global perspectives

Nominal growth matters more than real growth – for now

Nominal growth matters more than real growth – for now
Florian Ielpo - Head of Macro, Multi Asset

Florian Ielpo

Head of Macro, Multi Asset

In the latest instalment of Simply Put, we examine the recent resilience across equity markets and reason this is due to nominal growth having greater influence during periods of inflation than real growth. 


Need to know

  • Equities are showing resilience in the light of many headwinds
  • Nominal growth is rising due to increasing inflation while real growth declines, albeit at a slower relative pace
  • During this period of higher inflation, nominal growth seems to be driving equities, a scenario which should continue as long as nominal growth continues to increase


Since mid-March, the equity market has bounced back from a very rocky start to the year even though many factors point to the opposite result. Indeed, a commodity shock is usually detrimental to real growth and profits, while central banks’ hawkish actions to slow down inflation are typically a mid-term headwind for equities. To top it off, the future is not looking particularly bright as European and US sanctions against Russia are increasing. Nevertheless, equities are showing resilience. How can this be explained? First and foremost, we believe this is because corporate profits benefit from the nominal growth component of the economy – which is even more apparent today.

Chart 1 shows the decomposition of growth expectations between real growth and inflation in Europe and the United States in 2022.  Real growth clearly shows the first signs of a decline (about 0.5% over the last quarter in both regions). This is no surprise as GDP growth expectations have been revised down recently due to a combination of the Ukraine situation, higher commodity prices and higher rates – all of which are real growth headwinds. Yet, nominal growth is still increasing significantly thanks to inflation. Consequently, the real economy may be slowing down, but the nominal economy is still growing as inflation is rising faster than real growth declines. So, what matters most real growth or nominal growth?


Chart 1. Growth expectation decomposition in Europe (left) and the US (right): nominal versus real growth


Source: LOIM. Bloomberg. 2020-2022


To see which factor can explain equity movements, we regressed corporate profits for both nominal growth and real growth. Interestingly, both types of growth have equal explanatory powers (both long-term averages of the R-squared ≈ 50%) over the 1946-2022 period. The explanations however differ depending on the underlying regime. During inflationary periods (the ugly 1970s, 2007-2008 and 2022), nominal growth appears to determine corporate profits more than real growth. This could be explained by the fact that companies manage to pass on increasing prices to their customers: inflation is the reflection of what corporates do with their selling prices, as consumers show an acceptance of steeper prices. This has been apparent during the known periods of inflation shock – and the latest datapoint in Chart 2 looks to be comparable. Today, analysts anticipate a 9% rise in earnings, which corresponds to the 9% expected increase in nominal growth seen in Chart 1. Historically, a basic regression of earnings on nominal GDP growth would show that earnings progress by slightly more than 1.5x nominal growth. From this standpoint, analysts’ forecasts look conservative.


Chart 2. 3-year rolling R-square of corporate profits regressed on nominal growth and real growth


Source: LOIM. Bloomberg. 1952 - 2022


However, investors must be careful because these effects are temporary. For the moment, nominal growth is increasing but as central banks continue on their path to tame inflation, growth should also slow down to a point which is difficult to anticipate. Also, corporate costs are rising, so not all sales growth will become earnings growth. We expect both effects to be echoed in companies’ profit warnings for the quarter ahead during the current earning’s season.


Simply put, as long as nominal growth progresses, equities will remain resilient, but watch out for lower consumer demand.




Macro/nowcasting corner

The most recent evolution of our proprietary nowcasting indicators for world growth, world inflation surprises and world monetary policy surprises are designed to keep track of the latest macro drivers making markets tick. Along with it, we wrap up the macro news of the week.

