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.
GDP growth, inflation, exchange and interest rates.
In the four zones covered (United States, Eurozone, United Kingdom, Japan), wage growth continues to outstrip inflation, supporting household purchasing power gains, but contributing, apart from Japan, to keeping inflation in services at high levels. Price pressure indices and producer prices are recovering moderately.
In the United States, economic policy uncertainty, based on media coverage, fell slightly in May, after increasing for two months in a row. This drop can probably be attributed, at least in part, to the encouraging fall in inflation in April and May, which is feeding expectations of interest rate cuts by the Fed.
Because it relies on fossil energies, 80% of the energy mix around the world, economic activity produces greenhouse gas, mainly carbon dioxide which contributes to global warming. This phenomenon, theorized two hundred years ago by French mathematician Joseph Fourier, and which the IPCC, the International Panel of experts on Climate Change, has been describing for thirty years to alert us is no longer contested.
As expected, the ECB has lowered its policy rate, despite the upward revision of the staff inflation forecast. In the US, the very strong labour market report for the month of May will probably make the Fed even more cautious in deciding on a first rate cut. Until we have resynchronisation -with both central banks being in rate cutting mode-, there should be more desynchronisation, reflecting a difference in the disinflation cycle in the US versus the Eurozone. There is concern that this might weaken the euro versus the dollar and possibly weigh on the ECB’s policy autonomy. Such fears are unwarranted
According to the most recent S&P Global survey, the World Composite PMI index significantly improved in May (+1.3 points), rising to 53.7, its highest level since May 2023. After the more modest increase in April (+0.1 point), this is a further encouraging sign for Q2 world activity, especially as this improvement is being driven by both the services and manufacturing sectors, with their respective PMI standing at their highest level since May 2023 and July 2022, at 54.1 and 50.9.
GDP growth, inflation, interest and exchange rates.
After easing, tensions in global maritime trade are resurfacing. According to the Freigthos index, global freight rebounded by 40% between the last week of April and the last week of May (chart 5). Freight has returned to the levels seen in February, when the conflict in the Red Sea had intensified. The rise in transport costs varies markedly between shipping routes, and is more pronounced for trade from the west coast of the United States to the east coast of China.
Economic data for April and May augur a relatively good Q2 in terms of growth, despite some continuing dichotomies.
Climate has always varied. As the Earth has no fixed orbit or inclination (it is influenced by the other planets in the solar system, such as Jupiter and Saturn), its surface temperature evolves with the quantities of radiative energy that reach it, determining, for example, the great glaciation cycles of the Quaternary. Like a time-machine, paleoclimatology (the analysis of ocean or glacial cores) traces past climate fluctuations with increasing precision, from the appearance of homo sapiens around 300,000 years ago, and well beyond.
It is highly likely that this year the ECB will cut its policy rate before the Fed does. This sequencing has become a topic of debate amongst central bank watchers, as if the ECB would be jumping the queue and refuse to wait in line until the Fed has eased policy. Does it matter if the ECB cuts rates before the Fed? The answer is no.
In the first quarter, economic growth in Central European countries improved as expected (Poland: +0.4% q/q in Q1 2024; Hungary: +0.8% q/q; Czech Republic: +0.5% q/q; Slovakia: +0.7% q/q; Romania: +0.5%). Although details of the accounts are not yet available, there is strong evidence that growth was primarily driven by consumption, as reflected by the boost in retail sales.
In the US, in an environment of aggressive monetary tightening, the resilience of companies has contributed to the resilience of the economy in general through various channels -staffing levels, investments, growth of profits and dividends, etc.-. Companies’ resilience has been underpinned by different financial factors: company profitability, cash levels accumulated during the Covid-19 pandemic, the ease of capital markets-based funding, low long-term rates that had been locked in during the pandemic. Finally, the growing role of intangible investments also plays a role because they are less sensitive to interest rates, thereby weakening monetary transmission.
In the United States, economic policy uncertainty based on media coverage increased in April for the second time in a row. There appears to be a correlation between this result and the spillover from the disappointing inflation data in the first quarter, which caused various players (central banks and markets) to postpone and drastically reduce their rate cut expectations for the year. In addition, according to the Chair of the Fed, inflation remains high and the restrictive policy will need to be kept in place even longer in order to keep progressing towards the 2% target.
Some common inflation trajectories emerge between the different economic blocs: disinflation of food and manufactured goods continues, while energy deflation has largely abated, except in the United Kingdom. Apart from Japan, price pressure indicators (supply side) have rebounded in recent months (page 19) while wage growth is currently higher than inflation in all the regions (page 27).In the United States, CPI inflation fell slightly, from 3.5% in year-on-year terms in March to 3.4% in April, while the core rate fell from 3.8% to 3.6%. Deflation in used vehicles (from -2.2% in March to -6.9%) contributed mainly to this decline. On the other hand, services inflation remained stable at 5.3%
In April, the S&P Global composite PMI index for worldwide business activity rose again slightly (+0.1 points) reaching its highest level since July 2023 (52.4). This rise results from the increase in services, with the associated PMI hitting its highest level since July 2023 (52.7, compared to 52.4 in March). Conversely, the manufacturing index fell slightly in April (50.3, -0.3pp), following three months of growth. However, it is still in expansionary territory.
GDP growth, inflation, exchange and interest rates
The message following the FOMC meeting of 30 April-1May, was unambiguous. It will take longer than expected to reach the point of confidence on the inflation outlook that would warrant a cut in the federal funds rate. Consequently, we are back in a ‘high for long’ environment for the federal funds rate, like in the fall of last year. At the current juncture the key question is whether the economy can remain as resilient if the federal funds rate stays at its current level until the latter part of the year, or even longer, or whether the risk of a hard landing is increasing
The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. From a strictly economic point of view, dollarisation is effective in tackling hyperinflation. However, to be sustainable in the long term, it imposes severe constraints on fiscal policy and the nature of foreign investment. Conversely, the abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice, even in the short term.
