Key views Global Monthly 29 August 2024

Macro

Eurozone – Growth remained solid in Q2, with strong services growth offsetting weakness in manufacturing, and southern Europe outperformance offsetting weakness in Germany. We expect growth to continue at a 0.3% q/q pace in Q3, boosted by summer events, with payback likely in Q4. The manufacturing recovery continues to disappoint, in stark contrast to services. Growth is expected to remain below the trend rate over 2024. Services inflation remains on the high side, but leading indicators for wage growth suggests the disinflation process is broadly on track.

The Netherlands – The Dutch economy unexpectedly grew by 1% qoq in Q2, primarily driven by increasing exports and, to a lesser extent, government consumption. The Q1 contraction was revised up to –0.3% q/q. We expect continued but below-trend growth for 2024 as a whole, given the environment of weak demand, restrictive interest rates, and domestic constraints. All in all, we expect growth to average 0.6% in 2024 and 1.3% in 2025. Services inflation will be the key driver of inflation in the coming months. We have revised our inflation forecasts (HICP) to 3.1% in 2024, and 2.8% in 2025.

UK – Labour’s election win has limited near-term implications for growth and inflation, but tax rises are likely to keep a lid on the recovery. This is due to the lack of fiscal space and the limited appetite to re-open Brexit policy. The economy is recovering relatively strongly for now, but growth is likely to cool in the coming quarters. Disinflation is continuing, but services inflation is stubbornly high, with wage growth still well above levels consistent with 2% inflation. The return to 2% inflation will take longer than elsewhere, due to historically higher inflation expectations in the UK.

US – Growth rebounded strongly in Q2 2024 on the back of solid demand and investment. Increased policy uncertainty, and pockets of financial stress among households are likely to contribute to a slowdown in growth in the second half of the year, before returning to trend next year. The disinflationary process has resumed in recent months, and we expect it to continue in the remainder of the year, with the 2% y/y target in sight in the course of 2025.

China – On the back of Q2-24 GDP and recent monthly data, we cut our 2024 growth forecast to 4.9% (from 5.1%), while leaving our 2025 forecast unchanged at 4.5% . Exports are one of the remaining growth drivers, but export growth slowed in July and external risks are rising, as China's oversupply contributes to a broadening of trade spats. This risk would rise under a potential Trump 2.0 (higher, broader tariffs), although trade diversion mitigates the impact over time. On the policy front, we expect further piecemeal monetary easing, but more targeted (fiscal) measures are needed to move the needle.

Central Banks & Markets

ECB – We expect the ECB to resume rate cuts at the September meeting, following the July pause. Disinflation is broadly continuing, with negotiated wage growth falling sharply in Q2, while downside risks to growth have intensified. Although negotiated wages are expected to see a temporary rebound later this year, this is fully expected by the ECB and therefore unlikely to derail further cuts. Following the September cut we expect the ECB to cut at each meeting until the deposit rate reaches 1.5% in Q3 25.

Fed – We expect the easing cycle to start in September with an initial 25bps cut, followed by consecutive rate cuts at each meeting. The Fed will remain attentive to upside risks to inflation and downside risks to, in particular, the labor market. Monetary policy is expected to remain restrictive throughout 2024 and into 2025. We expect the upper bound of the fed funds rate to reach 4.75% by end-2024, and to reach the neutral 3.00% level by November 2025.

Bank of England – The MPC kicked off its rate cutting cycle in August, lowering Bank Rate by 25bp to 5.25%. This was in line with our expectations. Incoming data suggests stubbornly high underlying inflationary pressure, and sticky wage growth – which poses upside risks to medium-term inflation – is likely to keep rate cuts at a more gradual pace than for the ECB and Fed, even into next year. We expect only one additional rate 25bp cut in 2024, and four rate cuts (total 100bp) in 2025, with Bank Rate falling to 3.5% by end-2025.

Bond yields – The French election led to high volatility and higher spreads in June and July, but August was relatively calm. Spreads have tightened somewhat but we see little room for further spread tightening due to the uncertain political situation in France. We expect France to underperform Spain and Italy. Outright yields also stabilized in August after the significant decline of yields in July. The market's repricing of the terminal rate for the EZ brought it closer to our forecast while that of the US is now lower than ours.

FX – On 7 August our US economist changed his Fed view. Our view is somewhat less dovish than the market. Our view for the ECB has not changed and we hold the same view as the market. As a result of our change in Fed view, our view compared to market consensus and our expectations for the dollar on the US elections we have updated our EUR/USD forecasts. Our new yearend forecasts for EUR/USD are 1.10 (was 1.07) end 2024 and to 1.15 (was 1.10) end 2025.