SEIZE THE PRESENT
We have let this quote from the famous poem “If” inspire our macro thoughts this month. Acknowledging that we are not geopolitical analysts and wary that we do not have the luxury of not taking a view, we have introduced into our macro baseline the assumption that the conflict in the Middle East will not escalate, thus keeping increases in energy commodity prices limited and, most importantly, temporary.
Against this backdrop, barring mechanical upgrades to our energy inflation forecasts to reflect the recent shape of the Brent crude oil futures price curve and the strengthening of the US dollar, we have left the backbone of our macro baseline unchanged, while remaining wary, though, that any escalation and/or prolongation of the situation would hit the geographies under our coverage differently.
Against conventional wisdom, we think that overheating risks have declined in the US, albeit at the margin. Under base-guesstimate that the Iran conflict will only have a limited impact on the US economy, our projected macro-outlook is largely unchanged. Incoming data continues to support our baseline that economic activity retains momentum, led by domestic demand, while core disinflation remains benign and the risk of wage acceleration has eased.
Consistent with our geopolitical base-guesstimate, we are also keeping the shape of our projected macro-outlook for the Euro Area (EA) unchanged. For the time being, the energy shock that has unfolded so far isn’t enough to derail the acceleration in growth momentum we project for this year, while we allow the stress to filter through our projected inflation baseline via volatile components only, without involving core inflation.
However, acknowledging that the EA economy’s tolerance to rapid and sharp increases in energy commodity prices is lower than that of the US, we warn that downside risks to the EA macro-outlook are greater and more immediate than those faced by the US. Therefore, we do not rule out that, should the conflict persist, our view on the EA economy may be downgraded more quickly than that on the US.
While the hit to EA growth would be largely linear, that on core inflation might be more complex. Initially, underlying prices could be impacted if the energy market stress persist, yet, we would not anticipate core inflation to accelerate uncontrollably as it did in 2022. Given the presence of a much less solid macro backdrop than that experienced by the EA in 2022, we believe that the related growth relapse (and any eventual miscalculated response by the European Central Bank) would tame underlying inflation further down the road.
Finally, consistent with our wait-and-see approach, we have left our projected macro-outlook for China unchanged. Middle East tensions are unlikely, for now, to alter the growth and inflation trajectory; however, risks to the latter are increasing.
