Slowdown yes, recession no
Un train slowing down Can it derail? Certainly, if a bogie axle were to give way or if a rail were poorly bolted to the sleeper.
THEworld economy has slowed down over the course of the summer compared to the pace of early spring, when along with the flowers and leaves it seemed that a new phase of recovery was also blossoming in the manufacturing sector. What's worse, the various locomotives of the global convoy are proceeding to different rhythms, and this contributes to braking. While the sectoral and territorial divergences fuel doubts about the sustainability of growth. And some are approaching curves on the way (the curves never end, Eduardo De Filippo would have said).
The numbers speak for themselves. The business reviews, manufacturing and services, on production (PMI composite output) went from indicating global acceleration in the second quarter to signalling deceleration in the third: 52,1, 53,0 and 52,7 the sequence (a number above 50 means growth, and the higher it is the more widespread and therefore robust the growth is). But the geographical differences are marked both in the evolution and in the levels.
In fact, in USA the pace intensified (from 52,2 to 53,5 and to 54,5), while in China the pace first increased and then decreased (from 52,4 to 53,2 and then to 51,2), and the same happened in theEurozone (49,1, 51,6 and 50,6. While theIndia always march at high speeds (over 60) and the Japan is progressing (51,3, 51,5 and 52,7).
The sectoral gap is even more marked, with the tertiary sector which holds the fate of the recovery and the manufacturing that the ballast, re-proposing that tug of war which had already occurred at the beginning of the summer of 2023 and which had been resolved in favor of the first, in the sense that the global recovery continued. How will it end this time?
Compared to then, two differences can be highlighted, one positive and one negative. The positive one is that in thesummer 2023 the tertiary sector was slowing down, when manufacturing was falling into contraction, while today it is accelerating; and this could fuel new demand for material goods in the coming months and therefore revive industrial dynamics. The negative one is that part of the fall in demand and activity is linked to German automotive crisis, and European in general. A crisis that deserves an analysis in itself and which we mention below.
Before coming to this, there are two other important differences who play in favor of victory of the tertiary sector, and in general of the stability of the recovery. The first is that then the interest rates they were increasing and it was not known how much they would increase (they peaked in spring 2024), and therefore how strong the monetary tightening would be, while today they are in sharp decline and, in the short-term part that counts a lot for bank credits, they will fall even more with the cuts that the Central Banks are preparing to make.
The manipulators, in fact, have begun to lift your foot off the brake interest rates and will give more oxygen to demand, especially in the sectors most penalised by the higher cost of money (manufacturing and construction). It must be recognised that the maneuver is succeeding to take the gas off to moderate inflation without causing a fall in activity and an undesirable, beyond the inevitable, increase in unemployment. So now they can put some gas back into the engine of demand, and it is likely that this gas will be more effective than usual precisely because there were no damages to be repaired in the balance sheets of intermediaries and debtors.
The second difference is that the drop in inflation he's putting it in his pocket purchasing power to families, so current unit wage increases are more valuable than yesterday's. This will continue to fuel consumption, who on both sides of the Atlantic benefit from the treasure trove constituted by theexcess savings accumulated during the difficult months of the pandemic.
All the more so since unit wages are multiplied by continuous increase in time worked, given by the number of employed people and the hours they work. It is true that there is also a slowdown in job creation, but the total combination of increases in nominal unit wages, consumer prices and working hours draws a line of rapid increase in real wage bill. What is true for the US is also true for Europe, i.e. the Eurozone plus the UK, and specifically for theItaly.
Europe, as mentioned, suffers from the automotive crisis, the weak link in the green transition. Which especially affects Germany, and the rest of the system in a cascade. The automotive industry has to deal with supply and demand issues, which cannot be explored here for reasons of space. Suffice it to say that they will not be resolved in the short term, much less with counter-cyclical macroeconomic policies, but it is certain that a growing economy helps a lot in dealing with them, on a social and financial level. The Germans themselves have spaces in the public budget to counteract the headwinds of this crisis, and it would be good and right if they were to use them quickly. This is one of three closely spaced curves on the path of the world economy.
