Ever-decreasing cycles
The economist Joseph Schumpeter said it is generally regarded that there are four stages to the economic cycle in which the world operates: prosperity, recession, depression and revival.
Central banks aim to lift interest rates at times of prosperity in order to soften the pain of recession and depression, and cut rates during the downturn to stimulate the revival.
In many ways, the progress of the easing of pandemic restrictions has determined the place the different developed market economies are in in their respective economic cycles.
The US lifted restrictions first and so moved from depression to revival first, the UK was second, and the Eurozone third. And when it comes to monetary policy, the US was first to tighten, the UK second, and the Eurozone third.
Another factor to consider here is the differing nature of policymakers' responses to the pandemic. It is also relevant to any reading of GDP data, as economies move between the cycles at different speeds.
In the US, individual households were sent cheques by the government. The effect of this now, according to Robertson, is that while the US is having high inflation, much of which is coming from demand exceeding supply, this is not the case in the Eurozone and UK.
He adds: "Of course that is positive for economic growth in the US. I don’t think consumer demand will slow down much there.”
Moëc says it is “in all the textbooks”, that it is easier for policymakers to combat inflation that comes from the demand side of the economy than from the supply side.
Additionally, this is a positive for the US economic outlook, while the inflation in the UK and Eurozone is driven by supply-side inflation, which is more difficult to tackle.
Gerard Lyons, chief economic strategist at Netwealth, says an effect of recent years may be that “economic cycles seem to be shorter”, and it may be premature to declare that inflation has peaked as the war on Ukraine continues.
Robertson says that despite the US having stronger levels of economic demand, it is not a given that the economy will avoid a “hard landing” as it moves through the phases of the economic cycle.
According to Moëc, the difference in GDP growth between the Eurozone and the US will be particularly stark next year, with his forecast being that the US grows at 2.2 per cent, and the Eurozone at 1.7 per cent – a material gap, but one that is in line with historic norms.
