When assessing the future, the trend is your friend

The trend is clear: the growth in the economy has been weakening since the recovery from Covid in 2021

Technocrats and market watchers, including myself, have a liking for accuracy to the fourth decimal place, which makes sense when dealing with currencies and trades of a couple of billion.

However, that level of accuracy when applied to the macroeconomy is unhelpful as a gauge of where the economy is, where it's headed and what the implications are for various policy decisions. At worst, a focus on the decimal points can lead to a wrong diagnosis of where the economy is headed, thus potentially leading to incorrect action with negative consequences.

There are two recent data prints where this was most prevalent. The first was the release of South Africa’s economic growth statistics for the fourth quarter, and therefore full-year 2023. Quarterly growth was 0.1% during the fourth quarter after a contraction of 0.2% in the third quarter. Full-year growth for 2023 was a meagre 0.6% from 1.9% the previous year.

The full-year number’s interpretation, that it was positive and better than initially feared, is largely agreeable given how intensive load-shedding was. However, the celebration of avoiding a technical recession because growth expanded by 0.1% demonstrates the need to look for any green shoots.

But this is no green shoot. I would forgive newspaper headlines stating that South Africa avoided a technical recession because they are non-technical and sometimes can miss the bigger trends in economic analysis. But for those making a living from watching economic and market statistics, the difference between an expansion of 0.1% and a contraction of 0.2% is likely statistically insignificant.

What we can take out of these numbers is that economic growth was stagnant in the second half of 2023. If we look at the annual number, 0.6% is a moderation for the second consecutive year after 1.9% in 2022 and a peak of 4.7% in 2021. The trend is clear: the growth in the economy has been weakening since the recovery from Covid in 2021. This, then, should bring to the fore questions such as what has been driving that trend and is the trend about to reverse? If so, what will reverse it and what will that mean?

For policy markers it is about what must be done to reverse such down-trending growth in the economy.

The second data print is US consumer price inflation, which is key for the US Federal Reserve and therefore global financial conditions affecting all central banks. Annual headline CPI for February came in at 3.2%, the same as January’s print but slightly above market expectations of 3.1%. Core CPI, which excludes food and energy, was 3.8%, marginally down from 3.9% but higher than the 3.7% market expectation.

A month ago, the market assessed the probability of the Fed funds rate remaining unchanged at 90%. Those expectations have shifted to a 99% chance of no change in rates, which are now between 5.25% and 5.5%. Rate cut expectations have also been pushed back to June, at about 55% probability, which is not at all a high enough conviction. Key to this change in expectations has been the decimal point overshoot in actual inflation relative to expectations. However, I imagine Fed officials seeing sticky inflation rather than higher than expected inflation.

Here is my bigger point: the economy is very complex to measure, and data gets revised so often globally and locally. Decimal point accuracy is a useful concept for measuring economic growth, but the trend is your friend. On the inflation front, outcomes have been gradual, coming back towards targets across the world and in South Africa.

Adding complexity to inflation have been shocks such as geopolitical tensions and now El Niño threatening to push food prices higher. A 10-basis point upside surprise shouldn’t revise an outlook for monetary policy, but an upward trajectory or trend should. All said, in a world with multiple shocks and transformations of the economic structure, to anticipate the future, the trend is your friend.