As 2024 comes to a close, economic and political volatility seem to be at the forefront in the euro area, but in the US the economic outlook appears optimistic. On Thursday 5 December, Michel Barnier resigned as French Prime Minister following an overwhelming no-confidence vote against him which was supported by 331 MPs. The vote was submitted on Monday by the far-right National Rally party after Mr Barnier attempted to use Article 49.3 of the French Constitution to force a budget through parliament without a vote. The budget, which fell through, had included tax hikes and spending cuts to the

Timing is important for economic outcomes. During the pandemic, a series of unfortunate events all occurred at the same time to exacerbate the impact on the economy. Now, in the latest threat to the global economy, disruptions in the Red Sea have led to a substantial shift in shipping lanes. LSEG shipping analytics data show that container ships passing through the Suez Canal are down 30% year-on-year. Many ships are instead sailing around the southern tip of Africa, passing the Cape of Good Hope. However, this time around, there are a few elements of luck than mean the impact on

When, and by how much, are rates likely to be cut in 2024? After the central banks of the US, UK and EU hiked interest rates to their highest levels in years, the question has become increasingly pressing. Recent economic news has highlighted a divergence in economic performance between the US and UK, and caused investors to alter their expectations over the size and timing of rate cuts. Refresh this chart in your browser | Edit the chart in Datastream   The one-year overnight index swap rates for the US dollar, euro and sterling declined throughout most of Q4 last year on

The Polish economy escaped with one of the mildest contractions in GDP during the COVID-19 pandemic, and followed that with a strong recovery, but over the past year it has been on a downward trend. Its trajectory was disrupted by the surge in global inflationary pressures, and this turbulence was severely aggravated by the start of the war in Ukraine, an event which affected Poland particularly. The highly inflationary environment (further exacerbated by an influx of 1 million refugees from Ukraine) has eroded households’ purchasing power, while higher input costs have severely constrained the industrial sector, one of the key

The cost-of-living crisis has yet to trigger a pronounced recession in the world’s leading economies. However, high interest rates to curb inflation are likely to push the euro area into recession in 2024. Another possible effect of higher rates is increased fiscal fragility. As interest rates increase, so does the cost of government borrowing. Loose fiscal policy due to the cost-of-living crisis and COVID-19, combined with increased interest rates to curb inflation, have increased fiscal risk. It is notable therefore that, as can be seen from Fathom’s market-implied probability of default indicators in the chart below, this increased risk does

According to the flash estimate released on 31 July, the euro area returned to growth during the second quarter of this year, with economic activity increasing by 0.3%. In our latest Global Outlook Summer 2023, finalised early June, we changed one of our key calls and we no longer anticipate a global recession this year. The sharpest falls in real wages are now behind us and, in the US, real wages are rising. With a few exceptions, most major economies look to have navigated through the cost-of-living crisis while avoiding a period of economic contraction. They have dodged one bullet,

Last week’s signals from the Federal Reserve and European Central Bank that their rate-hiking cycles are set to continue in July was not sufficient to end a three-month rally in US equities, nor to prompt a material rise in implied volatility. Economies have proved far more resilient to rate hikes than many had anticipated, with even a mini-banking crisis in March failing to light the recessionary touchpaper. This resilience has caused the VIX Index, the leading indicator of market uncertainty, to fall to its lowest level in three years and well below its average since 1990 of 19.6. Equity markets

Housing markets surged during the pandemic, as colossal monetary and fiscal policy support and high savings rates pushed valuations to new peaks. This acceleration in price growth was the final stage of a synchronised, decade-long rally in house prices across the advanced economies. House prices also became stretched relative to fundamentals — all G10 economies have seen increases in house price-to-rent ratios since the start of 2015. This largely reflects the impact of low-for-long interest rates and quantitative easing. The big question for 2023 is the extent to which rising mortgage rates will now cause a correction in house prices.

Following the collapse of two US banks and the takeover of the troubled Credit Suisse by its main competitor, UBS, prospects of a global banking crisis have heightened. Both US and Swiss authorities responded firmly and swiftly, helping to stabilise markets. While the banking system is not burdened by the same issues as during the 2008 financial crisis, the nature of the current challenges come with their own set of risks and it would be premature to conclude that we are out of the woods. There are multiple reasons to indicate that we are not on the verge of a

The second-fastest Fed hiking cycle of recent times created its first casualty in the US banking sector last week, also reawakening fears about European banks, as the dramatic changes in the fortunes of Credit Suisse show. It appears that some US banks have been guilty of too lax an approach towards portfolio diversification, resulting in a situation where the prices of all held assets were strongly positively correlated — creating a highly concentrated risk around the path for rates. With yields rising as the Fed remains hawkish, many bank investments have been falling in value. Had these losses been booked

The failures of Silicon Valley Bank and Signature Bank in the US are the first sign of higher interest rates having a significant impact beyond the price of financial assets, and affecting the real economy. There will be more bumps in the road ahead, which we will be monitoring as we still expect most developed markets to enter a recession later in the year. So far our analysis presents four reasons why the current financial troubles, by themselves, may not be enough to tip us into a global financial crisis. First, policymakers have learnt lessons from the past. US authorities

There was good news on demand and activity from the closely watched ISM survey of US service-sector businesses in February. The index fell very slightly to 55.1, however, this is still well above the 50 benchmark that separates expansion from contraction. The new orders sub-index rose 2.2 points to 62.6, suggesting further positive momentum to come, with business demand for labour also increasing. The prices paid sub-index has fallen off its highs but remains well above normal pre-COVID levels. All this points to continued upward pressure on inflation. Federal Reserve policymakers have repeatedly stressed that they want to see meaningful