Economic Outlook

ECONOMIC OUTLOOK

Synchronised monetary policies

Major developed economies have held up so far this year, thanks to still strong labour markets both in terms jobs creation and wage growth. But robust growth means stickier inflation. Service prices are proving particularly stubborn, edging down but remaining well above central banks’ comfort zone for the time being. Major central banks look set to start a gradual rate-cutting cycle from the end of spring.

Thanks to a resilient economy, the Fed can bide its time. The United States economy remains strong. Latest business data and surveys show US growth back to pre-Covid levels at 2%, with consumption holding up well. This resilient performance is underpinned by a buoyant jobs market. Unemployment is below 4% with wage growth at 4% year-over-year. With fiscal policy still accommodative and the private sector sitting on sound balance sheets, the US economy may only slow down gradually over the next few months.

A strong economy may also keep inflation above its 2% target longer than previously expected. January inflation dipped to 2.4% year-on-year. Not bad, but core inflation remains above pre-Covid levels with services inflation at a sticky 3.4%. The Federal Reserve (Fed), weighing this scenario of dynamic growth and grudgingly falling inflation, will likely opt to cut rates in the next few months but at a cautious pace. We see three rate cuts in 2024, with the first in June.

ECB and BoE prudent in the face of slowly falling inflation. European economic data for Q1 confirm the trend established late last year: barely positive growth and a persistently strong labour market. Euro area GDP growth should remain weak for the next few months, but this masks a mixed picture: stagnation in Germany which ended the year dipping into recession, whereas peripheral economies experienced strong growth, benefitting from European subsidies and reduced dependency on foreign demand.

The UK economy, which also ended the year in a technical recession, is likely to remain sluggish amidst weak domestic consumption. While economic data in Europe is weaker than in the US, Europe's labour markets are holding up well. The euro area unemployment rate was 6.4% in January, lowest since the 1990s, and wages have risen 5% year-over-year. UK unemployment stood at 3.9% in December. So, as in the United States, inflation continues its gradual decline, with headline at 2.6% year-over-year in February in the euro area and 4% in January in the UK.

Against this backdrop, the European Central Bank (ECB) is also likely to start its rate-cutting cycle in June and could then decide a further two cuts this year, remaining in sync with the Fed. This enables the ECB to continue fighting continually sticky services inflation and avoid tensions on foreign exchange markets. In the UK, the Bank of England is also likely to cut rates in coming months, with three cuts overall in 2024 in our view.

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2024 GDP growth consensus forecasts