Shift in focus


When questions have been answered, new ones pop up, reflecting a shift in focus. We are again experiencing this phenomenon. Recent comments by Christine Lagarde and Jerome Powell have provided implicit guidance on the timing of the first rate cut. The focus is now shifting to how fast and how far policy rates will be reduced. A second shift in focus is from the soft data (confidence surveys) to hard data (activity, demand, employment): will the positive momentum of the former be confirmed by an improvement of the latter? Finally, a third shift in focus is the attention that will paid to political news, and its implications for the economy and markets, in the EU -with the approaching elections for the European Parliament- and the US presidential election, where both candidates are shifting into a higher gear.


When questions have been answered, other questions pop up and that requires a change in focus. The phenomenon is well-known, and this is what we are experiencing nowadays in doing our economic analysis. There is a shift in focus in three important areas.

The first change in focus is monetary policy. Recent statements by Jerome Powell of the Federal Reserve and Christine Lagarde of European Central Bank have made it clear that the timing of the first rate cut is now to be expected in June of this year rather than in spring as had been hoped for by financial markets at one stage.

So clarity on the timing of the first rate cut, it means that the focus is now shifting to the extent of policy easing and the speed of policy easing. And in that respect, we think that the central banks on both sides of the Atlantic will adopt a cautious stance because of lingering concerns that desinflation might actually be slower than they are expecting at present.

The question is important because it has an influence on the behavior of financial markets. Bond markets and equity markets are very interest rate sensitive. It will also have an impact on what is happening in the economy in terms of demand and activity.

Think of the property sector, think of housing construction activity. So, all in all, we expect a cautious approach, and we expect that the ECB will ease policy to the tune of 100 basis points this year, whereas the Federal Reserve would cut rates to the tune of 75 basis points.

The second shift in focus concerns the nature of the data.

The focus will shift from looking at the soft data to the hard data. Let me explain. In recent months, what we have observed is that there has been a positive momentum in terms of soft data. Soft data refers to business surveys, consumer confidence, household confidence.

And what we see in the euro area that has been a positive momentum, positive momentum based on simply comparing the average for the survey data for the most recent three months compared to the previous three months.

And there we have seen an improvement. The question that matters now is whether that improvement, that positive momentum in the soft data, will be followed by an improvement in the hard data. Think of activity. Think of demand. Think of the labor market.

And the question is very important, because should it turn out that the positive momentum in the confidence data is not followed by a similar dynamic in the hard data, what would happen is that confidence would drop again. And this would then have an impact, a negative impact, on spending decisions by households, on investment decisions by companies, on the willingness of companies to recruit more people.

And all in all, it is a very important question, of course, for the economic outlook during the remainder of the year in the eurozone.

And the shift in focus, well, the timing of it, it will be specifically important, particularly important in the second quarter to see an improvement of the hard data that would then confirm the historical observation that typically a better momentum in terms of sentiment tends to be followed by a better momentum in terms of the hard data.

Finally, a third shift in focus is the increasing attention that will go to politics, given the European Parliament elections in June of this year and the U.S. presidential election early November. In Europe, the topic is very important. Given the economic challenges that the European Union is facing, there is the energy transition and its financing, there is the issue of competitiveness of the European Union, there is the issue of strategic autonomy, et cetera, et cetera.

The list is long. So it remains to be seen to what extent the outcome of the European Parliament election will have an impact on the priorities and how things are being done. Turning to the U.S., the presidential election will be very important also in terms of economic policy for the U.S., but also more globally speaking. And one specific point of attention that is already coming to the forefront is what will be the stance taken with respect to trade policy against a background of a protectionist rhetoric that is intensifying. We will have to wait until the start of 2025 to have a clearer picture on this, and this will give us the opportunity in the meantime to cover this topic as new developments occur to cover this topic in our publications and videos.

Thank you for having watched ECOTV, and I'm looking forward to speaking to you again soon.