The U.S. is the growth engine

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In-house macroeconomic view

Global outlook

By and large, risks are currently balanced. A soft landing for the global economy is within reach. The International Monetary Fund (IMF) is keeping its forecast for global GDP growth next year at 3.2%. The estimate for the U.S. was raised from 1.9% to 2.2%, while the projection for Europe has been lowered by 0.3% to 1.2%. Business surveys continue to point to shrinking activity in the manufacturing sector. Although the services sector remains the driving force behind the global economy, it is gradually losing momentum.

The U.S. economy is very resilient in contrast to its European counterpart. China has announced that it will take decisive fiscal and monetary action to support its growth. Globally, the inflation picture is improving. Against the backdrop of falling inflation rates, central banks are expected to incrementally cut interest rates for the remainder of 2024 and in 2025. The European Central Bank (ECB) may be forced to up the pace of its easing cycle.

On the one hand, a great deal of uncertainty remains due to the likelihood of more and more trade conflicts, geopolitical tensions and high budget deficits. On the other hand, falling inflation, the easing of monetary policy and stronger economic recovery in China are likely to be key sources of impetus for the global economy in the coming quarters.

U.S.

The U.S. economy is continuing to prove resilient. The latest signs point to increasing stabilisation. Sound economic data dispelled fears of a recession in October. The latest estimate for GDP growth for the third quarter is 2.8% on an annualised basis. Personal income and consumer spending are rising moderately, indicating that while the economy has cooled, it is still growing. Demand from private households is stable and retail sales in September were surprisingly positive. Future interest rate cuts should further strengthen the recent rise in consumer confidence. Industrial production remained weak in September. Many companies are waiting to see the election outcome and whether there will be any further interest rate cuts before making new investments. The services sector meanwhile recovered noticeably in October, as both expectations and new orders increased. The labour market report exceeded expectations with the surprising addition of 254,000 jobs, higher average wages and a fall in the unemployment rate to 4.1%. These figures indicate that a soft landing for the economy is within reach. There was only a slight change in inflation in September. The consumer price index fell by 0.1% to 2.4%, which is mainly down to lower energy prices and rents. The core consumer price index, on the other hand, rose by 0.1% to 3.3%, more than expected. As the economy appears stable, the core consumer price index could remain at this level until the end of the year. The upcoming presidential election is causing considerable uncertainty, and not just because the result is expected to be close. Both political camps agree on a heavily debt-financed growth strategy. After a deficit of over 6% and an interest burden of over USD 1 trillion in the 2024 fiscal year, it is unlikely that this trend will change. The U.S. Federal Reserve (Fed) lowered key interest rates by 50 basis points and intimated that it could move to smaller cuts of 25 basis points in the future. The economic data remain stable and the mixed inflation figures favour a cautious approach. In our view, the Fed is unlikely to be in a hurry to cut interest rates further.

Eurozone

Economic growth in the eurozone weakened further in the third quarter. The upturn is losing steam and there are worrying signs that the eurozone could re-enter a period of stagnation after a good start to 2024. Despite the fact that unemployment is at a record low of 6.4% and wages are rising, the long-awaited recovery in consumption has failed to materialise. The saving rate of European households is higher than before the pandemic, which is in stark contrast to the U.S. economy. Surveys of economic activity indicate a decline in activity in October for the second consecutive month. The significant slowdown in the industrial sector in Germany and a slowdown in the services sector in France in particular are worth mentioning in this regard. Peripheral eurozone countries are doing much better. Looking ahead, the budget consolidation that is required represents an additional hurdle for European growth. Inflation fell to just 1.7% in September due to lower energy prices. This is below the ECB’s target range. While core inflation fell slightly to 2.7%, services inflation held stubbornly steady at 3.9% on an annualised basis. Even if the base effects alone will cause inflation to rise by the end of the year, we expect the disinflationary trend to continue. After three interest rate cuts of 25 basis points each, this opens the door for further and possibly higher interest rate cuts in the coming months. In view of the downside risks for the European economy, we believe that an accelerated cycle of interest rate cuts by the ECB is appropriate and likely.

China

Chinese GDP has grown by 4.6% on an annualised basis. The Chinese economy is plagued by weak domestic demand, high unemployment and a property crisis. Consumer confidence and investment in fixed assets have been adversely affected as a result. China is grappling deflationary pressure and is facing an increasingly aggressive political stance from its trading partners. The fact that leading indicators for the manufacturing industry are no longer in contractionary territory must be seen as a ray of hope. On the other hand, the corresponding survey for the services sector shows a slowdown for the first time since December last year. Deflation is becoming increasingly entrenched and is hard to combat. In September, the consumer price index rose by just 0.4%, while the core consumer price index rose by 0.1% on an annualised basis. Producer prices, on the other hand, fell by 2.8% year on year. Concerned by the slowdown in growth momentum, Chinese authorities announced a major policy shift at the end of September. Beijing significantly stepped up its efforts, and announced a broad and comprehensive package of measures to achieve the annual growth target. The PBoC exceeded expectations by cutting several key interest rates and reducing the required reserve ratio to the lowest level since 2018. It also cut lending rates for the property sector and announced plans to stabilise the market. The Ministry of Finance hinted at a budget revision to support the real estate sector, solve the problem of local government debt and strengthen the capital base of large state-owned banks. Concrete fiscal measures have yet to materialise. Political leaders merely promised “the necessary fiscal expenditure” to stimulate the labour market, support household consumption and stabilise the real estate market. The latest combination of measures could represent a turning point in Beijing’s economic policy. Financial markets are not yet fully convinced, given the lack of details.