2023-08-08 00:00:42
The question is, with Europe and China both struggling, can the US economy still pull through unscathed?
The Federal Reserve and the ECB both raised interest rates in July, but the likelihood that we now have reached the peak has increased considerably.
©Kristof Vadino
In the United States, the rhetoric that accompanied the decision signaled a more moderate attitude on the part of the Fed going forward. Recent inflation figures, which show a further decline in US inflationconfirm this idea.
At the same time, the ECB, although still facing a less rosy inflation picture, is facing a sharp slowdown in economic growth. The German economy is at a standstill, while Italy’s growth in the second quarter was negative. Producer confidence data suggests an even darker future. The decline in growth should have an impact on consumer prices, and therefore lower inflation.
But rates that have reached their maximum do not necessarily imply lower rates in the near future. Nonetheless, US bond markets are pricing in a series of rate cuts in 2024. As for the Eurozone, the likelihood of another hike in September has almost disappeared and rate cuts are expected from the second half of 2024. However, for central banks to cut rates, the process of deflation would have to push current inflation rates below their long-term target, or there would have to be a recession that would ultimately be deflationary. . Does this sound realistic?
China looks a lot like Japan at the end of the 80s with falling prices, an aging population and above all a real estate market in crisis.
Strong differences in Europe
In the United States, the economy continues to perform like a charm. Despite a declining manufacturing sector, strong government spending and buoyant consumers are keeping the economy afloat. Consumption remains quite strong because, on the one hand, US consumers are still massively spending their excess savings from public funds received during the covid period and, on the other hand, tight job market pushes up wages. It is estimated that these excess savings will disappear entirely by early 2024 and the labor market will become less tight in the short term, ending the period of runaway wage growth.
Europe presents a very different picture, with stark differences between countries. Economies that are more consumer-oriented and therefore service-oriented outperform those where heavy industry and exports are more important. Compare Spain to Germany. The former grew by 0.4% during the second quarter, while the latter remained stable. Europe is clearly at risk of falling into recession.
Meanwhile, the world’s second largest economy, i.e. China, failed to materialize hopes that the post-covid period would bring it strong growth. China looks a lot like late 80s Japan with falling prices, an aging population and above all a real estate market in crisis. The authorities in Beijing are trying to revive the economy, but without much success so far. Hence the question of whether, with Europe and China both struggling, the US economy can still come out unscathed?
The stock markets seem to believe so. US equity investors bet on the scenario called “Goldilocks”which implies a period of decent growth combined with low or falling interest rates due to subdued inflation. This scenario is frankly positive for the equity markets, as it provides a favorable backdrop for earnings growth as funding costs decline. And all sectors would benefit…
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