Macro Radar Taking the pulse of economic activity

A recession still has yet to arrive in the USA. The effects of the tightened monetary policy are unlikely to pose a serious risk to economic activity there until 2024. In Europe and China, however, economic headwinds are already blowing much more harshly today. There are mounting signs now that China will temporarily resume putting a higher priority on economic growth.

The recession that hasn’t arrived (thus far)

The US Leading Economic Index fell in June for the 15th month in a row. In light of this slumping indicator of economic activity, which has consistently been a reliable barometer in the past, the Conference Board is forecasting that the US economy will be in a recession from the third quarter onward. Meanwhile, however, a number of other macroeconomic data prints are pointing to a US economy that is still in robust shape. That’s why more and more economists are once again daring to talk about a potential soft landing. We, too, are optimistic and think that a recession won’t become an issue until 2024. But we also remain of the opinion that a recession will ultimately be unavoidable.

Stagnation in the Eurozone

The Eurozone has skirted a recession thus far, but the recent renewed round of disappointingly weak purchasing managers’ index readings portends a continuation of economic stagnation for the second half of this year. Not only is the very weak manufacturing sector acting as a brake on economic activity, but growth dynamics in the services sector are slowing as well. The effects of that on inflation are logical: prices of goods by now are in the midst of a rapid disinflation process. However, given substantial wage growth, it will likely take a longer time before the European Central Bank’s 2% inflation target moves back within eyeshot.

Last interest-rate hikes in the can?

There were no surprises at the central-bank policy meetings in late July. The US Federal Reserve raised its benchmark lending rate to 5.5% and the ECB ratcheted up its deposit rate to 3.75%. The remainder of the screenplay hasn’t been finalized yet, but at the moment there’s a lot suggesting that rate-hiking is now over in the USA. In Frankfurt, meanwhile, monetary policy hawks and doves look set to tussle over a final rate hike in September.

China’s charm offensive

China’s economy lost considerable momentum in the second quarter, growing just 0.8% compared to the prior quarter. China’s Politburo signaled that it will now resume putting a higher near-term priority on stabilizing economic growth. The recent marketing campaigns by a number of local governments promoting China as a great place to do business and the recent meeting between China’s top financial market regulator and the big names in the international private equity industry also fit with this picture. This charm offensive seems urgently necessary because inward foreign direct investment into China plummeted by around 75% in the second half of 2022.

No longer synchronous | America surprising on the upside and Europe on the downside Economic Surprise Indices

Sources: Bloomberg, Kaiser Partner Privatbank