News and events

08.01.2024

OUTLOOK H2 2024: Soft-landing

In November 2023, we wrote that: “2023 was not the year of change, but rather the year in which we paved the way for it”. Changes in the macroeconomic scenario in the first half of 2024 indeed provided the conditions for the start of the cycle of rate cuts on both sides of the Atlantic.

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In November 2023, we wrote that: “2023 was not the year of change, but rather the year in which we paved the way for it”. Changes in the macroeconomic scenario in the first half of 2024 indeed provided the conditions for the start of the cycle of rate cuts on both sides of the Atlantic.
In the Euro Area in particular, the conditions to allow the European Central Bank (ECB) to ease monetary tightening have already materialised: despite growth data in the first half of the year being better than expected, economic momentum remained well below potential on the whole, with the manufacturing sector only recently showing signs of moderate recovery. The outlook for consumption is constructive, but there will be no overheating: European households will continue to benefit from the gradual increase in purchasing power deriving from the slowdown in inflation and the savings rate will normalise, given the reconstitution of wealth and monetary easing. On the price dynamics front, inflation is losing momentum in line with the ECB’s estimates, net of a persistent stickiness in the component of services prices, which should have run its course by the end of summer. This allowed the central bank to begin cutting rates: we expect that the script will repeat in the second half of the year, at a pace of one cut per quarter.
In the United States, the conditions for easing tightening are gaining ground, but at a slower rate. US growth continued to prove decisively resilient in the first half of 2024, but we remain convinced that it is heading towards a process of gradual slowdown, as shown by the quarterly Gross Domestic Product data, which, as much as it is above potential, is losing momentum quarter after quarter. On the one hand, the labour market, albeit resilient, continues to regain balance, as recognised by Jerome Powell, Chair of the Federal Reserve (Fed). On the other hand, household consumption, while still robust in terms of level, shows a deterioration in the “quality” of spending. In terms of prices, progress in the disinflation process has been unsatisfactory in the first half of the year, due to an acceleration in the prices of services and a recovery in the prices of core goods, which forced the Fed to keep the rates where they were and to await further confirmation of the sustainability of the disinflationary trend. We remain optimistic about this point for several reasons: (1) the inflation expectations remain stable and close to the tar-gets of the central banks; (2) the rebalancing on the labour market continues; (3) the moderation in consumption will exert downward pressure on the prices of services and core goods. The easing in pressures on core inflation will allow the Fed to begin reducing rates after summer, at the pace of one cut per quarter, similar to the ECB.
Lastly, in China, our central scenario is unchanged: we remain convinced that the Chinese economy has entered a structural transition phase, in which only one of the two drivers of growth before COVID (exports and construction sector) is still active (export), while the construction sector is going through a transformation process that will no longer allow it to contribute to the growth as before. Similar to 2023, in 2024 the Chinese GDP will also expand at a rate close to the “new” potential of 5%, supported by exports, but slowed by the transition in domestic demand: private consumption is not yet ready to take up the mantle of construction.
In this context, our central scenario for 2024 remains broadly aligned with the one described in late 2023, including in terms of risk. Developments in growth and inflation remain crucial, especially in the United States, where the turning point is maturing and has not yet arrived. If for any reason the progress made in inflation did not manifest or growth did not continue in the weakening, the Fed could remain reluctant to cut rates throughout the entire second half of the year, and the turning point would be delayed for the second year in a row.

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