mixed this month. New orders surged to 12.2 from 5.4 in March. An improved 32.5% of respondents reported an increase in new orders while a lessened 20.3% reported a decline. The shipments index rose to 19.1 from 11.4, as a higher 36.5% reported increased shipments and a steady 17.4% reported declines. The delivery time reading rose to -9.4 from -16.7 as 10.0% reported faster delivery speeds, while 19.4% reported slower speeds.

Working lower, the unfilled orders measure eased to 0.8 in April from 1.0 in March. A lessened 13.6% reported an increase in order backlogs while 12.8% reported a decline. The inventories reading dropped to -8.9 from 4.4, negative for the sixth month in the last seven.

Job market conditions deteriorated this month as indicated by an employment reading which fell to -10.7 from -9.6 in March. Six percent of respondents reported more hiring while 16.4% reported less. Also weakening, the average workweek figure declined to -18.7 from -0.2.

The index of prices paid surged this month to 23.0 after a March decline to 3.7. This reflected 25.9% of respondents reporting increased prices and 2.8% reporting a decline. The prices received index improved to 5.5 from 4.6 and remained up from a low of -2.7 in May of last year. A steady 11.6% of respondents reported price increases and a lessened 6.2% reported declines.

Expectations for business conditions in the next six months deteriorated slightly with the April reading of 34.3 down from 38.6 in April. It remained up, however, from -4.0 in January. Expected shipments & new orders eased but employment expectations rose to the highest level in nine months. The expected workweek reading surged to the highest level since October 2021. Expectations for prices paid also strengthened to the highest level since June 2022. The prices received index eased, however, after strengthening in April.

The diffusion indexes represent the percentage of respondents indicating an increase minus the percentage indicating a decrease. The Philadelphia Fed data can be found in Haver's **SURVEYS** database. The expectations forecast figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Composite index moves to highest level in two years as new orders & shipments strengthen.
- Prices paid measure jumps; prices received increases as well.
- Expectations ease slightly but remain positive.

Philadelphia Fed Manufacturing Index Surges in April

Carol Stone, CBE

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Initial claims for unemployment insurance were steady at 212,000 seasonally adjusted in the week ended April 13, with the earlier week revised marginally from 211,000 initially reported. The Action Economics Forecast Survey expected the latest week at 215,000. The four-week moving average of initial claims was 214,500 in the April 13 week, unchanged from the week before. These latest amounts extend a narrow range for initial claims of 187,000 to 261,000 that has prevailed since the middle of 2021.

Insured unemployment, also known as continued weeks claimed, was 1.812 million in the week ended April 6, up slightly from 1.810 million the prior week. The earlier week was revised down from 1.817 million reported before. As with initial claims, these continuing claims have hovered in a narrow range for an extended period; they have run from 1.728 million to 1.829 million since May 2023.

The insured unemployment rate, that is, the amount of insured unemployment as a percentage of covered employment, is yet again 1.2% in the April 6 week. It has been at that amount continually since May 11, 2023.

Unemployment insurance rates vary widely across individual states. In the week ended March 30, the highest rates were in New Jersey (2.6%), California and Minnesota (both 2.4%), Rhode Island (2.3%), Massachusetts (2.1%) and Illinois (1.9%). The lowest rates were in Kansas (0.3%), Alabama, Florida, Kentucky, North Carolina and Virginia (all 0.4%) and Mississippi, Nebraska, New Hampshire, South Dakota and Tennessee (all 0.5%). Among other notable states, New York, Pennsylvania and Washington were all 1.8% and Texas was 1.1%. These state data are not seasonally adjusted.

Data on weekly unemployment claims are from the Department of Labor itself, not the Bureau of Labor Statistics. They go back to 1967 and are contained in Haver’s **WEEKLY** database and summarized monthly in **USECON**. Data for individual states are in **REGIONW** back to December 1986. The expectations figure is from the Action Economics Forecast Survey in the **AS1REPNA** database.

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- Initial claims maintain tight range for almost 2 years.
- Continuing claims still fairly steady since May 2023.
- Insured unemployment rate holds at 1.2%, also since May 2023.

