In the US, while the foundations of recent growth, tenacious beyond expectations, are showing some cracks, there are reasons to hope that they will not become too deep. On the one hand, we can count on the positive effects of an earlier cycle of monetary easing and, on the other, on the solid financial position of households, whose net worth has risen considerably thanks to strong gains in equities and property.
The heart of the threats is the already apparent slowdown in the labour market. While its cooling has so far been reflected more in a fall in job vacancies than in mass redundancies, it could approach an inflection point beyond which it would deteriorate rapidly. In addition, while household balance sheets are generally healthy on the whole, low-income households are in difficulty: credit card and auto loan delinquencies are at their highest level in over a decade. Finally, while the inflation situation has improved considerably recently, there is still a risk that it could stagnate at just above 2%.
Our scenario is therefore still based on a clear downturn towards the end of the year, without however degenerating into a recession: the probability of such an event seems low, though it is not zero. Growth is expected to reach 2.5% in 2024, the same rate as in 2023, before slowing to 1.3% in 2025. Although revised upwards, this cautious forecast remains below consensus and represents a marked slowdown compared with previous years. Total inflation is forecast to average around 2.9% in 2024, rising to 2.2% in 2025.
In China, the authorities will have to show lucidity, and certainly imagination, to manage the downside risks still hanging over the official 5% growth target. While the recently announced “all-out” stimulus plan has been favourably received by the markets, it is only the first step in revitalising an economy whose springs are slack: the crisis in the housing market is still unresolved, consumer confidence has been shaken by the weakening outlook for jobs and incomes, disinflationary pressures persist and domestic demand is sluggish, while threats to the dynamism of external demand are mounting (rising protectionism, reconfiguration of supply chains). Our growth forecasts of 4.7% in 2024 and 4.2% in 2025 therefore remain cautious.
Against the backdrop of a slowdown in the two main partner zones (the US and China), the acceleration in Eurozone growth will therefore depend essentially on the revitalisation of domestic demand, and private consumption in particular.
However, the results for the first half of 2024 have raised questions about the sustainability of a domestic recovery scenario: while the trend in household purchasing power has remained favourable to such a scenario, the trade-off between savings and consumption has belied it.
This preference for saving is justified on three counts: by uncertainty (linked to the lack of visibility, particularly on inflation after violent shocks, but also to the economic policy environment, not forgetting, more broadly, an anxiety-provoking international context), by the need to rebuild real cash balances eroded by inflation, and by the need to restore property purchasing power, a victim of the combined negative effects of prices and interest rates. More than its level (admittedly low, but only slightly below our forecast), it is therefore the composition of growth that has proved disappointing: the negative contribution of domestic demand has increased, the support of net exports has been eroded, inventories have made no contribution, but public consumption has made a positive one.
Thanks to continued disinflation (with average inflation at 1.8% in 2025 after 2.3% in 2024), a solid financial situation for private agents and a resilient labour market, we can still assume that domestic demand will recover, albeit at a more moderate pace than previously forecast. Our scenario therefore assumes a modest acceleration in growth: after reaching 0.8% in 2024 (thanks in particular to positive carry-over effects), it should settle at 1.3% in 2025, ie, below potential. However, the risks have been recalibrated: the downside risk to growth exceeds the upside risk to inflation.
In this environment, with a marked slowdown in the US economy, a serious threat of China running out of steam and a moderate but fragile acceleration in Europe, it is clear that we need to stay the course with the monetary easing already underway. Given the markets’ very favourable expectations of key rate cuts in both the US and the Eurozone, our scenario is currently less ‘bold’, but does not close the door to further easing.
At the September FOMC meeting, the Federal Reserve cut the Fed Funds rate by 50bp: this significant cut, justified both by the risks to the employment component of the Fed’s dual mandate and the existence of substantial room for manoeuvre, does not, however, presage the future pace of cuts. Although our scenario now assumes an earlier rate-cutting cycle, it retains the magnitude of the overall easing cycle, ie, 200bp. However, the cuts would total 100bp (vs 50bp) in 2024 followed by another 100bp (vs 150bp) in 2025. The upper bound would thus fall from 4.50% at end-2024 to 3.50% in Q325. While our central scenario calls for less aggressive rate cuts than the jumbo 50bp cut in September, one or more further cuts of more than 25bp cannot be ruled out. Such decisions would be motivated by a substantial deterioration in the labour market.
As for the ECB, the continuing decline in inflation means that it may extend its gradual interest rate cuts. The relative resilience of the European economy and the level of inflation (still slightly too high, despite its decline) should encourage the ECB to remain cautious. The ECB would therefore maintain the pace of rate cuts initiated in June and September: one rate cut per quarter, in 25bp increments. The ECB would stop cutting rates in September 2025, once the deposit rate has reached 2.50%. Recent signs of fragility in domestic demand, the need to remove the “savings mortgage” weighing on household consumption, and the likelihood of downward revisions to the ECB’s inflation forecasts could nonetheless prompt it to step up the pace of cuts.
A powerful downward movement in interest rates has already taken place, largely driven by the effective implementation of monetary easing, but also by expectations that key rates will continue to be cut at a sustained pace. The potential for further significant rate cuts is therefore limited.
In the US, 10Y USTs would reach 3.80% at end-2024, then 3.60% at end-2025. With monetary easing weighing on the short end of the curve, it would steepen. If Donald Trump is elected president in November, long-term rates could also rise due to expectations of an increase in the budget deficit (tax cuts) and higher inflation (linked mainly to tariffs), especially if the Republicans win a majority in Congress.
In the Eurozone, the 10Y Bund yield would be around 2.15% at end-2024 and 2.30% at end-2025. Finally, political fragmentation and a widening budget deficit have pushed the OAT-Bund spread to 80bp, the upper limit of the range (65-80bp) observed since the snap election was called in France; the spread is likely to remain within that range in the absence of any further shock.
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