The second curve is the redesigning globalization, dictated by the geopolitical tensions that are translating into various types of protectionism. The propensity-temptation to close itself to foreign trade and to defend national industries and workers with protectionism of various kinds and natures (from crude duties to the most refined forms of industrial policy) has never been so high. Although it is politically understandable and perhaps necessary to avoid other troubles (anti-market social and electoral revolt), it is all sand thrown into the gears of efficiency and productivity, that is, it is bad for growth. Furthermore, with the flags raised with nationalistic pride, consumers themselves change preferences and demand household brands, rather than foreigners. Even if all this does not cause a derailment of the world convoy, it is certainly among the causes of the weakness of orders from abroad, while strengthening those from within.
The third curve is the US presidential elections. The policies that both candidates would introduce are well known, either because they are in continuity with the current ones (more redistributive and oriented towards subsidies for green production in the Democratic camp), or because they were already seen two terms ago (more protectionist in the Republican camp). In neither case do they seem capable of causing a recession. But the outcome of the vote will remove a uncertainty factor and supporters of whoever wins will be euphoric and will celebrate with more purchases. In any case, the effects of the measures actually adopted will be felt next year and cannot affect the imminent course of the economic cycle.
To send growth into a tailspin, it would take a shock, which as such is unpredictable. Or a condition of financial imbalance that forces families or businesses or both to pull in their spending oars. A condition that does not exist, both because it was too recent Great financial crisis because his memory has already been removed from the minds and behaviors of debtors and creditors, and because the public debts have cushioned the effects of the pandemic and the energy crisis in the balance sheets of all private operators. proven proof is that the rate increase that has taken place has not caused suffering and arrears of payments.
Therefore the slowdown that has taken place so far will not be followed by another slowdown, and this by yet another, until it becomes a reverse. Especially since the drop in the price of oil gives a small boost to domestic demand in importing countries.
Inflation Back to Deflation? Unlikely
Il fate of the resurgent inflation, the highest in forty years, is marked. The decline in the temperature of consumer prices has continued, although more gradually and intermittently than its surge. Now the 2% target, signaling monetary stability, is in sight and within reach. It is helped by the decline in Oil prices, which is affected by lower than expected demand, as the tertiary sector is less energy intensive than manufacturing and China is more energy import intensive than the US, and by increasing extra-OPEC supply.
In 'Eurozone the annual variation of consumer prices fell to 2,2% in August from 2,6% in July and in USA to 2,5% from 2,9%. In both areas the change in net energy and food it is bigger and more viscous: in the Eurozone it has been fluctuating between 2,7 and 2,8% since April, while in the USA it is at 3,2% but with a clearer downward trend.
In UK the picture is similar, while in Japan inflation has risen to 2,8%, also fueled by the devaluation of the yen, and this is good news for a system that has long been mired in falling prices. China, instead, experiences negligible price variations, because companies try to stimulate consumer demand with discounts and sacrifices on the margins.
A bit everywhere costs rise more than the final price lists, because the "king of costs", the cost of labor, continues to increase more than before the pandemic and because the weakness of purchasing leads to a stimulation of order volume at the expense of unit earnings.
They are two opposing thrusts and between the two the first prevails, because labor markets remain tight, both for contingent reasons (recovery that creates jobs and keeps unemployment low) and for demographic issues (ageing of the population that tends to reduce the workforce, with fewer young people replacing the elderly cohorts).
In light of this last observation, it is it is unlikely that we will fall from the frying pan of inflation into the fire of deflation which prevailed after the Great Financial Crisis.
Dollar suffers from rate hike
"THE central bankers – said Nobel Prize winner in economics Robert Solow – they are like cuttlefish: they emit a cloud of ink and slide away». An accusation that is now dated. Central bankers have been unanimous, like a single man – or a single woman – in the time of Covid, sending fleets of helicopters into the skies of the countries, spending, spreading and creating money out of thin air. And even if they dithered for a long time before lowering those rates that had then skyrocketed to fight inflation (they repeated that decisions depend on the data, an attitude, this, that dangerously resembles driving while looking in the rearview mirror), now there is no 'sepia' in their declared intentions: rates must and will go down.
