Macro Radar

Taking the pulse of economic activity

Whereas Germany was unable to escape a technical recession in the end, the R-word presumably is unlikely to become an issue in the United States before 2024, but the restrictive monetary policy then looks set to take a toll there as well. A soft economic landing remains the much less probable alternative scenario.

Technical recession in Germany

Even though a variety of early warning indicators continue to signal a looming recession in the USA, economic activity in America has held up robustly to date. Hot air is leaking out of the employment market only at a slow pace, and the window of opportunity for a successful soft economic landing hasn’t completely closed yet. However, we continue to see a relatively high probability of a (belated) recession next year. Meanwhile, the German growth engine sputtered more severely than initially supposed last quarter. The Federal Statistical Office of Germany was compelled to lower its original GDP growth estimate for the first quarter to –0.3% and thus verified that Germany’s economy was in a technical recession. Weak personal consumption expenditures were the main cause of the poor economic performance. Consumers have been in a more buoyant spending mood in Switzerland, where gross domestic product increased by 0.3% in the first quarter of 2023.

Inflation increasingly disinflationary

Supply chain bottlenecks have by now largely become an issue of the past. Not only is this evidenced by global shipping container freight rates, which have fallen by more than 85% since peaking in autumn 2021, but in addition, producer price inflation is sharply on the retreat and is even negative in some instances. Con- sequently, ever fewer companies intend to raise their prices further in the future. These disinflationary tendencies are now also increasingly trickling through to consumer prices. Inflation in the Eurozone surprised in May by pulling back significantly from 7.0% to 6.1% (below the consensus forecast of 6.3%). This trend looks set to continue over the further course of this year.

Volatile interest-rate expectations

Despite the downward-pointed inflation trend, the path to the 2% inflation target is still a long road for both the US Federal Reserve and the European Central Bank. This means that at least two more interest-rate hikes particularly from the ECB are in the cards in June and July. However, they are likely to amount to only 25 basis points apiece because even the central bankers in Frankfurt recognize that the more restrictive monetary policy is already trickling through to the real economy and is prompting banks, for example, to tighten their lending policies. In the USA, meanwhile, a pause for now in raising interest rates further looks set to be on tap in June. The macroeconomic data in the weeks ahead will likely determine whether there will be another (final) rate hike afterwards. In any event, interest-rate expectations remain volatile – hopes of a speedy pivot to rate-cutting have diminished lately.

Kaiser Partner Privatbank interest rates view

In this context, Beijing’s current efforts should be interpreted as an attempt to get the image pendulum swinging back in the other direction.