Fewer and fewer rate cuts

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In-house macro-economic view – March 2024

Global outlook
Moderate growth that is actually slightly above last year’s level will come with inflation that levels off both above pre-pandemic levels and higher than the set target rates. Loose financial policy, solid labour markets and geopolitical challenges continue to pose the biggest challenges for an otherwise intact deflationary pathway. Therefore, nothing has changed with regard to our global growth projection.

Central banks in advanced economies will loosen their policies in 2024. Regardless, they are anxious to stress their data-based approach. In light of the better-than-expected economic data and stubborn inflation, the market expectation for interest rate cuts has reverted to exactly that which the central banks have consistently been saying for months. Given the large number of elections taking place, strong fiscal support can be expected. The flip side of this is further mounting budget deficits, which are not currently being seen to an appreciable extent as a risk for or price driver of interest rates. In the longer term, however, we regard this as a huge problem that cannot be ignored.

United States
U.S. economic growth is slowing compared with 2023, but is ongoing at a fair clip. The Fed has revised its growth and inflation forecasts upwards for 2024. The estimate for GDP growth in the first quarter is now +2.1% on an annualised basis. Even though the latest data were weaker than at the beginning of the year, demand for services as well as a healthy labour market will continue to prop up growth in the U.S. Consumer confidence fell in February, but remains solid, which is down to optimism about the inflation outlook. The labour market is continuing to normalise. The employment figure rose at a healthy rate in February, but the figures for prior months were adjusted downwards. Unemployment rose to 3.9% while the hourly rate fell and the number of redundancies declined. Deflation is coming to a standstill: price increases exceeded expectations in February for the second month in succession. Inflation expectations rose slightly. Both the headline and core Consumer Price Index were 0.4% higher than the previous month, which is down to stubborn inflation in the services sector. In terms of producer prices, we are seeing a similar development. For these very reasons, the Fed is hesitant to start the rate cutting cycle. A cut in June is still the most likely option. The solid economic growth and strengthening U.S. inflation are signs that the financial conditions are likely not as restrictive as assumed. The Fed could actually loosen its policy earlier than warranted by the economic situation, in order to avoid acting too close to the presidential election. It remains uncertain how low interest rates have to be for the Fed’s dual mandate to be sustainably fulfilled. In fact, just one increment may be enough, as was the case in 1995. The signalled number is still three.

Eurozone
Eurozone economic activity remained weak in the first quarter of 2024 as well. The ECB has revised its forecast for growth and inflation downwards: economic activity will only increase by 0.6% in 2024, and it has reduced its inflation forecast from 2.7% to 2.3%. We expect that growth in the eurozone will stagnate in the first half of 2024. However, the worst is likely to be behind us. GDP could actually increase more strongly in the second half of the year in light of falling inflation, solid fiscal support and monetary loosening. The Purchasing Managers’ Indices have again increased. For the first time since May 2023, the overall index has topped 50, indicating an improvement in macro-economic conditions. The labour market remains robust and, due to low unemployment and rising real wages, we expect consumer spending to provide increasing support in the coming months. The deflationary trend is intact, but, as is well known, the final push to get inflation down to the target is the hardest. Strong wage increases and low productivity mean that unit wage costs are climbing, which is hampering progress in the fight against inflation. Inflation seems to be stabilising above the ECB’s target. Nevertheless, in light of stagnating economic growth, the calls for cutting interest rates soon are becoming increasingly strident. We still expect the first interest rate cut in June but, because of the weak economy and the fact that growth and inflation forecasts have been revised downwards, we are not ruling out the possibility that the ECB will cut rates in the spring – and does so ahead of the Fed.

China
In March, the National People’s Congress set out China’s priorities and targets for 2024. The 5% target for economic growth is more ambitious than last year’s due to the base effect. At approximately 3.9% of GDP, the targeted budget deficit is similar to 2023. The inflation target is 3%. While fiscal policy will remain very expansionary, there is still plenty of scope to loosen monetary policy. Headline inflation, at 0.7%, published in February, is above expectations but below the set target. In the first quarter, the economy recovered amid real estate problems. Consumer demand remains the driving force behind the recovery, especially in the services sector, thanks to retail sales. We are now seeing positive spillover of services demand on demand for durable goods. Buoyed by infrastructure spending, industrial production and capital investment are improving. The Purchasing Managers’ Indices are stabilising in slightly expansionary territory. The impact of the real estate sector seems to have worsened recently. For this reason, political leaders must continue the active use of fiscal and monetary policy if they wish to achieve their goal of revitalising economic activity and reach their growth target for 2024.