Less than 2 years after spiking to decades highs, inflation is back in the neighbourhood of central bank targets in most of the world. Yet it is too soon to declare victory, as there are still cross currents for economic policy-makers to navigate. As they have earned a good track record of it, and room to act, the year-ahead baseline scenario is fairly benign for both advanced economies and emerging markets, with gradually easing financial conditions (from lower interest rates and a likely weaker US dollar) allowing activity to stabilize around trend growth.
GDP growth, inflation, exchange and interest rates.
The past week (16-22 September) was packed with monetary policy meetings and inflation reports. While the US Federal Reserve’s first key rate cut of 50 basis points was larger than we had expected, the status quo by the BoE and BoJ was in line with our expectations. With inflation running below 3%, real interest rates on both sides of the Atlantic remain broadly in restrictive territory. Expected moderation in inflation in services should prompt central banks in Europe and the US to continue monetary easing in the coming quarters. Wage growth in the private sector picked up slightly in the US, while slowing in Europe. The downward trend is expected to continue, with a less dynamic labour market
Uncertainty around US economic policy, based on media coverage, fell for a second month in a row in August. This drop is likely due to Jerome Powell’s speech on 23 August at Jackson Hole, where the Chair of the Federal Reserve stated that the time has come for policy to adjust, meaning it is time to lower rates. This announcement echoed the views of some Fed officials, as expressed in the Federal Reserve’s minutes published on 21 August.
GDP growth, inflation, interest and exchange rates.
The S&P Global Composite PMI Output Index resumed rising in August, gaining 0.3 points to 52.8, after two months of decline. This is an encouraging sign for global activity halfway through Q3 2024. However, this improvement masks a fairly clear divergence between the services sector and the manufacturing one. In August, the global services index hit its highest level (53.8) since June 2023 (with the exception of May 2024), while the manufacturing sector index recorded its lowest level since December 2023 (49.5).
In the United States, consumer price inflation is slowing, in line with the cooling of the labour market. After three months of more restrained growth, the CPI index fell in June, month-on-month, for the first time in two years. The core index rose very moderately (+0.1% m/m, the smallest increase since May 2020). Other important signs of disinflation: alternative measures continue to fall, and in particular the trimmed mean PCE index published by the Federal Reserve in Dallas, which is now well anchored below 3%. The rebound in producer prices, which is still limited at this stage, is nonetheless worth watching and could limit the fall in consumer price inflation. Year-on-year, producer prices rose back above 2% in the second quarter (2.7% y/y in June).
Over the past three and a half decades, the world has undergone profound change. From a situation of balance in the early 1990s -the peace dividend, the Great Moderation, globalisation- we have ended up in a world characterised by geopolitical, economic (supply side) and environmental disruption. A distinctive and fascinating characteristic of this new era is the coexistence of abundance (data generation and dissemination, investment needs) and scarcity (shortage of skilled staff given population ageing, difficulty in finding financing). These developments raise important questions
While recent economic data across the board suggest that growth was strong in Q2, leading indicators (business climate, household confidence) were more mixed in June, pointing to a more difficult Q3. This is particularly the case in the US, where even the ISM non-manufacturing index deteriorated sharply in June, while in Japan and the UK, growth should return to a more normal level after a very favourable Q2 (and benefiting from rebound effects in Japan, after a more difficult Q1).
The S&P Global PMI surveys are a key input in the assessment of the cyclical environment. Judging by the manufacturing PMI, many countries have seen a weakening of momentum in the second quarter of 2024 versus the first quarter. However, for most countries, the level of the PMI in June is still higher than in December 2023. Moreover, 17 countries out of 31 still have a PMI of 50 or higher, which reflects ongoing growth in economic activity. Focusing on the Eurozone and using the composite PMI to take into account the important role of services, it is reassuring to see that in June, although dropping from the 52.2 level recorded in May, the composite PMI was still in ‘real GDP growth territory’ at 50.9
In the US, uncertainty about economic policy, based on media coverage, rebounded in June after a brief dip in May. The June increase was probably related to the climate of political and monetary-policy uncertainty in the US a few months from the presidential election.
The accession of several Central and Eastern European countries to the EU in 2004 has been accompanied by impressive growth in their respective economies. Improvements in labour productivity have enabled real wages to catch up over the last twenty years, but wage pressures have remained very strong over the recent period without, however, affecting the economies' competitiveness to date. The region also remains attractive for foreign direct investment and continues to benefit from nearshoring activities. In the short term, consolidating public accounts is a priority to comply with commitments under the Stability and Growth Pact. Some countries are already under EU's surveillance, with the opening of an excessive deficit procedure.
Energy and mineral commodities are central to the low carbon transition process. Latin America, which boasts abundant amounts of minerals and key metals for the transition, and GCC[1] countries, which are dependent on revenue from hydrocarbons, are seemingly, on the face of it, taking contrasting paths on the transition journey. However, the macroeconomic consequences cannot easily be determined currently. Gulf countries have some advantages in the oil market, but the pace of the transition could affect revenues more quickly than expected. In Latin America, while the size of critical minerals reserves is brightening the outlook, various national strategies and numerous constraints could curb the scale
The second quarter of 2024 ended with a fall in the S&P Global PMI for global activity. The index stood at 52.9 (compared with 53.7 in May), ending seven months of consecutive increases. This decline was driven by both the manufacturing and services sectors, with the global PMI at 50.9 (compared with 51.0 in May) and 53.1 (compared with 54.0 in May) respectively. This fall in the index is not necessarily a sign of a slowdown in global activity, but forthcoming surveys will be all the more important to see whether this is a new trend or just a temporary disruption
The increase in global shipping flows, and the resulting logistical problems, continue to push up freight rates and container ship prices, but are not, at this stage, causing a significant slowdown in business activity or a major rise in import prices. The increase in prices gained momentum in June: the Freightos Index climbed by 43% m/m last month, compared with an increase of almost 15% in May. At the end of June, the index was 30% above the previous peak seen in mid-February, but still 60% below the record levels reached in autumn 2021.
Our central scenario of a Eurozone take-off and a US soft landing, confirmed by the latest available indicators, is characterised by an expected convergence in growth rates. This base case could, however, be impacted by political uncertainties on both sides of the Atlantic (uncertain outcomes of the early parliamentary elections in France and the US presidential election). Furthermore, while the ECB began its easing cycle in June, as expected, providing timely support for growth, the Fed is still holding back. This extension of the status quo, even if it seems justified for the time being, constitutes another downside risk. However, growth is benefiting from other supportive and resilient factors, chief among them real wage gains
The Covid-19 crisis, and even more so the energy crisis triggered by the Russian war in Ukraine, have changed the course of prices in the European Union (EU). Because they buy 90% of their gas and oil from abroad, the EU-27 have paid dearly for their dependence on fossil fuels. In 2022 and 2023, their annual energy bill rose to nearly EUR 700 billion, double that of previous years, while 200 million households saw their cost of living rise by an average of 16%, the same as throughout the whole of the 2010s.
Although we now know the results of the European elections, the implications of these results – in particular the outcome of the snap parliamentary elections in France – remain uncertain. Our central scenario of a Eurozone take-off and a US soft landing, characterised by a convergence of growth rates, could be weakened by political uncertainties on both sides of the Atlantic. However, growth is benefiting from tailwinds and factors of resilience, with real wage gains at the forefront. For the time being, the cyclical situation remains positive for the Eurozone: our nowcast estimates Q2 growth at +0.3% q/q. However, greater uncertainty surrounds the continuation of this recovery.
