Soft landing or turbulent times?

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In-house macroeconomic view

Global outlook

The IMF’s global GDP growth projections of +3.2% this year and +3.3% in 2025 remain unchanged in its latest “World Economic Outlook”. By and large, the global economy should have a soft landing. While the Eurozone is slowing picking up the pace again after almost stagnant growth last year, the U.S. is showing signs of a slowdown. The disinflationary progress is under way but the services sector in particular is holding it up. A return to the 2% target will take somewhat longer than in earlier cycles. For this reason, monetary easing will be introduced. Until now, political and geopolitical concerns have had only a moderate effect on economic activity. However, political uncertainty, geopolitical crises, increasing protectionism and high budget deficits have the potential to slow down the economic recovery and increase inflationary pressure again.

U.S.

The U.S. economy is slowing and a number of indicators are pointing to lower growth. However, fears of a major slowdown or even a recession are misplaced. Economic growth will continue at a moderate pace. The current estimate for GDP growth for the second quarter is 2.8% q/q. The conflict between expansionary fiscal and restrictive monetary policy is causing problems, as the two approaches are undermining each other. The latest leading indicators paint an unsettled and, in some respects, contradictory picture. On the one hand, we have solid growth in industrial production, increasing planning permissions – which signal a recovery of residential construction – and relatively stable retail sales. On the other hand, the labour market continues to slow down. In the private sector, fewer new jobs were created, and figures for previous months were also adjusted downward. It is also worth noting that the monthly increase in vacancies can largely be attributed to public sector jobs. Unemployment rose for the fourth consecutive month and is now 4.3% whereas wage growth slowed to 3.6% year-on-year. In addition, consumer sentiment remains subdued. On the positive side, inflation continues to slow, which is down to a decline in the cost of living. Headline inflation fell by 0.1% in June and rose by 3% year-on-year. The increase in core inflation, at 3.3%, has not been as slow for more than three years.

The disinflationary process and the weak labour market are good signs that the Fed’s patience has paid off. After Fed Chair Powell confirmed that confidence about inflation moving sustainably toward its target was gradually increasing, the broad consensus on the timing of the Fed’s first rate cut, for reasons including weaker economic data of late, is September. Whether further interest rate cuts will follow will, we believe, depend more on the next set of growth data than on inflation data. Against the backdrop of the Fed’s dual mandate, risk considerations are shifting further towards the labour market, as was also highlighted in the latest Fed press conference.

Eurozone

Economic growth in the Eurozone remains in recovery mode, but is losing momentum. Initial estimates put growth in the second quarter at 0.3% q/q. Both the hard data and surveys point to only moderate growth for the rest of the year. After a solid first quarter, the purchasing managers’ indices (PMI) in the Eurozone have fallen for both the manufacturing and the services sector. While the latter is still expanding at a good pace, manufacturing is contracting.

The latest data were disappointing, as demand remained subdued and political uncertainty grew. Rising real incomes and monetary easing could, however, provide a certain growth dynamic in the second half of the year. Unemployment also remains low, at 6.5%, and wages are rising at a steady pace. Despite good employment data, consumer confidence is persistently low and retail sales are still stagnant. The ECB’s quarterly lending survey is showing a certain degree of improvement in the demand for credit, whereas the supply side remain unchanged. While the markets so far seem to be largely unfazed by political developments and the record polling for extreme and populist parties, uncertainty over how to address fiscal challenges is mounting.

In our view, high and rising budget deficits pose one of the greatest risks to the Eurozone. Despite the launch of excessive deficit procedures, we expect hardly any progress to be made with budget consolidation. Headline inflation increased again slightly in July to 2.6% on an annualised basis, and core inflation remains too high, at 2.9%. Services inflation not only remains stuck around 4%, it could even rise further. Despite that, headline inflation is gradually moving towards the ECB’s target of 2%. In July, the ECB left key rates unchanged, at 3.75%. Similar to the Fed, the ECB remains “data-dependent”, is waiting for further signs of a slowdown in inflation and is not pre-committing to a particular rate path. Not least because of the downside risks for economic growth, we expect two to three further interest rate cuts this year alone.

China

China’s economic upturn is losing steam due to the beleaguered real estate market and the geopolitical tensions. In the second quarter GDP grew by 5.0% year-on-year. The leading indicators confirm the flagging momentum. While figures for the manufacturing sector are improving, they remain in contractionary territory. The services sector is still driving the recovery but is losing impetus. Despite a pick-up in state funding, the new order flow remains weak. Due to weaker consumer confidence, retail sales are also losing momentum. While export was a ray of hope for the Chinese economy, it led to greater trade tensions. The Chinese trade surplus reached a record high of USD 99 billion in June thanks to declining imports and surging exports. Industrial production is benefiting from strong export figures and the upgrading of equipment. Painting a mixed picture, solid investment in the manufacturing sector contrasts with a collapse in real estate investment. Support for the real estate sector should contribute to a pick-up in the economic recovery in the coming months. A sign that domestic demand is still weak, inflation is hovering around zero. Increasing private consumption expenditure remains a priority task for the Chinese authorities. One of the PBoC’s measures this month is to cut the key rate by 0.1%.

At the third plenum of the Communist Party in July, the Chinese government reiterated the need to reach this year’s GDP target of 5%. Longer term, the focus is set to be on domestic demand, technological progress and environmental technologies. GDP growth of 5% for 2024 remains an ambitious target, which will require additional political backing.