Despite recent market volatility, the US economy continues to show strong fundamentals, as indicated by 2.8% annualized GDP growth in Q2 2024. However, early Q3 2024 data has led to a sharp increase in financial market volatility.
Factors contributing to this volatility include a softer-than-expected July nonfarm payrolls report, hawkish signals from the Bank of Japan, and rising tensions in the Middle East, which pushed the S&P 500 Volatility Index to its highest level since October 2020.
Swiss Re notes that while the 20 basis point increase in the US unemployment rate triggered the Sahm Rule recession indicator, the rise remains relatively low compared to previous cycles, with distortions from COVID-19 affecting the indicator’s accuracy.
The higher unemployment rate appears to stem from more cautious hiring practices and an increase in labor supply, with no immediate downturn expected. In contrast, the euro area continued its recovery in Q2 2024, although Germany saw a slight contraction of 0.1% quarter-over-quarter.
Swiss Re has maintained a cautious growth outlook for 2025, citing heightened risks from geopolitical tensions and weak economic prospects in Germany. Additionally, economic activity in China remains fragile, with downside risks to end-year forecasts.
The reinsurer also reports that the near-term inflation outlook remains uneven, though the path toward the 2% central bank target is becoming clearer. Reverse base effects expected in the coming months may counter some of the disinflation progress seen in Q2 2024, but, overall, inflation trends are moving toward central bank goals.
In Europe, services inflation continues to drive overall inflation rates, potentially leading to an increase in 2024 CPI forecasts. However, this pressure is expected to ease in the medium term as wage growth slows.
In Japan, a more sustainable trend in underlying inflation suggests that policy normalization will proceed gradually into 2025, though recent Yen appreciation could impact inflation and delay rate hikes.
Swiss Re’s analysis indicates a shift in emphasis from inflation concerns to the normalization of interest rates. The July US jobs report supports the view that the Federal Reserve may start easing policy in September, with the potential for three rate cuts by the end of the year, one more than the two cuts currently forecast.
The European Central Bank is expected to continue its cautious approach to easing restrictive policies, given the ongoing strength in services inflation. Quarterly rate cuts are anticipated, with the next one likely in September.
Meanwhile, in Japan, the Bank of Japan is expected to monitor US economic conditions closely before taking further action, but policy normalization is anticipated to continue into 2025.
Swiss Re highlights that upside risks to its 2024 GDP forecasts for the US and Europe persist, with disinflation potentially leading to more significant rate cuts in the second half of 2024.
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