Horizon Q3│2024 - Economics

US: Economy slowly cooling down

Although the US economy appears to be cooling somewhat after a very strong period, there are no signs of a slump. In the first three months of the year, GDP growth slowed markedly to 0.3% compared with the previous quarter, with large swings in the highly volatile components of net exports and inventories contributing significantly. Although domestic demand weakened somewhat, the 0.5% quarter-on-quarter growth shows that the underlying momentum of the US economy remained quite robust at the start of the year.

The fact that the economy is only slowly losing momentum despite the Fed's restrictive monetary policy is mainly due to the expansionary fiscal policy. On the one hand, the government continues to spend a lot of money directly, while on the other it is using tax incentives to promote green (and some other) investments. Fiscal policy is likely to remain expansionary in the 2024 election year, but the stimulus to the economy is likely to be somewhat less than last year.

With growth slowing only slowly and inflation recently trending sideways at just above 3%, the Fed has no reason to cut rates at present. We therefore do not expect the Fed to initiate a turnaround in interest rates until December, i.e. after the elections. We expect a total of four rate hikes of 25 basis points each by autumn 2025, bringing the federal funds rate to a range of 4.25% to 4.50%.

The Fed will therefore remain on the brakes for a few more months in order to further dampen demand and thus price pressures. Even though monetary policy appears to be working more slowly than expected, high interest rates will not pass by the real economy unnoticed. Second quarter data suggest that the US economy has entered a period of normalisation after a period of overheating. For 2024 as a whole, we expect GDP growth to remain solid at 2.4%, followed by 1.8% in 2025.

The sentiment in the eurozone is gradually brightening

After almost stagnating in 2023, the eurozone economy is slowly regaining momentum. First-quarter GDP growth was surprisingly positive at 0.3% quarter-on-quarter, although the mild winter helped. The latest purchasing managers' surveys give rise to hopes that the recovery could stabilise over the summer. Another contributing factor is that the inventory correction in the euro area (excluding Germany), in which the manufacturing sector produced less than it sold, appears to have been largely completed.

On the demand side, consumer purchasing power is picking up thanks to rising wages and falling inflation. European consumers are still somewhat reluctant to spend. However, we expect this to change in the summer and that rising domestic demand, coupled with a recovery in the global economy, will provide a tailwind for the European economy. A slightly expansionary fiscal policy in southern Europe will also have a supportive effect, so that after a slightly weaker second quarter we expect GDP to grow by around 0.4% quarter-on-quarter from the summer onwards. For 2024, this implies economic growth of 0.8% for the year as a whole, followed by 1.6% next year.

The new elections in France pose a risk. With President Macron likely to be even further from a governing majority than before, further progress on reforms is unlikely. France also needs to reduce its excessive budget deficits. Judging by previous statements by political rivals, stable fiscal management would be difficult. However, there is a good chance that the parties outside the centre will moderate their stance if they actually have to assume government responsibility.

Upswing in Germany is still a long time coming

The German economy grew by 0.2% in the first quarter compared with the previous quarter. The mild winter weather and the associated increase in construction investment had a supportive effect. Without this special effect, growth would have been close to zero. The recovery is still a long way off, especially in the manufacturing sector. This is also due to the fact that the inventory correction in Germany has not yet progressed as far as in the rest of the euro area. This is partly because German industry is focused on highly cyclical goods and global manufacturing is only slowly gaining momentum. However, we expect a further recovery here as the year progresses. Another factor in Germany is the rising purchasing power of consumers. Real wages were 3.8% higher in Q1 than in the previous quarter, the highest increase since the start of the time series in 2008. Although we therefore expect the German economy to pick up from the summer, the negative statistical overhang from last year and the still weak first half of the year lead to a GDP growth forecast of only 0.2% for the year as a whole. For 2025, however, we expect quite solid growth of 1.4%.

As expected, the ECB cut its key rates by 25bp on 6 June. In the subsequent press conference, Lagarde did not provide any concrete information on the next steps. However, the moderate upward revisions to GDP growth for 2024 and to headline and core inflation for 2024 and 2025, as well as President Lagarde's comments, suggest that the ECB is in no hurry to cut key rates. In our view, the ECB will only cut the deposit rate once more this year – by 25bp in September. Inflation is likely to pick up towards the end of the year. Although this will be due to base effects, we expect the ECB to pause on its rate cuts. We expect two cuts of 25bp each in the first half of next year, before the ECB keeps the deposit rate constant at 3%.