In terms of macro data, this week has been light. In the US, the Service ISM index was expected to be 58.5, progressing from February’s 56.5 reading, and came in at 58.3. The service sector is clearly conveying the message that growth remains strong (see below chart). The combination of last week’s manufacturing ISM and this service component paints the picture of a very solid US economy. The Federal Reserve’s (Fed) minutes of its latest meeting, published on 6 April, added to this impression: the Fed intends to use quantitative tightening to slow down the economy, by selling USD 95 billion of bonds per month. This amount would be split between USD 60 billion of Treasuries and USD 35 billion of mortgage-backed securities, which compares with the peak rate of USD 50 billion a month the last time the Fed trimmed its balance sheet from 2017 to 2019. Over that period, it is worth noting that the Fed pushed 10-year rates to 3.26% on 12 October 2018. Back then, real rates increased to about 1.15% while inflation breakevens only rose to 2.17% – a very different situation from today. Our monetary policy nowcasters continue to indicate that central banks should keep on surprising investors with their hawkish tone in the months to come and the Fed’s James Bullard’s latest message hints at a net rise in short yields to 3.5%, which would imply a 100 bps curve inversion. This is a message all investors need to hear. However, the 2-10 slope declined to -200 bps in the 1970s and we are still very far from that.

In Europe, the macro data has probably been less negative than many expect. Retail sales in March remained on an uptrend, growing by about 5%, a high number by historical standards. Following on from consumer inflation reaching 7.5% , this week saw the publication of PPI inflation rising to 31.4%, one of the largest gaps ever seen between these measures. Finally, both German and French industrial production progressed year-over-year by about 2.5%, which is close to the historical average of the time series. Consistent with that, our growth nowcaster for the Eurozone remains strong and surprise indices are still in positive territory. The expected negative impact of the Ukrainian invasion is still nowhere to be seen but should start to appear by the end of April.

Finally, the Chinese economy continues show signs of distress: the Caixin PMI survey for the service sector showed a severe plunge (declining from 50.2 to 42). Recent lockdown measures are probably responsible for a large part of this collapse, but our nowcasting indicators still place China in a complex position from a macro standpoint.  The next weak point for the economy could be a slowdown in exports, as the rest of the world slows down but this is yet to come, as detailed previously.

Factoring in these new data points, our nowcasting indicators currently point to:

  • Solid growth worldwide, with stronger momentum in the Eurozone, while China lags. Eurozone and Chinese data show a moderation and a renewed decline, respectively. This remains a very limited evolution.
  • Inflation surprises should remain positive and all three zones (US, Eurozone and China) are rising. This is bad news for China, as the rise in commodities could further weaken consumers.
  • Monetary policy is set to remain on the hawkish side. Recently our indicators have all moderated, even though it remains hard to read during this early evolution.

World growth nowcaster: long-term (left) and recent evolution (right)
Multi-Asset-simply-put-Growth nowcaster-07Mar-01.svg
World inflation nowcaster: long-term (left) and recent evolution (right)
Multi-Asset-simply-put-Inflation nowcaster-07Mar-01.svg   
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Multi-Asset-simply-put-Monetary Policy nowcaster-07Mar-01.svgReading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The Nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).

Wichtige Informationen.


