I think Simon Ward is right to predict that a downturn in investment will be the next shoe to drop in developed market business cycles, even as easing inflation offers respite for households’ inflation-adjusted disposable income and spending. This has been a key theme for me and my colleagues at Pantheon Macroeconomics for a while. In the U.S., Ian Shepherdson believes that this will drive the economy into a mild recession, while we are a bit more sanguine in Europe for the simple reason that the euro area economy effectively has been close to recession since the end of last year. Simon Ward notes that the capital goods component of the global PMI hit a new low in April, that inflation-adjusted profits in G7 slowed sharply last year, and that nominal money is contracting. Crucially, he adds that credit standards are now tightening significantly in Europe, as well as across the pond. Flat-lining profits in inflation-adjusted terms, a contraction in nominal deposits, the lagged effect of higher interest rates and tightening credit standards is bad news for private capex, including inventories, as measured by the national accounts. The silver lining is that a slowdown in investment should, combined with softening inflation, persuade DM central banks to kick back from the table on rate hikes. The key question, however, remains whether a slowdown in investment and aggregate demand is adequately priced-in by equities. I doubt it.
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