Key views Global Monthly 26 September 2023

Macro

Eurozone – 2023Q2 GDP was revised lower to 0.1% qoq, down from a first estimate of 0.3%. Thus, GDP was roughly stagnant during 2022Q4-2023Q2. We expect the weakness in the EZ economy to continue for a while, with GDP probably contracting moderately or being close to stagnant during H2 2023-H1 2024. Recent economic data and surveys have supported this view. Inflation is expected to continue to decline this year and the next. Nevertheless, we have revised our forecasts for headline inflation higher, mainly due to higher energy and food inflation. Core inflation should fall to around 2% by mid-2024.

The Netherlands – Dutch GDP contracted in the first two quarters of 2023 which means the Dutch economy is officially in a technical recession. As growth will resume in Q4, over 2023 Dutch GDP is expected to grow by 0.5%. We expect growth to remain sluggish in the coming quarters on the back of high rates and lower external demand. The Dutch economy remains resilient; the labour market is still tight and bankruptcies – although increasing in recent months – are still below 2019 levels. We expect inflation (HICP) to average 4.8% in 2023 and 3.5% in 2024.

UK – Disinflation has continued, providing some relief to the Bank of England, but upside inflation risks remain significant given that wage growth has continued to accelerate. Demand has also shown signs of rebounding, with GDP growth surprising to the upside in Q2. At the same time, unemployment has started rising, and we expect a softening in demand to dampen wage growth over time. The economy is expected to broadly stagnate over the coming year or so, weighed by tight monetary policy.

US – Growth remains resilient for now, but headwinds for the economy are building, including from a potential government shutdown, the restart of student loan repayments, and slowing jobs growth. We expect a sharp slowdown in Q4, with the risk of a contraction. While higher oil prices are boosting headline inflation, wage growth has peaked, and we judge that a slowdown and a period of below trend growth will be sufficient to return inflation back to target. Inflation falling sustainably back to target hinges on a rise in unemployment over the coming year.

China – After the reopening rebound in Q1, the recovery lost steam, as headwinds from property and the global slowdown intensified. Scarring from previous stringent policies also form drags. Renewed signs of distress in property over the summer impacted confidence and sentiment as well. Beijing has continued with piecemeal monetary easing and targeted support, particularly for the property sector. That seems to have started filtering through, as the August data are pointing to stabilisation. We assume qoq growth to pick up again in 2H-2023.

Central Banks & Markets

ECB – The ECB raised the deposit rate by 25bp in September (to 4.0%), which was against our expectation of no change. The ECB will remain data dependent going forward, but it did hint that it may have done enough and that the hike cycle may be over. The ECB cut its forecasts for GDP growth in 2023 and 2024 markedly, but still seems optimistic on growth. We also expect inflation to come in below ECB expectations. Our base line is that the peak in the deposit rate has now been reached. We still expect a rate cut cycle to begin in March 2024. We now see the deposit rate at 2.25% at the end of 2024 (was 2.0%).

Fed – The FOMC kept rates on hold in September, but the Committee made clear that it is open to further tightening. We think July was the last hike of the cycle, and that benign core inflation readings will give the FOMC the confidence to keep policy on hold over the coming months. We continue to expect the Fed to start cutting rates from next March. Falling inflation will push real rates higher, and Fed officials have signalled that this would be inconsistent with the FOMC’s goals. Even with rate cuts starting next year, monetary policy is expected to remain restrictive throughout 2024 and even into 2025.

Bank of England – The MPC kept policy on hold in September, in a knife-edge vote. We now think Bank Rate has peaked at 5.25%. However, we would not rule out one last rate hike if inflation springs another upside surprise. The BoE is in full data-dependent mode, and UK macro data has been erratic over the past few months. We do not expect rate cuts until next May, and there is a risk that rate cuts get delayed even further, if inflation proves to be more persistent.

Bond yields – Main theme priced in by the market is for rates to stay ‘’higher-for-longer’’. Both US and Bund yields have reached a new peak as CB officials managed to convince the market that rate cuts are not on the card. The market does not price in any rate cuts before at least mid-2024. Looking at US rates, it’s increasingly evident that a more dramatic shift in the Fed’s narrative will be needed to generate a sustained turnaround in yields and meet our base forecast. On the Eurozone side, as the rise is mostly US driven and our economic view is gloomier, we continue to expect EU rates to decline by year-end.

FX – We forecast a modest upside of the US dollar versus the euro. The technical trend of the euro has deteriorated and some of the large net-long speculative euro positions have been reduced. We expect rate cuts by the Fed and the ECB next year, but our view on the ECB deviates more from the market than the Fed. EUR/USD could test support zone 1.0500-1.0640 in the coming weeks and months. Our forecasts for EUR/USD are 1.08 (end 2023) and 1.05 end 2024.