Economic Outlook

ECONOMIC OUTLOOK

Economic surprises further fuel central banks rate cuts expectations. Recent data have supported the view that the world’s major central banks will opt for a pivot soon. In Europe, the economy has surprised on the upside, albeit modestly. But the inflation easing appears well-entrenched and will encourage central banks to embark on a rate cut cycle sooner rather than later. In the United States, the economy has slowed slightly, and the latest inflation print is reassuring, suggesting the Federal Reserve (Fed) will likely go ahead with cuts, but these will be later and smaller than its European counterparts. In China, recent data show signs of a pickup but any improvement will be tentative.

Europe. Surprise indexes, which measure how far a given indicator deviates from consensus forecasts on the up- or downside, have been trending positively for the euro area and the United Kingdom. The economy has recovered slightly, thanks largely to past declines in inflation. We expect this improvement to continue, if only through a mechanical effect.

European economies were hard hit after the energy crisis, particularly the German industry, and with the energy market now back to normal they should now return to a healthier growth path. Expected cuts in central bank rates should provide a further boost. Even so, growth will remain modest according to our scenario. Meanwhile, inflation has continued to decline, even surprising the consensus on the downside, supporting the European central banks to make their first cuts in June, though further reductions are likely to be gradual given the generally healthy state of the economy.

US. After a year and a half of positive surprises, economic data proved disappointing last month. However, these downside surprises need to be seen in context. The US economic trends remain strong, with highly accommodative fiscal policy and robust private demand. The stock market surge of recent months has created a wealth effect for American households, who hold much of their savings in stocks. However, as the labour market normalises (in terms of jobs and wage growth) and fiscal stimulus fades, we expect the US economy to slow gradually toward its pre-Covid pace of around 2%. April’s inflation figures tend to confirm our scenario of a gradual decline, but after recent unpleasant surprises the Fed will probably tread cautiously in easing policy. We expect two cuts, both in the second half of the year.

China. Economic indicators point to a slight improvement. Industrial output and retail sales have picked up and sentiment surveys confirm this trend. Nevertheless, China’s problems have not gone away. The property sector continues to struggle, and the country faces a structural greying of the population.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 17/05/2024, 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.