Four Economic Themes Shaping the Next 12-Months

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Text on screen: Ken Chambers, Fixed Income Strategist

Kenneth Chambers: Tiffany, let's frame out our cyclical outlook, that covers the next six to 12 months ahead. And always top of mind is just the path for growth, inflation, policies, both monetary and fiscal. What are some of the key conclusions from that discussion we had?

Text on screen: Tiffany Wilding, Economist

Tiffany Wilding: Yeah. So we would really boil it down into four themes that we talked about. So the first is just, and I'll go through those four themes very quickly.

FULL PAGE GRAPHIC TITLE: Navigating the Descent: Four economic themes, LIST - 1. Tailwinds to U.S. outperformance are fading

But the first was just that some of the tailwinds, some but not all of the tailwinds to the US growth outperformance that we've seen over the last couple of years, those are fading. And I would actually argue that that's healthy.

Now there are some other things, I think, that have also boosted US growth. They look more ingrained to us. And that is the United States has outperformed in terms of productivity growth since the pandemic. That's largely been fueled by better investment growth. We think the US is better positioned in terms of its ability to capture the financial market gains, as well as the capital accumulation from technological innovation, AI and the build out and implementation around that.

But in addition, some of the weakness that's coming out and spilling over into global markets from China, the US is also more insulated from that. And Europe in particular, still looks very challenged from those dynamics as a result of just the European growth model being more reliant on China as an export market, obviously more dependent on energy and just more prone to have difficulty with broader global trade uncertainty.

FULL PAGE GRAPHIC TITLE: Navigating the Descent: Four economic themes, LIST - 1. Tailwinds to U.S. outperformance are fading, 2. Developed market economies look more “normal” than any time since 2019. But what is normal?

But that gets me to the second theme, which I think is also important, is that if you just take a step back, we are really just normalizing. All of these factors are a normalization to the series of shocks that we had during the pandemic and in the wake of the pandemic, and economies look just more normal now, kind of whatever that normal is, but more normal now than they have at any time over the last five years.

When we look across indicators like inflation, which are now within a stone's throw of central bank targets, some DM economies look like they're at risk of undershooting. We look at labor market indicators, we look at supply chain stress indicators that just were acutely impacted by the pandemic. All of those things just look like they've normalized. All the while, inflation expectations longer term have remained anchored.

FULL PAGE GRAPHIC TITLE: Navigating the Descent: Four economic themes, LIST - 1. Tailwinds to U.S. outperformance are fading, 2. Developed market economies look more “normal” than any time since 2019. But what is normal?, 3. Central banks are cutting rates to neutral, 4. Soft landings appear in reach, but risks remain

So that is to say, is that economies look more normal, we are now at the precipice and at a time where central banks really just need to readjust policy back to reflect the more normal conditions of their economies.

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All of that sounds great. We've had a soft landing. Now we're focusing on securing it or sticking it.

But that brings me to the fourth theme, which is just that the risks are still out there. On any given year, of course, there's a probability of around a 15% chance in the US of a recession. But of course, central banks could also start to lower rates and realize their economies are reaccelerating. Inflation is reaccelerating.

And so they will have to be attuned to these risks. And we think they are poised to either slow down the pace of cuts or speed them up as necessary.

But overall, because of kind of how long they waited, we think there is room here for them to drop rates around a range of different policy or economic outcomes.

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