In June, the main OECD economies experienced divergent trends, raising the question of the tipping point between a situation where growth continues – with inflationary pressures requiring further monetary tightening – and another where it slows down further and where the fall in inflation means that an end to rate hikes can be envisaged.
Business climate and recent inflation figures suggest that this tipping point is approaching in the US, where the Federal Reserve has paused interest rate hikes for the first time. The eurozone is getting close to this with a comparable fall in inflation, but the ECB is also facing an economic situation complicated by the divergence between countries, including Germany (already in a technical recession at the beginning of the year) and Italy, with growth remaining higher.
Everywhere, uncertainty about this tipping point is heightened by the buoyant labour market, which could further slow the fall in underlying inflation. Two economies stand out from the rest: the UK and Japan. The tipping point does not appear to be close in the UK, given persistent inflation and heightened fears of a wage-price spiral, which should lead to more rate hikes. In contrast, Japan has not tightened its monetary policy, which is not only supporting growth but also underlying inflation at a level not seen for over 40 years.