Dieses Dokument wurde von Lombard Odier Funds (Europe) S.A. herausgegeben, einer in Luxemburg ansässigen Aktiengesellschaft mit Sitz an der Route d’Arlon 291 in 1150 Luxemburg, die von der Luxemburger Finanzmarktaufsichtsbehörde, („CSSF“), als Verwaltungsgesellschaft im Sinne der EU-Richtlinie 2009/65/EG in der jeweils geltenden Fassung und der EU-Richtlinie 2011/61/EU über die Verwalter alternativer Investmentfonds (AIFMD-Richtlinie) zugelassen wurde und deren Aufsicht unterstellt ist. Geschäftszweck der Verwaltungsgesellschaft ist die Errichtung, Vermarktung, Administration, Verwaltung und der Vertrieb von luxemburgischen und ausländischen OGAW, alternativen Investmentfonds („AIF“) sowie anderen regulierten Fonds, kollektiven und sonstigen Anlagevehikeln sowie das Angebot von Portfolioverwaltungs- und Anlageberatungsdiensten.
Lombard Odier Investment Managers („LOIM“) ist ein Markenzeichen.
Dieses Dokument wird ausschließlich zu Informationszwecken bereitgestellt und stellt weder ein Angebot noch eine Empfehlung zum Kauf oder Verkauf eines Wertpapiers oder einer Dienstleistung dar. Es darf nicht in Rechtsordnungen verbreitet, veröffentlicht oder genutzt werden, in denen eine solche Verbreitung, Veröffentlichung oder Nutzung rechtswidrig wäre. Dieses Dokument enthält keine personalisierte Empfehlung oder Beratung und ersetzt keinesfalls eine professionelle Beratung zu Anlagen in Finanzprodukten. Anleger sollten vor Abschluss eines Geschäfts die Angemessenheit der Investition unter Berücksichtigung ihrer persönlichen Umstände sorgfältig prüfen und gegebenenfalls einen unabhängigen Fachberater hinsichtlich der Risiken und etwaiger rechtlicher, regulatorischer, finanzieller, steuerlicher und buchhalterischer Auswirkungen konsultieren. Dieses Dokument ist Eigentum von LOIM und wird den Empfängern ausschließlich zum persönlichen Gebrauch überlassen. Es darf ohne vorherige schriftliche Genehmigung von LOIM weder ganz noch auszugsweise vervielfältigt, übermittelt, abgeändert oder für einen anderen Zweck verwendet werden. Dieses Dokument gibt die Meinungen von LOIM zum Datum seiner Veröffentlichung wieder.
Weder das vorliegende Dokument noch Kopien davon dürfen in die USA, in die Gebiete unter der Hoheitsgewalt der USA oder in die der Rechtsprechung der USA unterstehenden Gebiete versandt, dorthin mitgenommen, dort verteilt oder an US-Personen bzw. zu deren Gunsten abgegeben werden. Als US-Person gelten zu diesem Zweck alle Personen, die US-Bürger oder Staatsangehörige sind oder ihren Wohnsitz in den USA haben, alle Personengesellschaften, die in einem Bundesstaat oder Gebiet unter der Hoheitsgewalt der USA organisiert sind oder bestehen, alle Kapitalgesellschaften, die nach US-amerikanischem Recht oder dem Recht eines Bundesstaates oder Gebiets, das unter der Hoheitsgewalt der USA steht, organisiert sind, sowie alle in den USA ertragssteuerpflichtigen Vermögensmassen oder Trusts, ungeachtet des Ursprungs ihrer Erträge.
Datenquelle: Sofern nicht anders angegeben, wurden die Daten von LOIM aufbereitet.
Obwohl gewisse Informationen aus als verlässlich geltenden öffentlichen Quellen stammen, können wir ohne eine unabhängige Prüfung die Genauigkeit oder Vollständigkeit aller aus öffentlichen Quellen stammenden Informationen nicht garantieren.
Die in diesem Dokument geäußerten Ansichten und Einschätzungen dienen ausschließlich Informationszwecken und stellen keine Empfehlung von LOIM zum Kauf, Verkauf oder Halten von Wertpapieren dar. Die Ansichten und Einschätzungen entsprechen dem Stand zum Zeitpunkt dieses Dokuments und können sich ändern. Sie sind nicht als Anlageberatung zu verstehen.
Dieses Material darf ohne vorherige Genehmigung von Lombard Odier Funds (Europe) S.A. weder vollständig noch auszugsweise (i) in irgendeiner Form oder mit irgendwelchen Mitteln kopiert, fotokopiert oder vervielfältigt oder (ii) an Personen abgegeben werden, die nicht Mitarbeiter, leitende Angestellte, Verwaltungsratsmitglieder oder bevollmächtigte Vertreter des Empfängers sind. ©2022 Lombard Odier IM. Alle Rechte vorbehalten.