ECB challenges from US exceptionalism

Published on 03/05/2024

US exceptionalism has topped global headlines in recent months and consensus now predicts real GDP growth of 2.4% in 2024, well above trend and near double the forecast late last year. The gap to the other major economies is striking, with most of them expected to see growth below trend. In the case of the euro area, for example, consensus sees growth of just 0.5%.

With the US disinflation process, moreover, hitting a rough patch in early 2024, market pricing on the future path of the Fed’s key rate has also seen a remarkable shift. While markets late last year where expected the Fed to cut rates by at least 125bp in 2024, market pricing at the end of April is looking for just one 25bp rate cut. This poses challenges for central banks elsewhere, and not least the ECB.

As the US economy often leads the global cycle, a first question arises as to the strength and robustness of the US expansion. The first release of 1Q24 GDP at just 1.6% QoQ annualised and softer leading indicators certainly casts some doubts. A further point worth note is that the dynamics of the US economy stems from just a few sectors and has been underpinned by past fiscal policy easing that is now turning more restrictive. Looking ahead to 2025, there is greater uncertainty, moreover, on the US outlook with the upcoming elections. The danger is to see more protectionist trade policies leading to a lose-lose situation for both the US and its key trading partners.

With the euro area facing several years of tighter fiscal policy and a still restrictive monetary policy, hopes to see a significant lift from a stronger US economy should be put into perspective and not least with other key export markets still facing a lacklustre growth outlook.

A second concern is that the US may now be exporting inflationary pressures through a stronger dollar. With the EUR/USD at 1.07 at the end of April, this will indeed mechanically push up inflation for key commodity imports priced in US dollars, and not least oil all else being equal. The broader impact hereof will, however, all else being equal, be disinflationary as consumers are forced to spend more on energy leaving less to spend on other goods and services. A further point worth note is that with other major currencies also trading weaker against the US dollar, the trade weighted euro has seen less depreciation thus dampening the risk of more broad-based imported inflation.

The currency channel, moreover, is not the only spillover form US monetary policy. Given the dominance of the US financial system, we tend to see the higher US interest rates often spill over, and least in part, to interest rates globally. This is indeed what we have observed in recent months, and this has the impact of tightening financial conditions elsewhere. Bottom line, the present US exceptionalism is an argument for the ECB to consider more, not less, rate cuts.

  • Michala Marcussen

    Chief Economist and Head of Economic and Sector Research for the Group