Economic Outlook

ECONOMIC OUTLOOK

Good news of the summer: decline in inflation

Since summer began, a number of indicators have suggested developed economies could face a more rapid slowdown than previously expected. However, there was good news too, with confirmation that inflation is down in both the United States and Europe, which should allow the world's main central banks to step up the pace of monetary policy loosening and give their respective economies a shot in the arm. The Bank of Japan, meanwhile, will likely be heading in the opposite direction, tightening monetary policy.

The Federal Reserve (Fed) turns its attention to the labour market. The US jobs market has been booming since Covid, but is now showing some signs of deterioration, prompting some to talk of recession. In our view though, the picture is more indicative of a return to normal after a period of uncommon expansion. Companies are still sitting on ample financial cushions, delivering strong profits and are unlikely to embark on any drastic job cuts in the short term. Meanwhile, American households are seeing a continuing rise in their real incomes. Finally, the Fed is likely to normalise monetary policy fairly fast. Its official mandate gives it two objectives: containment of inflation and stable unemployment. During the recent price surge, it made tackling inflation its clear priority, even at the risk of a severe economic slowdown. Now, with inflation clearly under control, the Fed is free to start cutting interest rates to curtail any further rise in unemployment.

The ECB needs to watch Germany's weak economy. In Europe, the German economy continues to show signs of weakness. It has proven especially vulnerable to three recent shocks: Covid, the Ukraine war and the slump in the Chinese economy. Germany makes up a third of the euro area economy and a sluggish Germany automatically drags down the region’s growth. With inflation apparently under control at long last (+2.2% year-over-year in August), the European Central Bank (ECB) could be tempted to loosen monetary policy faster to help the German economy and give the wider European economy a boost. At the moment, markets are discounting two rate cuts this year and six by next September. If current indicators on the economy and inflation are confirmed, it might want to go harder and faster, with three cuts this year. The Bank of England opted to cut rates in August and could do so again in November when it publishes its new economic forecasts. UK inflation is back near target (+2.2% year-over-year in July) and likely to hover around this level for the next few months, raising the possibility of another rate cut in December.

Bank of Japan (BoJ) bucks the trend. The Bank of Japan sprung a surprise rate hike on markets in late July and looks set to continue its tightening cycle. Inflation now looks to have peaked. Headline inflation was unchanged at +2.8% year-over-year in July and underlying inflation fell slightly to +1.6%. Japan's long struggle with deflation now seems to be over. This should encourage the BoJ to continue moving toward a more conventional monetary policy. The People's Bank of China has sought to revive moribund domestic demand by repeatedly cutting rates and pumping liquidity into banks. Further cuts, more closely targeted on the property market, may be announced in coming months.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 06/09/2024, 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.