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Looking past recession fears

10 September 2024

Please note: All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

What was all the noise about? A surprise Japanese rate hike, weak US employment data, a market sell-off and rising geopolitical tensions made August a busy month for those investors not relaxing on the beach. But ultimately, not much has really changed. 

The global economy still seems to be heading for a slowdown, without falling into a recession. Meanwhile, inflation is easing ever closer to central banks’ inflation targets.  

This all points to more rate cuts ahead in many Western economies. Indeed, after last month’s Jackson Hole central bankers’ bash, the US rate-cutting cycle could be set in motion later in September, with more quarter-point trims possible later in the year. 

US economy still leads the pack 

Despite a mild economic rebound in the three months to June – US real gross domestic product (GDP) expanded by 2.8% on an annualised rate, after hitting 1.4% in the first quarter – it still shows signs of weakness. 

Worryingly for policymakers, the jobs market is not divorced from the gloom: the unemployment rate has continued to climb. That said, the consumer remains in spending mode. 

Elsewhere, the eurozone economy is in recovery, after a poor 2023. However, real growth looks set to remain below 1% for the rest of 2024. Meanwhile, the UK stands out, aided, strangely enough, by political stability. 

Turning to Asia, and the world’s second largest economy, China, is not firing on many cylinders. As a result, real GDP growth is likely to be on the lower side of the government’s 5% target this year. 

Rate cuts in vogue

With weaker growth in the largest economies, unsurprisingly, inflationary pressures have eased. As such, most of the major central banks, leaving aside the Bank of Japan, are either cutting rates or seemingly close to doing so.   

That said, the pace and amount of rate cuts is unlikely to be uniform across the major trading blocs, and will depend on just how quickly economies slow. In the US, investors seem to be expecting the fed funds rate to lie between 3.0% and 3.5% for most of 2025-2027. 

Whether this occurs or not, excluding an inflationary shock, lower US rates are our base case scenario. The same is true in the eurozone (2.0-2.5%) and to some extent in the UK. However, in the latter, the market expects rates to drift down rather than to stabilise. 

Expect the unexpected

Like the start of the year, the tail-end of 2024 will have its own surprises. Where they will lie is another question. Outside of the implications of November’s US presidential vote, one question should be near the top of investors’ minds: can American policymakers engineer a so-called ‘soft landing’, or will the economy fall into a recession?  

Despite a weakening job market, the risk of a recession remains small. However, if one occurs, it would likely be relatively mild. Another positive, is that central banks have more room for manoeuvre to stimulate their economy, should the need arise, than they did a few years ago.

At a turning point?

As the US central bank contemplates joining many of its peers by starting a rate-cutting cycle, and trimming rates for the first time since a pandemic-inspired move in March 2020, might this mark a new era?   

Lower rates usually stimulate economies. However, signalling weaker policy could see businesses decide to delay investments, and consumers refraining from splashing the cash. At the same time, if growth accelerates too much, then inflation may roar back, or at least scare the market into believing so, and spook investors.

Should the economy be entering a new phase, then this could create its own challenges. For one, economists may need to recast their forecasts. More market volatility may follow too. 

When a tight race for the White House, as well as mushrooming government debt and worrying geopolitical tensions are added to the mix, then predicting what happens next in the global economy will be even tougher than usual. 

As ever, uncertainty should create its own investing opportunities. Staying nimble will be key as economies enter a lower-growth, falling inflation and rate-cutting phase. 

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