Economic Outlook

ECONOMIC

OUTLOOK

Divergent economic growth. We continue to expect the global economy to slow but with persistent differences between regions and countries. In the United States, the economy should soften but maintain a healthy pace of growth. In Europe, the economy is likely to slow markedly toward the end of this year, but regain momentum in 2025 as inflation fades and, more importantly, interest rates are being cut. In China, the fiscal and monetary stimulus package could inject new vigour into the economy. Meanwhile, political and geopolitical risks are on the rise and could spook economic agents at any time.

In the United States, a very slow soft-landing. The long-expected US slowdown – which some have been forecasting for several quarters now – has still not happened. Data show the jobs market has clearly eased, with a slight uptick in unemployment over the past months. But companies are still sitting on healthy balance sheets, with modest debt and enough free cash flow, and are even seeing gains in productivity. Against this backdrop, the loosening of the labour market is likely to be modest and gradual. The fall in inflation has also been confirmed, from 2.5% in August to 2.4% year-over-year in September. Slowing inflation amid a very gradual slowdown of the economy should encourage the Federal Reserve (Fed) to take its time bringing down policy rates. Markets are discounting 50 bp of further cuts by year-end, with another 100 bp to follow in 2025.

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.

In the United Kingdom, the economy seems to have held up better than in the euro area. As inflation, particularly in services, is proving sticky, the Bank of England looks to be treading a more cautious line than its peers. That said, the government is set to announce a fiscal squeeze and this, coupled with a strong pound, could lead the Bank of England to make two rate cuts this year.

In China, the economy still seems to be mainly powered by industrial production and exports. Consumption remains muted, with households still negatively impacted by property market woes. In response, Chinese authorities have announced a far-reaching package of measures to revive the economy. As a first step, China's central bank (the PBoC) announced rate cuts and macro-prudential measures. This was followed by a commitment at the recent Politburo meeting to deploy “necessary fiscal spending”. This was welcome news to markets, but the details of the measures and their likely long-term impact remain uncertain.

Political and geopolitical risks are on the rise. The United States goes to the polls on 5 November. This could prompt a fresh wave of uncertainty with a good chance we will end up with a politically gridlocked Congress. More generally, the new president, whoever he or she may be, could quickly ramp up protectionist measures with uncertain economic and political consequences. In France, wrangling over the budget continues amid a worsening fiscal outlook. Finally, in the Middle East, risks of a spillover of the conflict across the region are becoming even more pressing.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 14/10/2024, 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.