Economic review
Global economy stable but risks rising
Overall, the development of the global economy is fairly stable. Growth of around 3% projected to be realised in 2024 is similar to the growth rate in 2023 and the rate expected in 2025. There are however underlying regional differences. Risks have also increased, slightly worsening the outlook. Not because of the persistently above-target inflation rate, but because the threat of a recession is increasing. Various indicators are used to measure producer and consumer confidence worldwide, such as purchasing managers indices. These are often the first indicators of changes in supply and demand in manufacturing. These indicators are showing that industry is going through a difficult period, particularly in Europe, and within Europe, particularly in Germany. But even in the US and China, producer confidence in industry has been pointing to under-average growth for some time now. In the services sector, a strong recovery after the coronavirus period has continued for a long time, but here too, business confidence is weakening, once again mainly in Europe.
Inflation moves to the background
The wave of inflation in 2021-2023 seems to be subsiding. In the US, year-on-year inflation has now fallen to 2.5%, and to 1.8% in the eurozone. These rates are quite close to the “around 2%” inflation targets set by the Fed (US central bank) and the ECB (European central bank). One caveat regarding these figures is that the recent decline is mainly due to lower (or less rapidly rising) food and energy prices. These are traditionally highly volatile, and can therefore rise quickly, due for example to geopolitical tensions or crop failures. Inflation is also currently driven to a large extent by higher prices in services, linked to labour shortages and wage increases. This is the main reason why the decline in what is known as “core inflation”, which excludes volatile food and energy prices, is much less marked. Year-on-year core inflation in the US is still at 3.2% and 2.7% in Europe.
Central banks change tack with interest rate cuts
The gradual decline in inflation has been one of the reasons for many central banks to reduce their base rates. It is striking that almost all Western central banks, including the ECB, the US Fed, the Bank of England and the Bank of Canada, started to do this during the past quarter. Such a level of synchronicity is not that common. Before the change, the ECB was ahead of the curve with a rate cut in June, which we wrote about in our previous investment update. This brought the European base rate to 3.5%. The Fed did not follow suit until September, but with a relatively large cut of 50 basis points. As a result, the US base rate now stands at 5%, the same as in the UK.