Economy

“After the lower figures of recent months, the inflation pendulum is swinging a touch in the other direction again. The outlook for the Christmas shopping season has been further dampened. Despite strong wage increases, a gloomy consumer mood was already reported yesterday. The fall in energy prices provided less relief than in previous months and services became significantly more expensive at 4.0% year-on-year despite the usual seasonal price reductions. However, in view of the subdued development in demand, a noticeable slowdown in price increases in this economic sector is only a matter of time.”

Stephanie Schoenwald

„After a brief recovery in October, the ifo business climate is now falling again. No wonder, as Donald Trump's election victory is likely to create new headwinds for the already hard-hit German export industry. There is also the threat of a prolonged period until a new government is formed, during which German politics will hardly be able to react, let alone provide any stimulus. However, some growth is still possible in 2025 if private consumption gains some momentum and investment activity stabilises due to falling interest rates. The greatest downside risk, however, lies in the labour market, as it is unclear how long companies will be able to hold on to their employees while production capacity is significantly underutilised in parts of the economy.”

Dr Philipp Scheuermeyer

“The German economy has been trapped in stagnation for more than two years. Negative and positive growth rates alternate and the bottom line is that gross domestic product is not getting any further. Structural problems and a decline in international competitiveness, combined with weak domestic demand, are a tough pill to swallow. Nevertheless, rising real wages finally had a noticeable impact on consumption in the last quarter. In addition, the cycle of interest rate cuts has begun, meaning that at least slight growth is likely in the coming year. The downside risks include a weaker development on the labour market and, above all, an election victory for Donald Trump.”

Dr Philipp Scheuermeyer

"The ECB will probably go into the summer break without lowering interest rates again. In view of the recent lack of a decline in service inflation, this prudence seems appropriate to me. The cards will then be dealt anew in September. A continuation of monetary easing is currently the most likely scenario. However, a key prerequisite is that there are signs of a slowdown in wage growth by then. To enable employees to compensate for the loss of purchasing power they have suffered, collectively agreed wages have risen significantly until recently. This is still causing above-average cost pressure in the labour-intensive service sector. In addition, the ECB's scope for cutting interest rates also depends on the fiscal policy of European governments."

“The start of the interest rate turnaround is approaching in the eurozone. I expect the deposit rate to be lowered in July at the latest. Overall, consumer price inflation remained unchanged in April. However, the fact that services inflation has eased after a five-month standstill is likely to be more important for the ECB. At the same time, the growth environment in the eurozone suggests that inflation remains on target. Although gross domestic product surprised on the upside in the first quarter and sentiment has recently brightened somewhat, the European economy is likely to be slow to pick up speed. This suggests limited domestic price pressure. However, the development of energy prices remains a risk factor for inflation and the economy due to the ongoing geopolitical tensions.”

“In the US, the interest rate turnaround is likely to be delayed. Three negative inflation surprises in a row are too many for the Fed. Driven by services, price pressures have consistently regained strength in recent months. In the run-up to the upcoming FOMC meeting, Fed Chairman Powell already made it clear that the desired clarity regarding a sustained convergence of inflation towards the 2% target had failed to materialize. The robust economy, in particular the strong labor market, also relieves the Fed of the urgency to start easing. The probability of an interest rate cut before the summer break has therefore decreased significantly.”

“The economic outlook for the German economy is better than the current mood. The data on wage developments reported today confirm the assessment that private consumption should sustain a moderate economic recovery. The gap between inflation and nominal wage growth is visibly closing. A more significant increase in real wages can be expected at the end of the year. Driven by high price increases and the shortage of skilled workers, employees will receive the highest nominal wage increases in 30 years in the current year. On average, collectively agreed wages are expected to rise by more than 5% in 2023. A smaller increase is expected for next year. However, at around 2.5% (HICP), inflation in 2024 is likely to be much lower than in the current year, for which I expect average inflation of 6.3%. Subdued aggregate demand limits the scope for further price increases, and prices for both energy and food have already stabilised since the winter. If this development continues, real wages will rise noticeably again next year. This also gives rise to cautious optimism for the economy. In 2024, German GDP should therefore grow again after a decline of 0.4% this year, albeit only moderately at 0.8%.”

"The US economy grew by 2.4% on an annualised basis in the second quarter. The US economy is proving resilient despite the Federal Reserve's aggressive turnaround on interest rates. Stable consumer spending and nonresidential fixed investment had a positive impact. However, I continue to expect rising interest costs to slow economic activity in the second half of the year. Sentiment in the manufacturing sector has already deteriorated noticeably and the labour market, which has been clearly overheated lately, seems to be slowly cooling down somewhat. Workers will feel the impact, which will weigh on consumer spending in the coming months. However, on Wednesday, in parallel with the expected interest rate hike of a further 25 basis points, the U.S. Federal Reserve changed its assessment of current U.S. growth from "modest" to "moderate". The Fed now probably assumes that it only needs an economic dip – and not a recession – to push inflation further toward the two-percent target. This means that the US economy could come out of this interest rate cycle with a black eye.”