Incoming macro data suggest the global economy may experience a period of immaculate expansion characterised by solid economic activity and modest inflationary pressures.
Risks surrounding the growth-inflation trade-off, however, differ among regions:
1) The US economy faces the most prominent overheating risk. Growth could continue to surprise to the upside for cyclical and/or exogenous reasons. Should this lead to an increase in labour demand, wage pressures could accelerate amid a “small” labor market heavily constrained on the supply side by President Trump’s immigration policies. Against this backdrop, any AI productivity boom is unlikely to be sufficiently strong or rapid to rein in near-term labour costs and inflationary pressures.
2) Overheating risks are less acute in the EA, for several reasons. Firstly, the labour market balance is skewed towards excess supply, as demand continues to weaken while supply is on the rise. Secondly, while aggregate fiscal impulse is positive this year, defense measures account for almost two-thirds of the projected reduction in the cyclically adjusted primary balance, suggesting that neither near-term nor medium-term inflationary risks appear significant over the forecast horizon.
3) China continues to be in a different league. As growth remains driven essentially by external demand, inflation risks are limited and, in the absence of a substantial switch in government priorities away from R&D and toward consumer spending, risks remain tilted to the downside.
Against this backdrop our monetary policy baseline is unchanged. We continue to expect both the Fed and the ECB to ease policy this year for disinflationary reasons. We remain of the view that the Fed will cut rates three times (with risks skewed towards fewer cuts) and the ECB once. Finally, we maintain our forecasts that the PBoC will deliver around 40bps of rate cuts (OMO 7-day reverse repo-rate) and possibly one 50bp RRR cut.
Fabio Fois
Head of Investment Research & Advisory
Matteo Gallone
Junior Macroeconomist
Investment Research
Chiara Cremonesi
Senior Rates Strategist
Investment Research
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