Weekly Update - Resilient growth in the euro area and still strong in the United States!

Resilient growth in the euro area and still strong in the United States ! In the United States and the euro area, GDP growth in Q3 2024 was positive, but not on the same scale: continued strength in the United States versus weak growth in the euro area. More specifically, in Germany, recession was avoided (at least temporarily) while the Olympic Games supported activity in France. With inflationary risks now behind us, the ECB and the Fed are likely to continue cutting rates.
 
The euro area is holding up well. GDP growth in the euro area reached 0.4% quarter-on-quarter in Q3, the strongest pace for over two years. The Q3 figures also confirm the good momentum of the peripheral economies, with Spanish growth of 0.8% compared with 0.4% in France and 0.2% in Germany. Growth in peripheral economies continues to benefit from the EU recovery package and strong service exports (tourism).
 
France is boosted by the Olympic Games. Growth in France in Q3- 24 was 0.4% quarter-on-quarter, the strongest rise since Q3 2023. This was clearly supported by the Olympic Games, and as such question about the underlying strength of the French economy remains open. Business investment remains sluggish, contracting again in Q3 24 given the negative impact of new norms on vehicles. In addition, residential investment continues to decline against a backdrop of still high interest rates, while exports have fallen back. Public spending, on the other hand, has remained buoyant but, in view of the budget d
 
Germany avoids recession. While the consensus forecast was for a further contraction in the economy, growth came in at 0.2% quarter on quarter in Q3-24, albeit with a sharp downward revision to Q2-24 growth. Indicators at the end of the quarter were already giving positive signals, with a slight rebound in the business climate and consumer confidence indices. Activity in Germany has been yo-yoing since 2022, with GDP remaining at its pre-crisis Covid level. Germany is therefore doing better than expected. On the other hand, given the heightened signs of weakness on the labour market, activity could remain sluggish.
 
The United States on a roll. The United States is continuing to build on its excellent momentum, with growth in Q3-24 of 2.8% on annualized rate (0.7% quarter-on-quarter), driven by a 3.7% jump in personal spending and continued expansion in public spending and non-residential investment. The only negative factor in the Q3- 24 figures was the negative contribution from international trade, reflecting strong domestic demand.
 
In terms of inflation, the core personal consumption deflator, the Fed's preferred measure, eased to 2.7% quarter-on-quarter in Q3- 24, likely allowing the Fed to continue the rate-cutting cycle at its meeting on 7 November. Looking ahead, the United States is set to experience a softlanding given the softening of the labour market. In the euro area, purchasing power gains (wage increases above inflation) and monetary easing should support economic activity.
 
Other highlights of the week
 
In the highlights of the week, we chose to talk about inflation in Euro area as well as the Autumn Budget in the United-Kingdom :

• EURO AREA : measured slowdown in disinflation. The disinflation process halted in the euro area in October. Total inflation stood at 2% year-on-year, while core inflation was 2.7% (from 1.7% and 2.7% respectively) . This pause in disinflation essentially reflects the rise in energy prices. Inflation in services, the most rigid component, continues to slow, coming in at 3.9% year-on-year in October. These figures should allow the ECB to cut its key interest rate again in December.

• UNITED KINGDOM : A supportive budget. The Labour government has presented its first budget and multi-year plan. Numerous tax rises are planned (employers' social security contributions, capital gains tax, etc.) to finance an increase in public spending (hospitals, education). The government has also decided to increase public investment. Tax increases will not be enough to cover the additional public spending and investment. As a result, this budget should support economic activity, which could slow the Bank of England's rate-cutting cycle. The markets continue to anticipate a cut in November, but not anymore in December. Finally, the sharp rise in bond issuance announced for the next 5 years has pushed up long-term rates.

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