U.S. Jobless Claims Steady at a Moderate 212,000 in April 13 Week

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Registrations for cars in Europe for March fell by 8.8% month-to-month after falling by 1% in February. January, however, had been a strong month for registrations in Europe. The sequential trends are mixed and do not show a clear way forward. The 12-month change in sales/registrations falls 4.7%. Over six months registrations fall harder at an 11.9% annual rate, but then over three months registrations gain at a 7% annual rate. These data are prone to volatility. To adjust for that, I execute the same calculations on three-month average data to smooth out the volatility and let the trend shine through. Unfortunately, this procedure still does not produce a clearer picture of trend.

Chart 1, executed on year-over-year growth rates, shows registrations gradually losing momentum among reporting countries. Sequential growth rates across countries finds Germany and Spain with accelerating sales/registrations. France and Itay with fairly clear trends showing decelerating sales. Meanwhile, the U.K. trend shows confusion with no clear pattern emerging.

Looking very broadly, all reporting countries show registrations lower in March everywhere except for France, in 2024 compared to January 2020 before Covid struck. France is the lone exception that shows registrations in March higher by just 2.2% than they were over four years ago. That is not exactly a stunning success.

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Europe has been struggling. Weakness in vehicle sales is not news. After Covid, vehicle registrations dropped sharply then recovered but dropped again in the wake of Russia’s invasion of Ukraine. In early 2022 registrations bottomed out and rebounded into 2023, but by later in 2023 the rebound had run its course and trends turned flat and since have decayed.

The ECB is set to provide some help if it can follow through. Markets expect an ECB rate cut in June of this year. But U.S. and U.K. experiences might provide some caution or counterpoint as inflation has kicked up its heels in the U.S. and put the Fed’s well-telegraphed plan to ease on the back burner. In the U.K., inflation has simply slowed its progress and seems to be moving sideways.

Global economic conditions have been disrupted and under pressure dating back to the Great Recession. That recovery was drawn out and slow with unemployment rates falling continuously in recovery but slowly in the recession aftermath. Then Covid struck and created a new disruption that since has been magnified by the Ukraine invasion, Hamas’ attack on Irael, Israel’s response to ferret out Hamas, and now Iraq’s attack on Israel has given way to the re-emergence of an active axis of evil with Iran, China and North Korea providing support and arms to Russia in its aggression toward Ukraine. It is not clear when the global economy will ever be the same as these shocks and alliances disrupt global activity and drive wedges between countries that used to trade freely. The global economy is in a very disrupted and dangerous state of play.

Europe

Vehicle Registrations Losing Momentum in Europe

Andrew Cates

**Global growth momentum**
Global economic activity has shown some signs of improvement over the past three months according to the latest raft of flash PMI surveys. Comparing the latest composite PMI for April with its level from January reveals that most major economies are registering both positive growth (i.e. a PMI above 50) and a quickening pace of growth compared with three months ago (i.e. an April PMI that is higher than where it stood in January). The notable exception to this is the United States, where the pace of expansion that is being signaled by these surveys has slowed. Compared with the major advanced economies, India also stands out as registering a relatively rapid pace of economic growth as well (see chart 1).

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**Copper prices**
Copper is closely monitored as a key commodity due to its extensive use in the industrial sector and its growing importance, in particular, in renewable energy and electric vehicle production. That copper prices have risen strongly over the past few months will therefore likely be viewed as a positive signal about the underlying health of the world economy (see chart 2). To be sure, supply disruptions have also contributed to the rise in prices in recent weeks, but it is surely no coincidence that other key barometers of growth (e.g. PMI surveys) have been signaling an improving global economic environment at the same time.

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**Semiconductor trade**
Copper is a component used in producing semiconductors, particularly in the manufacture of integrated circuits. And that’s surely a key reason why the recent relative buoyancy of South Korea’s semiconductor exports, evidenced in chart 3 below, also aligns with the messages from charts 1 and 2 above. Haver’s calculations specifically suggest that South Korea’s semiconductor exports climbed by around 43% y/y in the first 20 working days of April on a seasonally adjusted and working day adjusted basis. That’s down a little from around 47%y/y in March but nonetheless still a punchy growth rate compared with longer-term trends.

