Centerfin Collective Weekly

Weekly Update September 15, 2023

ECB hikes while China eases, US consumer showing weakness? GDI paints different picture than GDP

ECB hikes while China eases

This week, the European Central Bank (ECB) raised interest rates 25bps to 4.00%, its 10th interest rate increase in a row. Meanwhile, China announced a cut in its reserve requirement ratio (RRR) for the second time this year. The ECB is still dealing with high inflation in the Eurozone, which was at 5.3% as of August. China, on the other hand, has been dealing with a sluggish economy.

  • Both central banks in the Eurozone and China find themselves in precarious positions
  • The ECB is dealing with stubbornly high inflation and a lack of significant growth, having to balance rising rates to lower inflation but not weaken the economy further
  • China is dealing with slowing growth, which was bordering on deflation several months back, until showing some signs of life recently
  • This further highlights the changing nature of the world’s economies, where China continues to decouple from the Western world

US consumer showing stress?

The resilience of the US economy has come as a surprise to most market prognosticators this year. The strength of the US consumer has been one of the key areas helping the economy grow above expectations. Much of this can be attributed to the fiscal stimulus provided to the consumer during the pandemic and since. We are starting to see some cracks in the consumer story, with debt delinquencies growing to their highest levels in over a decade.

  • As stimulus has run out, the consumer has been borrowing to continue spending
  • Delinquencies on auto loans, credit cards, and consumer loans are the highest levels since the years following the financial crisis
  • The rise in delinquencies is a sign that the consumer is finding it hard to keep up with payments, in part because of the significantly higher interest rates
  • This could be an early signal of an impending slowdown in spending
  • Consumer spending makes up 65-70% of the US economy

GDI paints a different picture than GDP

As we have written, Gross Domestic Product (GDP), one gauge of the economy, has been showing strength that has surprised most economists and market watchers. A less-known measure of the economy's health, Gross Domestic Income (GDI), has painted a different picture, contracting in two of the last four quarters.

  • GDP has been showing resilient economic growth in the face of tighter monetary conditions (higher interest rates)
  • GDI, which measures the total income earned while producing goods and services, has been showing the opposite
  • Technically, the two should be the same, but there are often discrepancies given different sources of data
  • Interestingly, discrepancies tend to be accentuated during inflection points in the economy
  • In 2007, for example, GDP was showing growth of 2.5%, while GDI was falling
  • We seem to be experiencing a similar pattern today, which could lead to downward revisions of GDP in the coming months

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