GOING BY THE LEOPARD BOOK
Consistent with our "Leopard" narrative, US growth has proved resilient but not overheated thus far, running modestly above its potential rate. Looking ahead to 2027, we expect the broad contours of our macroeconomic baseline to remain largely unchanged. Accordingly, the outlook for inflation remains open to the disinflation process.
The recent energy shock has inflicted less damage to the EA economy than initially feared. Provided that Middle East tensions have reached their peak and that energy prices are retracing, - albeit with some lingering volatility, from the peaks of March and April, we expect the EA economy to remain resilient throughout 2027, maintaining a growth path consistent with the 2026 trend. The outlook for inflation remains benign. The latest inflation prints have shown that evidence of indirect and second-round effects from higher oil prices has been virtually absent. We believe the inflation trend will remain tilted toward moderation, albeit at a slightly slower pace than our pre-summer expectations.
Recent activity data suggest that China's domestic economy continues to struggle for traction. With policy support gradually gaining traction across both the consumption and infrastructure investment fronts, we expect growth to improve modestly in 2027. Our baseline for inflation in 2026 remains unchanged. We continue to expect headline inflation at 1.0% (annual average). For 2027, considering the mild uptick in our growth baseline, we expect headline inflation to tick up to 1.2%.
We continue to expect the Fed to remain on hold for the rest of the year, but Chair Warsh speech at Jackson Hole has led to an increased probability of a hike in September. In 2027, the Fed could adopt an easing bias, considering that we expect economic growth to remain close to potential while inflation will have already reached target and will remain around 2% throughout 2027. That said, the Fed’s stance in 2027 will ultimately depend on how the monetary-policy framework under Chair Warsh evolves and at which level FOMC members see the neutral rate.
Probabilities are increasing that the ECB will deliver an additional rate hike in September. At the same time, we maintain our view that the ECB will not be able to deliver the full amount of tightening currently priced by markets (a bit more than 2 hikes) between now and the end of H1 next year. Unless growth proves more resilient than expected amid the likely re-emergence of downside pressures associated with renewed instability in the Middle East, we believe that the conditions that could justify a third rate hike—namely elevated oil prices, in the absence of significant direct, indirect, or second-round effects on inflation—would represent a substantial drag on growth. This would make it difficult for the ECB to justify further tightening beyond a potential September hike. In 2027, we expect one/two rate cuts by the ECB, possibly in H2 2027 (vs. Q4 2026 before).
The PBoC's latest Quarterly Monetary Policy Report, released on 12 August, reinforced the central bank's dovish policy stance but stopped short of signaling any imminent broad-based monetary easing measures. Accordingly, we change our PBoC call, and we now expect no policy rate or RRR cuts in 2026 (compared with a 10bp policy-rate cut in Q3 in prior baseline), with near-term policy support more likely to come through faster fiscal-policy execution. Broad-based monetary easing is more likely to come later (in 2027), if growth weakens further or fiscal support proves insufficient.
