Former Bank of England deputy governor Sir Paul Tucker recently described talk of a V-shaped recovery as “beyond stupid”. Sir Paul may be unaware that global retail sales and industrial output surpassed their pre-covid peaks in June and September respectively. (Sir Paul has displayed a detachment from reality in the past, for example in his design of the Bank of England operating system that failed spectacularly during the GFC because of its lack of a discount window through which banks could access emergency liquidity.)

The rolling V recovery, at any rate, has now extended to global profits. A national accounts based measure of G7 gross domestic operating profits (equivalent to EBITD) rebounded strongly in Q3, regaining its Q4 2019 level – see first chart. The numbers cover all sectors (i.e. including virus-restricted services) and unlisted as well as listed companies. Chinese industrial profits, meanwhile, were up by 28% in the year to October.

The profits rebound provides further confirmation that the G7 / global business investment cycle bottomed in Q2 2020, implying that all three investment cycles (inventory, business, housing) are now acting to lift to underlying economic momentum – second chart. The forward-looking business capex survey indicator monitored here stepped back in November because of the European lockdowns but the signal remains positive – third chart.

G7 Q3 profits strength was focused on the US, where domestic non-financial corporate profits (net of interest and true economic depreciation) surpassed a Q4 2018 high – more evidence, on top of monetary trends, of superior US economic prospects. The UK numbers were also strong but should be discounted – the statisticians included a large “alignment adjustment” to fill a hole in the GDP accounts. Japanese profits lagged, reflecting a later economic recovery – a catch-up is likely.

Equity market analysts have been scrambling to adjust their forward earnings estimates to reflect profits reality. The MSCI ACWI earnings revisions ratio (number of upgrades minus downgrades as proportion of all estimates) reached a 10-year high in November, echoing the positive message from another strong global manufacturing PMI report – fifth chart.

The PMI report also confirmed that a V-shaped industrial recovery is filtering through to prices, with output and input price indices moving above their long-term averages. Supply-chain bottlenecks, reflected in many firms reporting lengthening delivery delays, are adding to upward pressure – sixth chart.

The question of whether an emerging inflation pick-up represents a temporary blip or a lasting move higher hinges on the extent to which monetary trends normalise over coming quarters. G7 three-month broad money growth eased further to 4.6% at an annualised rate in October but year-on-year growth of 16.1% remains higher than in any previous year since 1973. The view here is that three-month growth needs to slow further and remain weak for a sustained period to warrant confidence that inflation will return to its 2010s average after an expected 2021-22 bulge.