World Economic Situation and Prospects | February 2024

Inflation in most economies has notably decreased, attributed to lower energy and food prices. This development has allowed central banks to consider slowing or halting their interest rate hike cycles. While this could signal positive prospects for many economies, ongoing tensions in the Red Sea region pose a threat, potentially raising shipment prices and affecting the consumer price index in the coming months. The risk of Middle East conflicts disrupting energy markets and reigniting inflationary pressures globally persists.

 

Most central banks have chosen to keep their current policy settings, acknowledging the lagged impact of sharp interest rate increases and the prevailing geopolitical tensions. Their stance suggests an intention to keep policy rates higher for an extended period. Even the Reserve Bank of Australia (RBA), in its February meeting, did not rule out the possibility of another interest rate hike if deemed necessary. Additionally, given the tight financial conditions and the growing risk of geopolitical fragmentation weighing on global trade and industrial production, a comprehensive review of the economic outlook for different economic zones will be conducted in February.

 

US Economic Outlook in February 2024

The upcoming month could prove pivotal in shaping the outcome of the 2024 presidential election, particularly with the Supreme Court scheduled to deliberate on whether US states can disqualify Donald Trump from the race on February 8th. While the likelihood of votes against Mr. Trump remains low, the uncertainty surrounding this event poses a high-risk scenario for financial assets, particularly the dollar.

 

On the economic front, recent data indicates that the US economy has displayed greater resilience than initially anticipated. Adjusted for inflation, gross domestic product (GDP) surged at an annual rate of 3.3% in the last quarter, with major components of economic activity experiencing expansion. Throughout 2023, US consumer spending exhibited resilience, particularly in the fourth quarter. Additionally, nonresidential fixed investment, exports, and federal, state, and local government spending contributed to the improved growth of US GDP.

 

Thanks to lower inflation and robust labor markets, December witnessed a rise in income and spending, showing no signs of a recession. Core retail sales increased by 3.3% year over year. The Personal Consumption Expenditures Price Index, which stood at 2.6% in December (down from 5.5% at the beginning of the year), played a significant role in this progress.

 

In December, Core PCE, excluding volatile food and energy prices, eased to 2.9%, with both Core and headline PCE price indexes seeing a modest 0.2% monthly gain. These figures mark the lowest levels for overall and core PCE since the onset of the inflation surge in March 2021.

 

With notable numbers in nonfarm payrolls (NFP) and consumer confidence reaching nearly a three-year high of 114.8, expectations for January sales figures, along with positive indicators for the economy, income, and employment, are anticipated to improve further. Such projections could present the Federal Reserve with a more challenging decision-making environment regarding monetary policy adjustments. While strong labor data and increasing spending may suggest holding rates for longer, it's crucial to avoid keeping rates excessively high, which could potentially stifle the economy's momentum. Currently, the Fed watch tools of the CME Group price the likelihood of a rate hike at less than 20% for the March meeting. Hence, upcoming data later this month and in early March will be pivotal and require closer monitoring.

 

Key events on the economic calendar include inflation numbers (13th), retail sales, Philadelphia Fed surveys, trade data, and industrial production figures (15th), housing data, Producer Price Index (PPI), and Michigan inflation expectation surveys (16th), US Leading Index (20th), housing numbers, and PMI data (22nd), with durable goods orders scheduled for February 27th.

 

Eurozone Economic Outlook in February

Recent data releases in January and February show tentative signs of recovery for the Eurozone. Contrary to market expectations of a 0.1% contraction and the looming threat of a technical recession, GDP for Q4 2023 remained stable, neither increasing nor declining. Additionally, inflation, which had eased to 2.9% in December, further decreased to 2.8% in January, signaling a potential need for the central bank to consider interest rate cuts.

 

On the labor market front, improvements are noticeable across most Eurozone members and the union as a whole. Eurozone unemployment decreased to 6.4%, while in Germany, the largest Eurozone economy, it dropped to 5.8%, according to the latest published data.

