0:00:00
As the year is drawing to a close, time has come for economists to look back and to assess to what extent 2023 has been in line with expectations or has brought us many surprises. Let's start with the first part, 2023 in line with expectations. Well, the first dimension, the first dynamic, very important is disinflation.
Headline inflation has declined very significantly thanks to a base effect, the decline in energy prices, but also core inflation.
0:00:46
So stripping out energy prices and food prices, core inflation has also declined. And this is something, of course, that central banks are welcoming very strongly. Another development that has been more or less in line with expectations is the very poor growth performance in the euro area.
You could say that actually, euro area has been throughout the year in a situation of stagnation or quasi stagnation. And the third development, which was in line with expectations, is the monetary transmission, that is the transmission of higher policy rates into the economy through bank credit, both in terms of demand, where demand has declined, but also in terms of supply, where banks have adopted a more cautious stance in granting credit.
0:01:36
And these developments of monetary transmission, of the tightening of the financing conditions has been very visible in the real estate sector. Let's now focus on the surprises of 2023, where it should be said from the start, the list is long, not to say very long.
First big surprise, monetary tightening, rate hikes, more rate hikes to a bigger extent than anticipated at the start of the year. And at times, this has caused huge volatility in government bond markets. It was particularly the case during the summer months, where in the month of September, US treasury yields at the 10-year maturity reached 5%, creating a lot of nervousness in financial markets globally.
Nevertheless, investors in risky assets have kept their nerve, even faced with a geopolitical shock in the Middle East.
0:02:31
Returning to the economic developments, risk appetite remained elevated with equity market investors. And I think that is related to the resilience, the huge resilience, impressive resilience of the US economy throughout the year, where growth actually kept on surprising to the upside.
But more broadly speaking, there's also been resilience in the euro area and in the US, of course, in terms of the labor market. So this has been factors underpinning the confidence of investors in the earnings outlook for companies. And another element that has played a role is that as central banks were tightening policy, there was actually hope that we were getting closer to the terminal rate.
Looking at the latest developments, we can say that 2023 will have been a year surprising until the very end.
0:03:23
The recent pickup in the disinflation in the US, but also the change in tone of certain members of the FOMC, has led to a reassessment of the policy rate outlook in 2024 by financial markets. Investors now expect that the first rate cut will already occur in the spring of next year.
And this is a view that we entirely subscribe to. It also means that the likelihood of a soft landing in the United States, that means that inflation converging back to target without creating a big increase in the unemployment rate or without triggering a recession, that likelihood of a soft landing has significantly increased.
This is, of course, very good news for the US, but also good news for the global economy and the euro area to start with, given the close economic relationships between the US and the euro area.
0:04:17
Turning to the euro area, let's not forget that in the meantime, inflation has also come down actually more than anticipated. And this has led, in combination with the change in tone from governing council members of the ECB, has led to a reassessment of the outlook for the ECB deposit rate.
Markets are now expecting that in the spring of next year, the ECB will proceed with the first rate cut. And this is a view that actually we share. So it means that for the euro area, the combination of the US achieving a soft landing, the decline in inflation and the prospect of lower interest rates, well, it is a very promising combination of developments.
0:05:05
And actually, it allows me to say that we are finishing this most surprising year on a hopeful note for 2024. I thank you for having followed us throughout the year. On behalf of the team, I wish you an excellent festive season. And I invite you to stay tuned for 2024 for more economic updates.
Festive season.
