Key views Global Monthly October 2024
The US is cooling, China is still weighed by the weak property sector, and the eurozone recovery is in danger of going into reverse. Our base case remains for the global economy to converge to more trend-like growth as we move into 2025, but downside risks – particularly in the eurozone – have increased. A sharp rebound is unlikely while rates remain restrictive. More aggressive Fed & ECB rate cuts, and China stimulus measures may help, but downside risks remain from possible new trade tariffs should Trump be re-elected in November. Inflation remains well behaved, with falling oil prices helping, though wage growth and services inflation remains too high in the eurozone. The ECB and Fed have started lowering interest rates, and we expect both central banks to continue cutting rates until a more neutral level of rates is reached later next year. Still, lags in pass-through mean that it will take time for rate cuts to meaningfully lift growth.
Macro
Eurozone – Downside risks to growth have intensified, with October PMIs still pointing to a subdued growth outlook. We have lowered our growth forecast for Q3 to 0.2% q/q, and our annual forecast for 2025 to 1.1% from 1.5% previously. The manufacturing recovery continues to disappoint, and the services recovery is also now losing momentum. Growth is expected to remain below trend rate for the remainder of 2024, before picking up in 2025. Services inflation and wage growth remains on the high side, but this looks unsustainable given the weak growth environment.
The Netherlands – Following the unexpectedly strong 1% q/q growth in Q2, we expect continued but below-trend growth for the second half of 2024, given the environment of weak demand, restrictive interest rates, and domestic constraints. Growth will average 0.6% in 2024 and 1.3% in 2025. Employment is marginally declining and unemployment increasing, but given strong labour demand and limited available labour supply, the unemployment rate is expected to remain low. Services inflation is the key driver of inflation in the coming months, given still elevated wage growth.
UK – The government looks set to announce a combination of tax rises to fund regular spending commitments, and additional debt to fund longer-term growth enhancing public investment. The full details will be announced on 30 October. The economy is recovering relatively solidly for now, but growth is likely to cool in the coming quarters as tax rises bite. 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 and consumption remain strong, while the labor market cools. Growth in labour demand is slowing, and is outpaced by increases in labor supply, but demand has not yet contracted. Increased policy uncertainty, and pockets of financial stress among households are likely to contribute to a slowdown in growth into 2025. Despite recent relatively hot CPI readings the disinflationary process continues with the 2% y/y target in sight in the course of 2025.
China – The economy remains stuck in low gear, although September data on balance suggest the economy ended Q3 on a slightly more positive note. Recently, Beijing finally started shifting the pendulum back from longer-term industrial policy towards short-term demand management . Following the PBoC’s package end September, fiscal stimulus plans are being unfolded, but scale and timing are yet to be confirmed . All this shifts the balance of risks to growth forecasts in a positive way. Still, this could change again after the US elections, as external risks would rise materially under a 2nd Trump presidency..
Central Banks & Markets
ECB – We expect the ECB to continue cutting rates at the December meeting, following the October cut. Disinflation is broadly continuing, while downside risks to growth have intensified. Negotiated wage growth is expected to see a temporary rebound later this year, but this is expected by the ECB and therefore unlikely to derail further cuts. We expect the ECB to cut at each meeting until the deposit rate reaches 1.5% in Q3 25. Officials have recently opened the door to a potential 50bp cut, but we think a material deterioration in growth and/or inflation would be needed for this to materialise.
Fed – The Fed started its easing cycle with an initial 50bps cut, with the upper bound currently standing at 5.00%. We expect consecutive 25bps rate cuts at each upcoming meeting, with the balance of risks towards a near-term acceleration, and a medium-term slowing. The Fed will remain attentive to upside risks to inflation and downside risks to, in particular, the labour 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 4.50% by end-2024, and to reach the neutral 3.00% level by October 2025.
Bank of England – The MPC paused rates at 5.25% in September, 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 this year – at the November meeting – and four rate cuts (total 100bp) in 2025, with Bank Rate falling to 3.5% by end-2025.
Bond yields – The Fed’s 50bp cut in September was a well-received surprise in the market. Markets are currently pricing in around 200bp of cuts in total which aligns with our view. Consequently, we continue to anticipate US Treasury yields to move lower and the curve to steepen. A similar scenario is unfolding for European rates. Following weaker PMI data last week, the market has started to price in additional cuts. Therefore, it appears that rates are set to follow a downward trajectory in the foreseeable future.
FX – Since the start of October the US dollar has rallied by almost 4% across the board. Nominal and real yield spreads between the US and Germany have moved in favour of the US dollar. This reflects that markets have priced in less rate cuts for the Fed this year following strong US data, but more for the ECB. As we are approaching the US elections, developments in the polls are having more impact on the US dollar. Expectations that former President Trump may win the upcoming elections has supported the dollar.
