Outlook on the economy
Focus on the labour market
Developments in the labour market would seem to be a determining factor for the economic outlook. In the past, unemployment was often seen as a so-called ‘lagging factor’. This is because unemployment often didn't increase until after a recession had ended. But this has changed, as consumer spending has become increasingly important for economic growth. A serious weakening in the labour market could also be the start of a recession caused by a drop in consumer spending. So far, the signals are mixed. In the US, unemployment has been rising steadily for a year, but remains historically low at 4.2%. The same is true in the eurozone, where unemployment in August reached its lowest level since records began in 1999, at 6.4%. However, the fact that developments in the labour market are attracting increased attention from economists and investors became clear in early August, when disappointing US employment figures led to sharp falls in stock markets and a flight to government bonds.
Everyone at the ballot box
Besides developments in the labour market, the results of the various upcoming elections will continue to determine the economic outlook. More than 40% of the world’s population will go to the polls this year, with the US presidential election being the most significant in the short term. But political instability in Germany and France could also affect future economic policy. One common denominator is that economies were boosted by very supportive government fiscal policies in the years after the coronavirus pandemic. Scope for this is becoming increasingly limited, given the sharp rise in government debt and higher interest rates.
Geopolitical tensions remain
We have not yet discussed geopolitical tensions. The ongoing war in Ukraine and the battle between Israel and Hamas in Gaza (and now Hezbollah in Lebanon) remain a major threat to the global economy. Most notably, past conflict situations, especially in the Middle East, have frequently affected the global economy due to a higher oil price. That does not seem to be the case at the moment. The price of oil has recently fallen to less than USD 70 per barrel and has remained on average well below USD 80 per barrel this year.
High degree of uncertainty
More interest rate cuts are on the horizon for Europe and the US in the coming period. The interest rate market is now counting on base rates in Europe and the US falling below 2% and around 3% respective in one year’s time. Given the decline in inflation and the deteriorating economic outlook, we do not see this as unrealistic. Volatility looks to have returned to haunt the financial markets, as we saw in August when stock prices fell sharply on the back of disappointing employment figures. Lower bond yields also point to more uncertainty among investors, with government bonds acting as a safe haven. But stock markets could still recover quickly as recession fears recede and interest rates fall further. Partly in view of the recent escalation of hostilities in the Middle East and the uncertain outcome of the US elections, we do not see any reason to take strong tactical positions between asset classes and regions at this time.