Economic Outlook

ECONOMIC OUTLOOK

Central banks confirm their gradual pivot.

The European Central Bank (ECB) cut rates in early June. However, this initial cut came with a deeply prudent commentary, indicating that further reductions would be slow and gradual. The Fed meanwhile awaits confirmation of the recent fall in inflation to embark on its own slow rate cut cycle. Our scenario for the economy and inflation continues to point to a cycle of gradual rate cuts by the major central banks. In China recent data show some green shoots of recovery, but the improvement will be limited.

Europe. In Europe, leading indicators signals a stronger economic momentum ahead in the euro area and United Kingdom. Moreover, the economy has up-ticked slightly, helped by the normalisation of inflation. We believe this improvement will continue, if only as an automatic ratchet effect. In the wake of the energy crisis, European economies were clearly dragged down, particularly in Germany where industry took a heavy hit. With energy supplies now back to normal, economies should return to a better pace of growth. Subsequently, likely cuts in central bank rates should add a further relief. Nonetheless, our outlook remains one of only modest growth. Meanwhile, inflation continues to fall but remains somewhat sticky as wages rise to catch up lost ground. The Bank of England should soon follow the ECB into a cycle of rate cuts, and is likely to take its time, given the stickiness of inflation and the generally healthy state of the economy.

US. Recent activity indicators have sent mixed signals of late, with some surveys apparently suggesting a slump and others a risk of overheating. We are looking to avoid overreacting to these blips, as we continue to expect the economy to come off the boil slowly while still growing at a healthy pace. Fiscal policy remains a major source of stimulus while domestic demand continues to draw support by healthy balance sheets of households and companies. The stock market rally of recent months mainly reflects a wealth effect among American households who hold much of their savings in equities. That said, the US economy looks set to slow back towards its pre-Covid growth rate of around 2%. The jobs market is rebalancing itself in terms of job numbers and wages as the fiscal stimulus is easing off. On the inflation front, May's figure reinforced our scenario of a gradual decline, but after a number of negative surprises the Federal Reserve will remain prudent; we expect two cuts in H2.

China. Economic indicators have improved slightly. Industrial output and retail sales both grew lately and surveys suggest this trend will continue. However, the Chinese economy's troubles have not gone away, including the ongoing struggles of the property sector and, longer term, an ageing population trend.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 13/06/2024, publication completion date. Past performance does not prejudge future performance. Investments may be subject to market fluctuations, and the price and value of investments and the resulting revenues may fluctuate downward and upward. Your capital is not protected, and original investments may not be recovered.