Scenario Eco - Temporary clearing

Video editorial - Temporary clearing
Michala Marcussen - Group Chief Economist

When will the ECB cut rates next?
The ECB delivered a 25bp rate cut on 6 June and question now is when the next rate will follow. ECB President Lagarde has been clear that this will very much depend on the incoming data, and this means that markets will be closely monitoring each report for clues.
To our minds, the most likely timing for the next rate cuts in September. The euro area economy is currently enjoying a disinflation bounce as witnessed by the better first quarter growth numbers and this will leave the ECB confident that it has time on its hands. Moreover, with the wage dynamics still running strong due to past inflation, the ECB is still concerned about potential spillovers.
The hurdle to a July rate cut is thus high, but should the economy slow at a faster pace than we expect the door could open to this possibility. Overall we expect to see 75bp more of rate cuts before year-end. This will, however, still leave monetary policy in restrictive territory and this at a time when fiscal policy is also tightening. Overall we thus expect to see sluggish growth in 2024 and 2025 for the euro area.
The challenge now for the incoming European Commission and European Parliament is to enhance the competitiveness of the region to secure a strong growth model for the region in an increasingly fragmented world.

When will the Fed cut rates next?
The exceptional resilience of the US economy has in recent months lost some steam with consumers growing more cautious and corporates trimming back hiring plans. The challenge for the Fed, however, is that inflation is proving sticky on the last stretch of returning to target and although special factors, and notably auto insurance, have weighed in, the Fed clearly prefers to err on the side of growth rather than risk higher inflation.
With the momentum of the economy now slowing, we expect the Fed to deliver rate cuts and look for a total of 75bp in 2024. The outlook beyond, however, is marked by uncertainty with the November elections having a key say for the future path of both domestic and international politics.

Will China’s new policy mix succeed?
The Chinese government have recently adopted a number of measures aimed at boosting the domestic economy in the face of ongoing headwinds from the real estate deleveraging. Measures aimed at upgrading machinery, equipment and appliances should offer some support, but we nonetheless expect households to retain high precautionary savings. A key concern, moreover, is to see concerns that China is exporting excess capacity trigger further tariff measures by key trading partners.
On a more general note, geopolitical tensions and fragmentation are likely to remain a structural headwind t the global level at least for the foreseeable future. Moreover, the risk is that this will delay much needed urgent action to fight climate change.