Surprise, flexibility and the central bank

Economia Global

José Ramón Díaz (Caixabank Research) | The publication of Q4 activity data confirmed that the world economy closed last year with a much better combination of growth and inflation than anticipated at the beginning of the year., In countries like America. o Spain, the average growth rate in 2023 was 2.5%, when analysts’ consensus forecast 12 months ago was in the range of 0.5%-1%, At that time there was reported to be a high probability of the occurrence of a recession in the US, which was supported by signals such as inversion of the slope of the interest rate curve. same way, On the inflation front, the trend over the past few months has been much more benign than most estimates, thanks to deceleration. Shock powerful And its indirect effects gradually disappear, waiting for wage growth data to confirm that the second-round effects remain under control.

so, In an environment characterized by the accumulation of negative shocks since 2020, the positive surprise of 2023 was once again the resilience of the global business cycle, It is understood as “the capacity of a living organism to adapt in the face of a disturbing agent or adverse condition or situation” (the first meaning of RAE). As the Fed Chairman himself recently acknowledged, it is very unusual from a historical perspective that the monetary tightening implemented over the past two years has not had a more rapid impact on activity and, above all, on employment. In this context, it is understandable that at their previous meetings central banks have not attempted (or, at least, not forcefully) to counter the significant movement of relaxation in financial conditions in recent weeks, which means That investors are hoping for an unblemished deflation process. , The latest inflation data speaks for itself and shows improvements on both the supply side (beyond short-range disturbances caused by geopolitical risk) such as the speed with which monetary tightening this time has been transferred to demand through the credit channel.

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The question is what might change in the roadmap that financial markets expect for central banks, And beyond the always complex calibration of geopolitical risks (with the enigmatic Trump factor looming over the medium-term landscape), the uncharted territory that The last step in the fight against inflation and the effects of regional and regional cyclical deviations (they should be mitigated in this first semester), The risk in financial markets like the US is to die from success and walk away from a scenario. soft landing to another no landing, This is not our central scenario, but the reality is that recent growth of GDP (4% annualized in the second half of 2023) or employment (about 3 million jobs over the last 12 months) are clearly above prospects, no matter what. We are optimistic about the impact of artificial intelligence on productivity. for now, Flow of positive data on activity in the US. This simply means delaying the moment when the market expects the first rate cut by the Fed, This was on the back of a reduction in the estimate of the cumulative decline in 2024 (from 150 to 100 bp) from the March meeting to the May or June meeting and an improvement in loan yields of about 20 bp since the beginning of the year. rally November and December. A movement that has also occurred in Europe, in this case, due to the reluctance of ECB Council hardliners to concede defeat so quickly, and not due to improving activity data.

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Definitely, Once the low rates scenario is already on the market radar, doubts from now on focus on what the path to monetary normalization will be like. And what will be the level of arrival. The alternative is to start early and let the momentum be dictated by the data or, conversely, wait for definite signs that the inflation target has been reached and set a path for movements at that time. In the first case, there is considered to be a risk of some negative surprises in the behavior of inflation, especially on the supply side, which could complicate the final phase. Whereas, in the second case, the risks of second-round effects and a challenging geopolitical environment (Middle East, US elections, etc.) are reduced, but the risk of over-breaking is assumed instead.

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so, The key this year is whether the resilience of the world economy will also comply with the second meaning of RAE: “the ability of a material, mechanism or system to recover its initial state when that disturbance has ended.”, This normalization will depend on the ability of economic policy (monetary and fiscal) to adjust to demand supply that continues to digest the effects of geopolitical uncertainty, labor market changes or the generalized search for strategic autonomy.


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