End of the summer slump

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In-house macroeconomic view

Global outlook

In terms of risk perception, the pendulum is currently swinging from inflation towards growth. This caused elevated market volatility, especially at the beginning of last month. While global economic growth will slow in the second half of the year, a soft landing remains the most likely scenario. We expect global GDP growth of around 3%. Inflation is currently easing. However, there is a risk that price pressure will return towards the end of the year. The conflict between fiscal and monetary policy remains a problem.

U.S.

GDP for the second quarter, at an annualised growth rate of 2.8%, and healthy domestic demand, is better than expected. The latest data confirm that the Fed’s restrictive policy is curtailing demand. Economic surveys remain mixed. The manufacturing purchasing managers’ index slowed in August to its lowest point this year, while the services sector is expanding at a healthy rate. Despite a noticeable slowdown in the labour market, the majority of the economic data remain very healthy. With the unemployment rate up for the fourth month in succession and, at 4.3%, at its highest for almost three years, the “Sahm Rule” has been triggered. In the past, once this rule was triggered a recession has always occurred in the US. However, in our opinion these concerns are misplaced at the moment. Fiscal policy remains very supportive and even after the election in November there is little prospect of a change of tack towards budgetary consolidation. The Fed is at the ready and has made it crystal clear that the focus of its dual mandate has shifted from combating inflation to supporting the labour market. The interest rate cutting cycle will begin in September and further interest rate cuts will follow before the end of the year. Given an inflation rate of 2.9% (core inflation of 3.2%), there is plenty of scope for adjusting monetary policy.

Eurozone

The Eurozone economy recovered further in the second quarter, as interim data show. GDP second-quarter growth was +0.3% q/q, similar to the first three months of the year. While Germany was disappointing, Spain and France did better. Despite the good result for the quarter, the upturn in the Eurozone is flagging. Both the hard data and the leading indicators are weak. While the purchasing managers’ index rose, driven by the one-off effect of the Olympic Games, the manufacturing sector continues to struggle. Against the backdrop of a record-low unemployment rate of 6.5%, consumer confidence in the Eurozone is improving – although it remains below the post-pandemic peak. Disinflation paused in July, with the consumer price index rising slightly by 2.6% and the core index unchanged at 2.9%. Services inflation remained stubborn at around 4%. The increase in wages and salaries based on bargaining agreements was slower in the second quarter, at 3.6%. Even though the ECB is making decisions from meeting to meeting, the latest data – especially the slowdown in the economic momentum – greatly increases the probability of an interest rate cut in September. We currently expect that the ECB will not be as aggressive as the Fed with its interest rate cuts. The subsequently narrowing interest-rate differential between the euro and the US dollar is one of the biggest arguments in favour of the former at the moment.

China

China’s economic growth is losing momentum and the political leaders must provide further support to reach the GDP target of 5% for 2024. The country’s economy is impacted by the weak labour market, sluggish consumer spending and ongoing headwinds from the real estate sector. Nor do leading indicators paint a particularly positive picture: The manufacturing sector remains in negative territory, new order flow is mediocre, consumer confidence is weak and the services sector is in decline. Slackening domestic demand is to be revived through falling interest rates and other government measures with the aim of increasing incomes, widening the social security net and boosting consumption of services. To solve the problem of excessive local government debt, extensive plans have been made to strengthen finances, the essence of which is the shifting of revenue from central government to local authorities. China’s economy can still rely on exports as well as on industrial production – which is growing nicely thanks to government spending. Due to the tensions with its most important trade partners, however, the development of trading data cannot simply be extrapolated into the future. Consumer inflation increased slightly in July (+0.5% y/y) on the back of food prices and seasonal effects. Overall, however, the Chinese economy continues to battle deflationary tendencies. Due to the ongoing weakness, we expect further political support measures in the coming months.