Scenario Eco - Central banks at a crossroads

Video editorial - Central banks at a crossroads

Michala Marcussen - Group Chief Economist

Why has the US economy shown such resilience?
The U.S. economy has surprised with a better-than-expected performance and Consensus now sees 2024 GDP growth at just over 2%, compared to just 0.6% last summer. Compared to the other major economies, this makes the US something of an exception. Over that same period, we have seen the euro area Consensus revised down from 1% to 0.5% today, while the Consensus for China has remained broadly unchanged at 4.6%, which is somewhat below the official growth target of 5%. The surprising strength of the US economy stems in part from a virtuous cycle of disinflation that has given consumers the confidence to spend and in term supporting job creation and thus adding more confidence to the consumers. This phenomenon has also been at work in Europe, albeit less pronounced. A further positive twist has come from strong corporate profits, and this despite aggressive monetary policy tightening. Looking ahead, we nonetheless see several factors that point to softer growth for the US. Top of the list excess pandemic savings, which were likely even more substantial than initially forecast, are now fading and consumers savings rates are low. Much of the recent dynamic in the labor market, moreover, has come from just a few sectors and most recently concentrated on health care, which is still being catching up from the pandemic. While health car growth is set to be sustained by an ageing population and the prevalence of chronic health conditions, the current pace of hiring is well in excess of structural trends and set to slow. The further question for the US is what happens next on the fiscal side? Burgeoning public debt argues for some austerity, but here the uncertainty is greater, not least with the presidential election upcoming in November.

When will the Central Bank cut rates?
The euro area economy posted zero growth at the end of 2023, and prospects for 2024 remain weak. The ECB is nonetheless still concerned that strong wage growth could yet trigger a new uptick in inflation and is keen to see evidence of wages slowing before cutting rates. Markets are now fully priced for a June rate cut, but some Governing Council members are keeping the door open to April. An important difference between the US and the euro area is the larger fiscal consolidation taking place in Europe, and this is acting as a headwind to growth near term, but also securing Sounder foundations for the economy longer term. The key issue for Europe today is to catalyze more private investment, to support innovation and job creation. And this requires more private financing, not just in terms of the volume of financing supplied, but also its risk willingness and its smooth geographical allocation across the region. The recent push to revive Capital Markets Union is welcome, but it is important to see this project delivered quickly and with some public support for key areas such as the Green transition, and this not least in the geopolitically more fragmented world, shaped by growing regional rivalry.