Soft landing still in sight

Economic growth is slowing mostly in line with our expectations, but we think recession risks remain low. We make only marginal adjustments to our forecast profile and see 2024 GDP growth at 2.5% (from 2.3%) and 2025 at 1.5% (unchanged).
Potential output continues to grow at a brisk pace, supported by increases in labour supply, solid productivity growth and fiscal policy driven demand for manufacturing investments.
Risks to the outlook remain somewhat skewed to the downside. The current low savings rate indicates that consumers’ buffers remain weak. Slow monetary policy pass-through and high share of fixed rate mortgages suggest that rate cuts will not provide a rapid boost to economic growth, if the outlook deteriorates faster than we expect.
Inflation forecasts have been adjusted modestly lower. We see headline inflation averaging 2.9% in 2024 (from 3.2%) and 2.2% in 2025 (from 2.5%) and core inflation at 3.3% in 2024 (from 3.4%) and 2.4% in 2025 (from 2.6%). We now expect the Fed to cut interest rates by 25bp at every meeting from September until June 2025 (prev. only every other meeting from September), followed by two final cuts in H2 2025 (terminal rate 3.00-3.25%; prev. 3.75-4.00%).

Economic growth slowed down during the first half of 2024, partly due to negative contribution from net exports but also slowing private consumption and investment growth. Labour market conditions have also cooled faster than expected, but mostly as a result of rapidly growing labour force, as number of layoffs is still low. Overall, we think the US economy remains on a solid footing and the soft landing is still in sight.

In contrast to some European economies, US consumers’ savings rates have remained low throughout the post-pandemic period. Solid labour markets and relatively upbeat consumer sentiment have supported continuous growth in real spending volumes. However, if wage growth cools and concerns around rising unemployment start to set in, consumers’ savings buffers remain weak. Latest retail sales and sentiment indicators suggest that for now, nominal spending growth has remained brisk and optimism about future outlook has risen, but also that consumers are getting increasingly worried about their current economic situation.

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