La Fed meets on September 17-18, and it is not the 'if' but the 'how much' of the rate cut that is uncertain. It is not likely that, as some FOMC members would like, the cut will be half a point: it would be like admitting that they waited too long and now they have to recover quickly. Let's be content with a quarter point, and let's wait for other similar cuts: after all, with inflation sharply declining (see above), the real rates become too high and they must come down quickly if they do not want to put shackles on the wheels of an economy that has held up so far, even if some cracks are visible.
The upcoming US rate cuts have finally normalized the yield curve. The inversion (2-year T-Bond rates higher than 10-year T-Bond rates) began in mid-2022, and ended in September 2024, with 10-year rates a few hundredths of a point lower than 10-year rates; historically, over the past fifty years, the 90-year T-Bond yield has been about 2 basis points higher than the XNUMX-year, but the difference is likely to be lower in the future, given that, 'secular stagnation' or not, long-term rates, which have been declining in historical perspective, will not regain levels of yesteryear.
The deadlines for the submission of the Eurozone deficit recovery plans causes some nervousness on the spread, as is normal. But these are modest movements. Basically, in the last year it Italy spread has decreased, as a result of prudent management of public finances by the Government. Minister Giorgetti said, with some exaggeration, that the network of constraints imposed by the new public finance rules resembles Soviet planning. And the President Mattarella he objected – between the lines but not so much – that this Government had approved the rules. They are both right: the rules – even if less hostile than the previous ones – are mainly aimed at putting errant public finances back on the right track, not errant economies: they do not have a 'double mandate' at the Fed. Italy had to approve them, because it could do nothing else. Now all we have left is skillfully chisel away the rock of rules, which fortunately is quite porous.
Lo spread has fallen more than France, more due to the shortcomings of our transalpine cousins than to our merit. By now the yields of the OAT French are at the level of passes Spaniards.
The change of dollar, which in the fall of 2022 had crushed theeuro below parity, has weakened since then, for reasons that have nothing to do with either the growth differential or the rate differential (both differentials were and remain favorable to the greenback). It must be remembered that the dollar exchange rate is determined, like any other commodity, by supply and demand, and these are directly affected by transactions whose the vast majority is linked to capital movements, not to current transactions. This banal observation is all the more relevant for a currency, like the American one, which is also reserve currency and billing currency. The advantages that these features give to the dollar have been repeatedly criticized by the rest of the world (from the "exorbitant privilege” lamented by Giscard d'Estaing and later), and today we see various attempts to limit them: from the agreements between countries of the 'Global South' to use their respective currencies for debts and credits without going through the dollar, to diversification of reserves of the Central Banks (fewer dollars, more gold or yuan…).
More recently, another traditional determinant of exchange rates – the long-term real rate differential (see chart) – may have played against the dollar, but it is unclear how long this influence will last. Now that the Fed and ECB have embarked on a path of lowering rates, much will depend on the pace of this decline, which could be more rapid on this side of the Atlantic.
The trends of the Yen they were not well tempered. Sharp swings, following the changes in monetary policy, have shaken the prices, which first rose from 130 to 160 (against the dollar), and then fell back to 140. It is always difficult to keep up with the exchange rate of the Japanese currency, always under the thumb of the alternating events of the carry trade, but, if one wants to heroically find a common thread, one can look for it in the Yield spread between T-Bonds and JGBs (see graph).
On the stock markets, the fear of correction (see the violent fluctuations in prices in July and August) has passed, following the holding of profits and the growing evidence of the no-return turnaround in monetary policy, as well as the holding of growth. Prices are close to historic highs for Wall Street (1% down) and for the Eurozone (3% down), and again far from the correction area (traditionally -20%) for Japan (13% below the maximum). The China is a pitiful case which, compared to the historic highs of late 2021, is still 45% below, and shows no signs of improving, even though since then its economy has grown more than those on both sides of the Atlantic and the one on the other side of the Sea of Japan.
