Economies standing at the crossroads

We are still in a phase of transition in the big economies. We continue to expect that we will see slightly weaker labour markets, inflation moving towards the 2% target and interest rates being slowly cut in both the US and the euro area, combined with slightly higher economic growth in Europe but somewhat lower growth in the US. None of these things have clearly materialised yet, but data releases and central bank comments during March continue to point in that direction.

US inflation was higher than the target again in February, with the core PCE prices (the Fed’s preferred measure) increasing 0.3% m/m following 0.5% m/m in January. The Fed still expects inflation to decline, and the indication from the March meeting was that we should still expect three rate cuts of 25bp during 2024, and that the Fed Funds rate should over time move towards 2.6% from the current up to 5.5%. The US labour market continues to show robust job growth but not as robust as previously thought, as the very high January number was revised down. The job growth is supported by a growing work force and indicators still point to a slightly easing pressure in terms of job vacancies.

The European Central Bank is clearly signalling an intention to cut rates in June. The bank seems confident that inflation is moving in the right direction, and that impression was largely supported by the preliminary March figures. However, it is still concerned that wage growth could be a hindrance for sufficiently low inflation, and the euro area wage data for Q1 will not be available before the ECB rate decision on April 11. Hence the comment from ECB President Lagarde that “we will know a little more in April but we will know a lot more in June.”

One European central bank, namely the Swiss, did cut its policy in March, from 1.75% to 1.5%. Swiss inflation is leading the rest of Europe lower, reaching 1.0% y/y in March on both headline and core measures. On the other hand, Japan delivered its long-expected rate hike, ending the last negative-interest rate policy in the world. Japanese inflation has been slower to increase than in many other countries, but finally seems to be firming around the 2% level. Importantly, inflation is now supported by high wage growth of above 5% among large companies which gives confidence that there will not be a rapid return to stagnating or declining prices, as has often been the case in previous inflation episodes in Japan.

China published a GDP growth target of 5.2% for 2024. That is the same growth rate as last year but in reality quite ambitious as that growth rate came on the background of a very weak 2022 with extensive COVID lockdowns. Hence, we expect to see significant policy stimulus to Chinese growth this year. It seems that the decline in housing sales has stopped but at a low level, and it remains unclear what the effect on the overall economy from housing will be. March data indicate that there has been a decent recovery in manufacturing also supported by indicators from other countries, not least the US. Higher commodity prices, including for oil, also support the impression that manufacturing is doing better. However, some leading indicators from elsewhere in Asia suggest that the recovery could be shallow and short-lived.

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