Business Bayani PH

As policy rates rise together, major economies are heading in different growth directions. In a recent report released by financial intelligence solutions provider S&P Global, the United States stands out as a front-runner, boasting nearly 5% annualized growth in the third quarter, fueled by robust consumer spending and an inventory rebuild. 

However, on the other side of the Atlantic, Europe finds itself in a flatlined state of economic activity, with services-based economies such as Spain outperforming their manufacturing-centric counterparts like Germany.

Key factors linking different economic outcomes are strong job markets, higher spending on services, supportive fiscal policies, and ongoing pressure on core prices. Although inflation seems to have reached its peak, central banks are cautious, avoiding premature declarations of success, and staying watchful for potential risks.

U.S. Leading the Charge

The U.S. economy continues to defy the global trend, posting impressive annualized growth of nearly 5% in the third quarter. This performance is attributed to strong consumer spending and a notable inventory rebuild. As the year draws to a close, fourth-quarter GDP is on track to mirror potential growth at 2%.

Europe: Activity at a Standstill

In stark contrast, Europe is grappling with economic inertia, characterized by flatlined activity. The dichotomy between services-driven economies, exemplified by Spain’s relative resilience, and manufacturing-centric nations, such as Germany facing challenges, underscores the nuances within the European economic landscape.

China: Stabilized Growth Amid Challenges

China has managed to stabilize its growth through targeted government stimulus, albeit with lingering concerns in the household confidence and stressed property sectors. The absence of significant inflationary pressures contributes to the overall stability in the Chinese economic outlook.

Emerging Markets: Resilience Prevails

Emerging markets, led by domestically driven economies like India and Indonesia, or those closely linked to the U.S. such as Mexico, exhibit resilience. However, the ability to implement policy rate cuts is constrained by the cautious approach of the U.S. Federal Reserve.

Labor Markets Shine Amid Divergent Growth

A positive aspect in economies is strong job markets, supported by robust spending on services. Even with different growth outcomes, low unemployment persists due to service sectors’ labor-intensive nature. Furthermore, fiscal spending strongly supports many economies, enhancing labor market resilience.

Inflation Dynamics and Central Bank Caution

While overall inflation is decreasing since its peak in late 2022, core inflation stays high, around 5%, in many advanced economies. This durability is linked to robust job markets and continuous spending on services and non-tradable goods. Central banks indicate a prolonged maintenance of current interest rates, underscoring their dedication to managing persistent core inflation.

Financial Conditions and Market Dynamics

Markets expect interest rates to stay high until mid-2024, following a “higher-for-longer” trend. Yet, the recent easing of financial conditions creates challenges for reducing inflation further. Despite earlier tightening, recent changes in long-term yields and currency values indicate a nuanced view for central banks.

Updated Growth Forecasts and Regional Narratives

Worldwide, predictions for economic growth stay mostly steady, with minor changes in important emerging markets. The U.S. continues with robust growth, Europe encounters challenges, and China stabilizes with focused stimulus efforts. Emerging markets show varied growth, influenced by trade exposure and local factors.

Risks to the Soft-Landing Scenario

The macroeconomic attention turns from inflation to achieving a smooth economic transition, bringing potential risks. Balancing growth and controlling inflation becomes tricky, with uncertainties about how rate hikes since early 2022 affect the economy. Additional unpredictability arises from geopolitical factors like Russia-Ukraine conflicts and ongoing U.S.-China tensions.

Labor Market Holds the Key

A successful soft landing depends on the strength of the labor market. As monetary policy takes time to show its effects, the next few quarters will be crucial in determining if the global economy can smoothly navigate this transition. The objective is a gradual adjustment, avoiding sudden corrections, and ensuring a steady path towards sustained growth, full employment, and reaching target levels of inflation.

In the ever-changing global economic scenario, uncertainties persist, and the soft landing story unfolds amid nuanced challenges and opportunities. With central banks proceeding cautiously and economies working towards stability, the upcoming months will offer vital insights into the direction of the post-inflation shock era.◼