Inflation regained ground in the United States and the euro area in December, rising from 3.1% to 3.4% and from 2.4% to 2.9% year-on-year respectively. However, the breakeven inflation rates (10-year bonds) for the four major eurozone economies have fallen below those of the United States. The breakeven rate has also dropped in the United Kingdom, where the inflationary environment has improved, although it remains more deteriorated than in the other areas.
When looking ahead and formulating the forecasts for 2024, it is always relevant to look back at the recent past and to have a final look at 2023. It was a year with many surprises. The resilience of the Labor market in the US and in the euro area faced with aggressive monetary tightening, the resilience of the US economy in general with a staggering growth performance, the stagnation in the euro area, but also the decline in inflation. But the thing that has been the defining characteristic for 2023 to treat undoubtedly, has been the fact that the peak in policy rates has been reached in the United States and in the euro area. When we now look at 2024, we can say that there are two quote unquote certainties.
Further progress in terms of disinflation and the room this creates for central bank easing seem to be the only economic ‘certainties’ for 2024. What is left is a list of important questions that should be answered as the year progresses. What will be the pace and extent of rate cuts? Is there a risk of underestimating the impact of past rate hikes that still must manifest itself? What about the timing and strength of the pickup in growth in reaction to lower inflation and the start of policy easing? Is there a downside to the scenario of a soft landing in the US? The answers to these questions matter for the real economy but are especially important for financial markets and the policy rate expectations.
In December, the S and P Global Composite PMI index for worldwide business activity rose again slightly (+0.5 points), reaching 51, its highest level since August 2023. This is the second consecutive month of improvement, after five months of decline. The signal remains encouraging for global activity at the end of Q4 2023. However, this improvement masks a fairly clear divergence between the services sector and the manufacturing sector. In December, the global services index reached its highest level since August 2023 (51.6), while the manufacturing index recorded its lowest level since the same month (49).
GDP growth, inflation, interest and exchange rates.
The economic picture during November and December reveals some divergence between Europe, on the one hand, and the US and Japan, on the other hand.
Almost one year ago, we labeled 2023 as ‘a year of transition to what?’ based on the view that inflation would decline, that official interest rates would reach their peak and a concern that the disinflation process could be bumpy. 2023 has brought us many surprises: the resilience of the labour market in the US and the Eurozone, the extent of monetary tightening, the risk appetite of investors. The biggest surprise was the growth performance of the US economy. Towards the end of the year, the changing message from the Federal Reserve -and to a lesser degree of certain ECB governing council members- with respect to the monetary policy outlook has brought us a another favourable surprise and a hopeful note for 2024.
GDP growth, inflation, exchange and interest rates
According to its final estimate, the S&P Global Composite PMI improved slightly in November, wiping out almost all the decline recorded in October. The November index stood at 50.4 (compared to 50.0 in October and 50.5 in September), ending a five-month decline. This is a slightly positive signal for global growth in the middle of Q4 2023.This modest improvement can be seen in both manufacturing and services.
Updated data on GDP growth, inflation, interest and exchange rates.
The latest inflation data from the major developed economies have helped fuel the decline in bond yields and reinforced the conviction that the first policy rate cuts will take place in the first half of 2024 in the US, the euro area and the UK.
The evolution of international trade is sending rather reassuring signals about the state of global demand. New machinery and equipment orders from South Korea, as well as export orders from Taiwan – generally seen as two reliable indicators of global manufacturing activity – rebounded sharply in October.
Whether one likes it or not, China has a key role in the “green” industrial revolution that will take economy to climate neutrality. In the transition to all-electric, particularly as it is happening in Europe, it is even strengthening its positions. The planned ban on the sale of new petrol and diesel cars will bring the end of a technological barrier that has thus far allowed European manufacturers to excel, whilst keeping Chinese-made vehicles away from their markets.
In the United States, economic policy uncertainty, based on media coverage, increased in October for the second month in a row. The rise is probably related to the ongoing risk of a US government shutdown, and also to some uncertainty around the tone of the Fed’s statement after the FOMC meeting of 31 October-1 November.
The range of first estimates of Q3 GDP growth is quite broad, ranging from a very positive figure in the United States (1.2% q/q) to a return to stagnation in Europe (-0.1% q/q in the euro area and 0% q/q in the United Kingdom), after a temporary acceleration in Q2. At the same time, Japanese growth posted a clear correction (-0.5% q/q) after two very positive quarters.
US household consumption was 10% above its pre-Covid-19 level in the third quarter of 2023 when French one was only slightly above (1%). This dynamism across the Atlantic is based on a somewhat more favourable trend in purchasing power but, above all, on a fall in the personal savings rate. American households have apparently showed a greater sensitivity to improving labour market conditions. As the latter are becoming less favourable and US households now have fewer extra savings to cushion the impact of monetary tightening, US growth could lose significant support.
Latest data on GDP growth, inflation, interest and exchange rates.
Several central bankers have recently insisted that the ‘last mile’ in the marathon towards the inflation target may be the most challenging. After an initial swift decline of headline inflation on the back of favourable base effects due to lower energy prices, further disinflation may take more time. Corporate pricing power, inflation expectations and wage growth play a key role in this respect. By insisting on the ‘last mile’, central bankers probably want to avoid sounding too optimistic on disinflation. Otherwise, financial markets might price in early rate cuts, which would cause an easing of financial conditions in capital markets that would neutralize part of the monetary tightening
The fall in the global composite PMI index continued in October. It hit the dividing line between the expansionary and contractionary zones (50.0, from 50.5 in September). This is a sign that global economic activity is flatlining in this early part of the fourth quarter of 2023.
Updated GDP, inflation, interest and exchange rates data.
With the exception of Japan, core inflation is falling in most advanced economies. The decline is quite widespread (food, clothing or household & equipment goods). This dynamic underpins our forecasts that no further rate hikes are expected from the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE).
Global exports have levelled off for almost two years, after a strong increase in 2021. Export growth has stagnated in both emerging and advanced economies. However, the CPB data show a slight rebound in exports in volume terms in August, at 1.1% m/m, although the annual rate is still negative at -2.3%. The monthly increase was driven by China (+5.3% m/m) and the United States (+1.3% m/m),
GDP growth, inflation, interest rates and exchange rates
