Central banks concerned about persistent inflation and modest growth

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In-house macro-economic view

Global outlook
As the global economic recovery progresses, the IMF has slightly raised its global growth projection for 2024 to 3.2%. The upward correction can mainly be attributed to the U.S. economy, for which growth of 2.7% is now expected. With a growth projection of 0.8%, Europe is over the worst, and China’s economy should grow 4.6% with political support. Overall, solid labour markets, a resilient services sector and progress in the manufacturing sector are having a positive effect on the economic outlook. On the other hand, these developments, coupled with fiscal supports during the election cycle, could put the disinflationary pathway in jeopardy. The fall in inflation, which has come to a halt, raises the question whether financing terms are restrictive enough for inflation to reach the target. Nevertheless, central banks in advanced economies will loosen their policies in 2024. However, given the different growth dynamics, outlooks are very varied and quite a bit more moderate than six months ago. Key rates will therefore remain high for longer than expected.

United States
Even after the rapid expansion that took place in 2023, U.S. economic growth remains healthy. While the first estimate for GDP in the first quarter, +1.6% quarter-on-quarter is weaker than expected, some data points to a possible pick-up in the second half of the year. Consumer confidence weakened in April due to concerns about the most recent rise in inflation. New orders for durable goods remain good, while the capital investment dynamic is weakening. Personal income remains solid and private consumer spending picked up in March with a rise in retail sales. The manufacturing sector is starting to show signs of recovery. The service sector is still expanding. The rise in the employment rate outside of agriculture was impressive, and unemployment fell to 3.8%. Despite the solid employment data, growth in wages, at 4.1%, is lower than February’s 4.3%. This is down to the increase in the labour supply mainly due to immigration.
Inflation data is feeding fears that inflation could consolidate at a high level. Inflation exceeded expectations in March for the third month in succession, with headline and core inflation up 0.4% each month. Inflation expectations are also gradually rising. Falling confidence in reaching the 2% target is causing further delays in monetary policy loosening. It can still be assumed that the Fed will cut interest rates this year. But the current macro-economic conditions clearly are not right for an interest rate cut in the first half of the year. At the same time, strong expansion and the robust labour market are raising the question whether the current policy is restrictive enough to curb demand and whether the Fed should loosen its policy at all.

Eurozone
Economic activity in the Eurozone is weak but the latest data reflect a distinct improvement in the macro-economic situation. The Purchasing Managers’ Index, for example, is on the rise, having fallen for several months. The economy seems to be over the worst. Leading indicators and surveys on future economic activity are recovering from a low base. The services sector delivered a positive surprise in April and global trade is slowly growing, which should give the Eurozone some positive impetus. Bank lending to households and businesses is improving. However, the investment outlook remains weak, as businesses’ demand for credit declined sharply in the first half of the year. The close-to-record-low unemployment rate of 6.5% is slowly improving consumer confidence, which is still in negative territory. Retail sales figures are stagnating but rising real wages and the good employment situation are likely to shore up private demand in the coming months. We therefore expect that growth in the Eurozone will stagnate in the first half of 2024 but gradually improve and gain momentum in the second half of the year. Fiscal policy will by and large be supportive in 2024 as well. Due to the deficit issue, pressure to consolidate government budgets is mounting. The disinflationary trend is continuing, with inflation down further in March to 2.4% and core inflation to 2.9%. The fight against inflation is not yet won, as services inflation stubbornly remains at 4%. The ECB’s negative assessment of the economy and the good progress made on combating inflation are bolstering the arguments for the ECB to loosen its stance. An interest rate cut in June seems to be a done deal.

China
China’s economic indicators point to a certain amount of improvement and a consolidation of the economic recovery. Even though GDP rose annualised in the first quarter by 5.3% year-on-year, thus beating expectations, reaching GDP growth of 5% in 2024 remains a challenge. Growth in the first quarter was mainly concentrated in the first two months of the year. March, on the other hand, saw a certain degree of slowdown in industrial production and retail sales. It seems premature to speak of a revival of the Chinese commercial sector. The recovery in global demand remains uncertain and Chinese domestic demand remains the key to a sustained recovery. However, the political measures to strengthen domestic consumption and to speed up the modernisation of the industrial system are bearing first fruit. There was a sharp uptick in leading indicators in March. The manufacturing sector is returning to growth after several months of decline, while the services sector remains the driving force behind economic activity. Given the stricken real estate sector and the weak labour market, considerable headwinds are still blowing. Price pressure fell again in March: the Consumer Price Index only rose 0.1% year-to-date. Core inflation only rose 0.6% too, having gained 1.2% in February. Producer prices are still well inside deflationary territory (-2.8%). We expect that political leaders will continue the active use of fiscal and monetary policy to achieve their goal of revitalising economic activity and reaching their growth target for 2024.