 

Amidst the relative decrease in inflation, economic activities showed slight improvement. January's headline inflation dropped to 2.8% year-over-year. Although the deceleration was slightly less than expected, core inflation eased to 3.3%, with service inflation remaining steady at 4.0%. The Eurozone Composite PMI for January increased slightly to 47.9, indicating modest growth in both the services and manufacturing sectors. Despite this uptick, PMI measures remain below 50, signifying a contraction in overall activities.

 

With weak economic growth and further ebbing of underlying inflation, the European Central Bank (ECB) will find more reasonable grounds to initiate a policy interest rate cut of 25 basis points to 3.75% at its April monetary policy announcement.

 

Looking ahead in the Eurozone later this month, there are no significant market-moving events or data releases anticipated. However, pricing changes based on ECB policy changes could facilitate smoother increases in stock markets and alleviate pressure on the euro. On the economic calendar, notable events include the ECB Economic Bulletin (8th), German inflation numbers (9th), Eurogroup meeting (12th), ZEW EU Economic Sentiment (13th), EU GDP (14th), Eurozone inflation (22nd), German Ifo Business Climate Index and GDP (23rd), and the GfK German Consumer Climate on February 27th.

 

The UK Economic Outlook in February 2024

The most significant event in the UK for the month was the Bank of England's (BoE) decision to maintain its rates on the first day of February. By keeping its policy rate steady at 5.25%, as widely anticipated, the central bank signaled its confidence in the economy's ability to withstand higher rates to control inflation amid uncertainty about the trajectory of inflation. Of note in the meeting was the single vote for rate cuts and the removal of any reference to potential further tightening. During the press conference, Governor Bailey indicated that the central bank had removed the upside bias on rates, raising questions about the duration of the hold on interest rates.

 

On the data front, PMI figures indicate increased economic activity across various sectors, including manufacturing, services, and construction. Labor market data, with an unemployment rate of 4.2% and an Average Earnings Index +Bonus increase of 6.5% year-over-year, underscores the challenge facing both the central bank and the government in further reducing headline inflation, which stands at 4%.

 

Later in the month, key data releases include labor market data on the 13th, inflation figures on the 14th, GDP and trade data on the 15th, and retail sales on February 16th.

 

Overall, the Monetary Policy Committee's inclination towards lowering interest rates in the coming months suggests that pressure on Sterling may persist. However, hopes of less hawkish policies could buoy stock markets, especially given the signs of progress in economic activities.

 

Asia Economic Outlook in February 2024

Recent data suggest a modest firming of China's economy in early 2024, contrasting with disappointing figures from the final months of 2023. Meanwhile, in Japan, the Nikkei 225 index continues to reach new highs.

 

China's manufacturing PMI edged up to 49.2 in January, compared to 49.0 in December, slightly below the consensus forecast of 49.3. Similar progress was observed in the service sector, with the January services PMI rising to 50.7, up from 50.4 in December and slightly exceeding the consensus forecast of 50.6. However, concerns persist regarding slower orders in the manufacturing sector, tempering optimism for the coming months.

 

Following concerning data in the last quarter of 2023, the Chinese government and the People's Bank of China implemented various support measures, including reducing the Reserve Requirement Ratio and expanding access for property developers to commercial loans. However, addressing more substantial issues, such as a declining and aging population, is necessary to sustainably boost market sentiment.

 

With the Chinese New Year holidays in February, expectations for significant economic activities and market changes are subdued, while a more optimistic sentiment may prevail.

 

In Japan, progress in stock markets and economic activities has prompted discussions within the Bank of Japan (BoJ) about potentially exiting the negative rate policy. Governor Ueda and his team emphasized that withdrawing from the negative interest rate policy does not imply further rate increases. This comment fueled Japanese stocks to reach a new 35-year high in the first week of February.

 

In the economic calendar, Japanese GDP data on the 15th and industrial production on February 27th stand out as important events to monitor for the remainder of the month. Expectations for stock markets suggest that Asian markets may see slightly improved performance this month.