TPT January 2024

INDUSTRY 360

A good priced at 1 mark in 1922 would cost 1.25 billion marks the following year. To this day, central bankers in Europe, and especially in Germany, are far more wary of inflation than those in the US. Regardless of specific policies, central banks throughout the world generally pursue two common goals: full employment and low inflation. This requires striking a delicate balance. When the unemployment rate is too high, moving the economy back toward full employment benefits only one group, the unemployed. If the central bank goes too far, it can incite a round of inflation, which is detrimental to everyone, the employed and the unemployed alike. Full employment, then, is a rate of employment that doesn’t lead to inflation, which usually is around 95 per cent employed and 5 per cent unemployed. The other target, low inflation, is easier to define. A common benchmark for low inflation is a rate of 2 percent annually. This is the inflation target of the US Federal Reserve Bank, the Bank of England, the Bank of Japan, and the ECB. The Covid reaction As the severity of Covid-19 became clear, health agencies recommended reducing personal contact. Governments around the world suspended many types of gatherings, including in the workplace, shutting down entire industries. As governments replaced pay cheques with direct payments to households and businesses, rivers of money poured into the world’s economies. The inevitable result was a round of inflation. How has industry fared? Then-and-now comparisons of GDP for the UK, the Eurozone and the US show stark differences. From 2019Q4 to 2023Q3, the UK economy has grown little, just 1.4 per cent. In the Eurozone area, growth likewise has been very modest, at 3 per cent. In the US, GDP grew about 7.3 per cent. Comparing industries that rely on tube and pipe, such as manufacturing and construction, again reveals marked differences. In the UK, the manufacturing index was 102.0 before the pandemic. It registered 102.2 late in 2023. This dovetails with household demand for durable goods, which fell in five of the seven most recent financial quarters (2022Q1 to 2023Q3). The purchasing managers’ index, or PMI, was below 50 throughout all of 2023. Construction in the UK fared better than manufacturing, but it was still tepid. It grew from an index of 100.4 to 105.1 over the same timeframe. In Europe, the manufacturing PMI has been less than 50 since the second half of 2022. Germany tends to lead the way; its PMI has been increasing since July 2023, but it’s still in the low 40s. The capital goods industry in the EU grew 8.1 per cent over the last four years, but the other segments didn’t fare as well. Demand for durable goods fell by nearly 2 per cent over the same period while construction in the EU grew little more than 1 per cent per year since the end of 2019. In the US, personal consumption of durable goods grew nearly 30 per cent since the pandemic set in, adding $451bn to GDP. Business investment in equipment was flat while construction fell by about 5 per cent, but these are smaller industry segments. The losses were on the order of $40bn.

Figure 2: Inflation Rates for Select Economies. Other than in Japan, the inflation rate peaked about 24 to 30 months after the pandemic started. Unlike the other countries, Japan is fighting deflation. Its central bank’s actions are working to promote inflation. Sources: Office for National Statistics, Eurostat, Bureau of Labor Statistics, and YCharts.

Figure 3: Interest Rates for Select Central Banks. Three of the world’s largest central banks began fighting inflation with sustained interest rate increases during the first half of 2022. As shown in Figure 2, the corresponding rates of inflation began falling in reaction to these rate increases. Sources: Bank of England, European Central Bank, Federal Reserve Bank, and Bank of Japan A crash vs a soft landing Economies have always been prone to periods of growth and periods of recession. The giddy highs of an overperforming stock market inevitably lead to an awful hangover when things go wrong; real estate bubbles always burst; fat times give way to lean times. In the modern era, in which economies are overseen and guided by the actions of central banks, appropriate policies prevent the extremes, but nevertheless, recessions follow expansions. Usually. Will the outcome be different this time? In the US, it might. The recent boom seems destined to ease gradually rather than end abruptly. As of mid-December, some economists cited several robust economic indicators as evidence of a soft landing rather than a crash. And, after the December meeting of the US Federal Reserve Board of Governors, its chairman Jerome Powell spoke cautiously about the state of the US economy, noting that the Federal Reserve Board’s policies would not be subject to change until they are reviewed in 30-31 January, 2024. Powell’s public statement, made on 13 December, was well received by the business community. The Dow Jones Industrial Average jumped more than 400 points that day.

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JANUARY 2024