Economic Outlook

ECONOMIC

OUTLOOK

The global economy in the run-up to Trump 2.0. Recent economic data remains in line with our central scenario of a soft-landing in the United States, weak but positive growth in Europe, and a still fragile economy in China. The US election was the culmination of a busy year for elections around the world. In Europe, budget discussions continue while Germany is offering a new source of political uncertainty. In this context, markets are expecting central banks to continue with rate cuts, though at a more moderate pace for the Fed and BoE (100-125 bps by the end of 2025) than for the ECB (125-150 bps).

A very gentle slowdown in the United States. US economic data remains on a positive trend. GDP grew at an annualised rate of 2.8% in Q3 (0.7% quarter-on-quarter), driven by domestic demand. Although disrupted by two hurricanes and major worker strikes, the underlying trend in the labour market remains that of a gradual easing of tensions. The sound financial health of companies (with profit margins close to record levels) and households (net wealth still high) should allow the US economy to experience a soft-landing.
Europe is heading for a temporary soft-patch. The euro area economy is looking less healthy. Germany's industrial output continues to be hampered by high energy costs, weaker demand from China, Chinese competition especially in the auto sector, and stagnant household consumption. In France, now that the Olympics bump has faded, sentiment among households and companies seems to be depressed by the political uncertainty prevailing in the country. The upcoming fiscal policy tightening could also weigh on growth. The wider euro area economy thus looks set to slow towards the end of the year, but the slowdown will likely be short and shallow. Countries such as Italy and Spain remain on a stronger growth trend. The region may benefit from a simultaneous retreat of inflation – down from 2.2% year-over-year in August to 1.8% in September – and easing of European Central Bank (ECB) rates. Markets are pricing in 50 bp of further cuts by the turn of the year and 100 bp in 2025. Nevertheless, the stuttering economy could prompt the ECB to bring rates down faster.
New uncertainty over inflation. Thanks to the broad success of the Republicans, Trump will seek to implement his campaign promises: an expansionary fiscal policy (tax cuts); a sharp rise in customs duties, and a restrictive immigration policy. The economic impact of these measures will depend on how they are implemented. In theory, they could support activity in the short term, but they could also trigger a new wave of inflation. As a result, the US Federal Reserve (Fed) could decide to slow the pace of interest rate cuts. It is too early for the Fed to assess the impact, but it nonetheless adds to uncertainty over the outlook for inflation. This has already been reflected in the more cautious stance communicated after the latest Fed’s Monetary Policy Committee, which took place two days after the election.
Sluggish growth in the euro area. GDP growth in the euro area reached 0.4% quarter-on-quarter in Q3, the strongest rate for two years. However, this strong growth was, in part, artificially boosted by the Olympic Games in Paris. Business climate indicators remained at moderate levels, signalling a continuation of sluggish growth. With falling inflation, a buoyant labour market, and interest rate cuts on the one hand, and still solid corporate profit margins on the other, it’s possible recession will be avoided. However, the risks to growth are on the the downside, due to restrictive fiscal policies expected in 2025. This may compel the ECB to cut rates at least five times by late 2025.

Political uncertainty extends to Germany. Although the French government should be able to survive discussions on the draft 2025 budget, France remains in an area of political fragility. This uncertainty is now spreading to Germany, where the three-party coalition in power since 2021 no longer has an absolute majority. Early elections will take place on 23 February. So, while Trump is back in power, the euro area's two main economies are suffering from political instability. That said, the European Union is not completely unprepared. Several programmes have been launched or are under discussion, aiming to reduce the EU’s dependency on the US and China (strategic autonomy, CHIPS Act, European defence project, etc.).
The new UK budget changes the BoE rate outlook. Recent news in the UK has been dominated by the new government's budget. It plans for material increases in public spending and investment, that will be financed in part by tax increases. Consequently, fiscal policy is expected to be less restrictive than previously anticipated, thus limiting the BoE's room for manoeuvre.
In China, the real-estate sector continues to weigh on the economy. Q3 growth was slightly below the Chinese authorities' target of 5%, but several signs of a rebound in activity in Q4 emerged (notably infrastructure investment). Nevertheless, the real estate market remains depressed, and inflation remains below 1% year over year. As a result, new measures to stimulate activity and support housing could be announced, especially given Trump’s re-election.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 10/11/2024 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.