Find the latest publication of “Perspectives”, the analysis of the macroeconomic environment and financial markets from BLI – Banque de Luxembourg Investments. The topics of the Q4/2024 Outlook include:
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The remarkable resilience of the American economy appears to be continuing.
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The rotation observed on the stock markets in the third quarter is expected to continue.
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The main risk for stock markets at the moment is geopolitical.
Macroeconomic environment
Although growth in the global economy has been relatively modest throughout this year, a major collapse in activity, linked to a recession in one of the major economies, has not occurred, despite the tightening significant monetary observed in the United States and Europe between March 2022 and September 2023. However, it is undeniable that the global economy relies heavily on American domestic consumption, which continues to grow at a regular rate of around 3% per year in real terms, despite a slight deterioration in the job market. On the other hand, outside the United States, economic activity was significantly less dynamic. In the euro zone, the signs of improvement that appeared in the spring have not been confirmed, with the latest activity indicators revealing continued weakness in the manufacturing sector, as well as a slight deterioration in services.
In China, persistent difficulties in the real estate sector, which have undermined household confidence, prompted the authorities to recently announce a set of measures to revive the economy. In Japan, rising inflation has eroded household purchasing power, preventing a significant recovery in domestic consumption this year.
HOUSEHOLD CONSUMER EXPENDITURES IN THE UNITED STATES
For two years, domestic consumption in the United States has become almost the sole engine of global economic growth. Despite numerous obstacles, American households have been able to maintain vigorous demand. Among these obstacles, the most notable remains the significant increase in interest rates by the Federal Reserve, which has led to a widespread tightening of credit conditions. This tightening particularly affected small and medium-sized businesses, which had been unable to refinance their debts on capital markets at the historically low rates observed during the pandemic. Rising financing costs have squeezed their profit margins, leading to a wave of bankruptcies. Little by little, signs of a weakening of the job market increased, with a drop in temporary positions, voluntary departures and overtime. In July, the marked slowdown in job creation and the rise in the unemployment rate suggested a more lasting increase in the latter. However, in the following months, the situation turned around: the unemployment rate fell again and job creation regained strength. In this context, maintaining real annual growth in American domestic consumption at around 3% is becoming an increasingly plausible scenario.
SAVINGS RATES IN THE UNITED STATES
When the Bureau of Economic Analysis released the annual review of the US national accounts in September, it significantly raised GDP growth estimates for previous years. Thus, GDP growth for 2023 was finally revised to 2.9%, compared to 2.5% previously, and that of 2022 to 2.5%, instead of 1.9%. More interestingly, the revision of the gross national income (GNI) — which, by adding residents’ income, also reflects the value of national production — has attracted attention. Usually, a gap between GNI and GDP is resolved by a downward revision of the latter. However, this time, the GNI was strongly enhanced, stimulated by a greater than expected increase in public transfers, interest and dividends and corporate profits. This revision made it possible to reassess the savings rate at 4.8%, far from the initial 2.9%, which would have recalled the lows reached during the real estate bubble of 2005-2007. This calls into question the supposed erosion of American consumer reserves and reveals that the financial situation of households and businesses is less fragile than statistics from previous months suggested.
PUBLIC DEBT AND GDP IN THE UNITED STATES
The possibility of a recession, which logically should have resulted from the inversion of the interest rate curve, the prolonged decline in the composite index of the main leading indicators, as well as the pressure exerted on the margins of small and medium-sized businesses, the main providers of jobs in the United States, ultimately does not seem to materialize. If the growth of services to the detriment of the manufacturing sector undoubtedly contributes to reducing the frequency of recessions, it is above all the surge in public debt since the 2008 financial crisis which plays a central role. Although each unit of debt now generates fewer and fewer units of GDP, the overall volume of new public borrowing nevertheless supports the incomes of households and businesses, thus making them better equipped to overcome temporary difficulties. Despite the risks associated with growing public debt, the prospect of a change of course in the run-up to the November presidential elections remains almost non-existent. Indeed, the two presidential candidates advocate the continuation of a policy of unbridled public spending, without concern for budgetary rigor. Thus, the continued increase in public debt constitutes an additional factor reducing the probability of an economic contraction next year, despite the contrary signals emitted by the historically most reliable leading indicators.
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