The US is cooling, China is still weighed by the weak property sector, and the eurozone recovery is in danger of going into reverse. Our base case remains for the global economy to converge to more trend-like growth as we move into 2025, but downside risks – particularly in the eurozone – have increased. A sharp rebound is unlikely while rates remain restrictive. More aggressive Fed & ECB rate cuts, and China stimulus measures may help, but downside risks remain from possible new trade tariffs should Trump be re-elected in November. Inflation remains well behaved, with falling oil prices helping, though wage growth and services inflation remains too high in the eurozone. The ECB and Fed have started lowering interest rates, and we expect both central banks to continue cutting rates until a more neutral level of rates is reached later next year. Still, lags in pass-through mean that it will take time for rate cuts to meaningfully lift growth.
Macro
Eurozone – Downside risks to growth have intensified, with September PMIs pointing to a significant deterioration in the outlook. We have lowered our growth forecast for Q3 to 0.2% q/q, and our annual forecast for 2025 to 1.1% from 1.5% previously. The manufacturing recovery continues to disappoint, and the services recovery is also now losing momentum. Growth is expected to remain below trend rate for the remainder of 2024, before picking up in 2025. Services inflation and wage growth remains on the high side, but this looks unsustainable given the weak growth environment.
The Netherlands – The second calculation of GDP confirmed that the economy grew by 1% q/q in Q2, and growth in Q1 was unrevised at –0.3%. We expect continued but below-trend growth for 2024 as a whole, given the environment of weak demand, restrictive interest rates, and domestic constraints. With the new government plans, we expect growth to be slightly higher in 2025, but impact is limited. All in all, growth will average 0.6% in 2024 and 1.3% in 2025. Services inflation will be the key driver of inflation in the coming months. Our inflation forecasts (HICP) are 3.1% in 2024, and 2.8% in 2025.
UK – The government has been signaling a more significant fiscal tightening than previously expected. The full details will be announced on 30 October. The economy is recovering relatively solidly for now, but growth is likely to cool in the coming quarters. Disinflation is continuing, but services inflation is stubbornly high, with wage growth still well above levels consistent with 2% inflation. The return to 2% inflation will take longer than elsewhere, due to historically higher inflation expectations in the UK.
US – Growth and consumption remain strong, while the labor market cools. Growth in labour demand slows, and is outpaced by increases in labor supply, but demand does not yet contract. Increased policy uncertainty, and pockets of financial stress among households are likely to contribute to a slowdown in growth into 2025. Despite a relatively hot CPI reading in August, the disinflationary process continues with the 2% y/y target in sight in the course of 2025.
China – The Chinese economy remains stuck in low gear, with domestic demand still being hit by the property downturn. We long held the view that more focus on short-term demand management (rather than industrial policy) was needed, and also likely. The PBoC's September package (consisting of policy rate/RRR cuts and measures to stabilise property and the stock market) was partly aimed at turning market sentiment. This helps to mitigate downside risks to our 2024/25 growth forecasts, but should be followed by additional (fiscal) support to have a more meaningful, lasting effect on the economy.
Central Banks & Markets
ECB – We expect the ECB to continue cutting rates at the October meeting, following the September cut. Disinflation is broadly continuing, while downside risks to growth have intensified. Negotiated wage growth is expected to see a temporary rebound later this year, but this is expected by the ECB and therefore unlikely to derail further cuts. We expect the ECB to cut at each meeting until the deposit rate reaches 1.5% in Q3 25.
Fed – The Fed started its easing cycle with an initial 50bps cut, with the upper bound currently standing at 5.00%. We expect consecutive 25 bps rate cuts at each upcoming meeting, with the balance of risks towards a near-term acceleration, and a medium-term slowing. The Fed will remain attentive to upside risks to inflation and downside risks to, in particular, the labour market. Monetary policy is expected to remain restrictive throughout 2024 and into 2025. We expect the upper bound of the fed funds rate to reach 4.50% by end-2024, and to reach the neutral 3.00% level by October 2025.
Bank of England – The MPC paused rates at 5.25% in September, in line with our expectations. Incoming data suggests stubbornly high underlying inflationary pressure, and sticky wage growth – which poses upside risks to medium-term inflation – is likely to keep rate cuts at a more gradual pace than for the ECB and Fed, even into next year. We expect only one additional rate 25bp cut in 2024, and four rate cuts (total 100bp) in 2025, with Bank Rate falling to 3.5% by end-2025.
Bond yields – The Fed’s 50bp cut in September was a well-received surprise in the market. It is currently pricing in around 200bp of cuts in total which aligns with our view. Consequently, we continue to anticipate US Treasury yields to move lower and the curve to steepen. A similar scenario is unfolding for European rates. Following weaker PMI data last week, the market has started to price in additional cuts. Therefore, it appears that rates are set to follow a downward trajectory in the foreseeable future.
FX – For the coming months we expect EUR/USD to stay in the 1.07-1.12 range with a year-end forecast of 1.10. We expect less aggressive rate cuts (than market consensus) by the Fed. This should support the dollar. Meanwhile we expect slightly more rate cuts from the ECB to weigh on the euro. This could push EUR/USD towards 1.07. But uncertainty surrounding the US elections could have a negative impact on the dollar in the near-term. Overall, we expect range-trading for the months ahead. Our yearend forecasts for EUR/USD stands at 1.10.