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**Monetary policy transmission**
Calibrating monetary policy in recent years has been particularly challenging thanks to significant supply-side shocks to the global economy and considerable uncertainty regarding the demand-side implications. Whether or not monetary policy settings are now sufficiently restrictive in the world’s major economies is now being actively debated not least given recent indications that inflationary pressures have been building again. One point of contention is the seemingly blunt impact of monetary policy in both exacerbating, and then mitigating, inflation. This effect can be indirectly observed across advanced economies through the apparent breakdown of the Phillips curve relationship, which traditionally links unemployment and inflation. Over the past 20 years, as shown in Chart 4 below, this relationship typically yielded a negative correlation, in line with textbook theory. However, the post-COVID period has witnessed a significant divergence from this, a substantial disinflationary process has unfolded even as labor markets have remained very tight over the past two years.

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**US fiscal policy support**
An analysis of financial balances can be insightful in understanding these dynamics. Chart 5 below illustrates those balances for the three sectors that constitute the US economy: the private sector, the government sector, and the foreign sector. Each sector's financial balance is determined by subtracting its total expenditure from its income. A financial surplus means the sector is accumulating financial assets, whereas a deficit indicates it is depleting assets (or increasing its borrowing) to fund its activity. Because these three sectors encompass all US economic activity, both domestic and international, their combined financial balances must equal zero.

A key point to note with respect to the US is the dramatic deterioration in the government’s financial balance in the post-COVID phase, initially prompted by private sector retrenchment (which subsequently reversed). Subsequently, however, COVID relief packages – which allowed the private sector to accumulate big saving reservoirs - coupled with large infrastructure investment programmes, have still left the government sector with an historically large deficit (amounting to 9.3% of GDP in Q3 2023). Against that backdrop, and partly thanks to that hefty fiscal policy support, the private sector has, on the whole, accumulated financial surpluses. These were depleted in the post-COVID recovery phase – which allowed the economy to maintain strong momentum - but were still sizeable, at around 4% of GDP, in Q3 2023. It is equally notable, however, that this private sector surplus has been climbing over the past 18 months. That could signal that monetary policy is restrictive not least as it has been accompanied by a smaller deficit on the foreign sector’s account as well.

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**Euro area financial balances**
An analysis of euro area financial balances is not as dramatic. The regional oscillations in each sector’s financial position have, in particular, not been as large as in the US (see chart 6). The government sector’s deficit position, for example, at 2.7% of GDP in Q3 2023, is little-changed compared with its pre-COVID level (of 3.1% of GDP) in Q1 2020. The private sector surplus, in the meantime, notwithstanding some initial post-COVID shocks, stood at 5.8% of GDP in Q4 2023, which compares with 2.5% in Q1 2020. This implies that the euro area economy as a whole has been in balance largely thanks to an offsetting increase in the foreign sector’s deficit, or putting that another way, in a higher current account surplus. The bottom line is that, at least on a regional basis, fiscal policy has been much less accommodative, and through a much higher private sector surplus, monetary policy is placing a big brake on the region’s economies as well.

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Following a week in which the risks to the global economic outlook suddenly skewed to the downside, the pendulum has swung back again over the past few days. Confidence in a soft landing for the world economy has instead now re-surfaced partly thanks to firmer-than-expected global economic data, together with some solid corporate earnings reports from the United States. Additionally - and at the root of last week’s concerns - geopolitical tensions between Israel and Iran have eased, further bolstering investors' risk appetite. In our charts this week we delve into key insights from April's flash purchasing managers' (PMI) surveys (see chart 1). We also examine the recent rise in copper prices—often a reliable indicator of global economic activity—and now echoing the messages from those PMI surveys (chart 2). An additional echo (and indeed reason for) both improving global growth momentum and higher copper prices can also be found in the impressive growth in South Korea’s exports of semiconductors (see chart 3). Next, we explore monetary policy issues, particularly how traditional Phillips curve models have struggled to accurately predict the relationship between inflation and unemployment in recent years (chart 4). We conclude with an analysis of financial balances in the US and euro area, which offers some reasons for those struggles (charts 5 and 6).

Charts of the Week: Flash Dance

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