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Economic and financial review and outlook for the second half of the year

Published on 24/06/2024


Economic and financial review and outlook for the second half of the year

​As the first six months of 2024 draw to a close, Olivier Colsoul, Senior Strategist at AG, took time out to discuss the dynamics that have shaped the economy and financial markets over the first half of the year.

What is your view of the economic situation?

Since the beginning of the year, the global economic situation has been gradually improving. Leading economic indicators have returned to expansionary territory. In addition, economic growth came a positive surprise in the first quarter in China and the eurozone, seemingly emerging from a period of lethargy that had lasted several quarters. 

Across the Atlantic, even though GDP figures have eased, the resilience of the US economy is as topical as ever.

On the inflation front, after a considerable slowdown over the past 18 months, returning to the 2% target looks a little trickier. It is above all the resistance of the services sector that is holding things up, not least because wage growth there is still strong. That being said, there is no doubt that inflation is slowing.

What were the implications for the central banks, which were under pressure to act?

Some of the major central banks, for example those of Switzerland and Sweden, were the first to pull out all the stops by kick-starting their first interest rate cuts. These were followed in June by the Bank of Canada and the European Central Bank, as was to be expected. While it did indeed lower the cost of money, it was careful not to confirm that this was the start of a new downward cycle given the "sticky" nature of inflation. Nevertheless, it did admit that there is a strong likelihood that others will follow suit in the future. However, for this to happen, the key metrics will have to move in the right direction, i.e. towards continued moderation.

"The global economic situation has been gradually improving"

The US Federal Reserve is in no hurry to pull the trigger, given that the economy is performing well and inflation is a little higher than in Europe. However, at least one first cut should take place before the end of the year.

The main stock markets continued their jubilation over their upward trend. How can this be explained?

The major stock market indexes are posting performance here and there close to 10%, sometimes above and sometimes below. So-called American exceptionalism has once more worked in Wall Street's favour. The now-famous 'magnificent seven', mainly in technology, once again stood out with record rises in both their profits and share prices. Yet the rest of the ratings did not fall short of the mark but did not progress as strongly. The good news comes from corporate results, which continue to improve more broadly and are leading to positive revisions by analysts. We can now see this in European stocks, even if their growth is intrinsically weaker than that of their US peers.

However, the same cannot be said of emerging markets, which are still lagging behind.

Absolutely. Despite growing interest in India, what is happening in China has the upper hand. Although growth has picked up, many economists expect the recovery momentum to fade over time. In addition to the geopolitical context and the risk of a new trade war with the United States and possibly with Europe, the persistent pressure on the property market and the weakness in household and private business confidence are reducing the impact of the rather timid stimulus efforts. In addition, international investors are wary of the Asian giant.

"Inflation proved to be more persistent than expected in the United States"

As for bonds, they are struggling to get out of the red zone, hence an underperformance.

It's true that performance so far has been disappointing. There are two reasons for this. Firstly, the Fed's particularly accommodative communication last December triggered an all-out rally, causing a sharp fall in bond yields at the end of 2023. Secondly, inflation proved to be more persistent than expected in the United States, prompting the market and the Fed to postpone expectations of a rate cut. As a result, volatility prevailed on the bond markets, and the pressure on bond yields somewhat rose again.

How would you sum up the first half of the year?

Overall, it has shown a positive trend. From an economic point of view, growth is tending to strengthen, while disinflation is proving a little more sluggish, but at levels that are not alarming. On the financial markets, the stock markets are giving investors something to smile about. The only downside concerns bonds, which have remained volatile but, on the plus side, offer better interest rates than they did 6 months ago.

What's the outlook for the second half of the year?

Overall, the trends seen so far are unlikely to reverse. The economic upturn is likely to continue, but without leading to a strong rebound, as monetary policies remain deliberately restrictive in order to keep inflation in check. Key rates are expected to fall slightly, including in the United States. This means that our main scenario of a soft landing for the economy, to varying degrees on both sides of the Atlantic, still holds true, which is reassuring. For investors, bonds should logically perform slightly better, given their higher yield at maturity. As for equities, while the environment and earnings trends remain favourable, price rises could be more muted in the near future, given the good performance already achieved in the first half.

"The stock markets are giving investors something to smile about"

Finally, to conclude the interview, we haven't yet touched on the political - or even geopolitical - aspect. 2024 is shaping up to be a record election year on a global scale. Without really engaging in forecasting, what impact could these events have on the global economy and financial markets?

Half of the world's voting-age population in 88 countries will be called to the polls this year. Not all elections have the same impact though. The most important is undoubtedly the US presidential election in November, but closer to home, the European and Belgian federal elections have just taken place. While the former did not hold any major surprises, the result of the Belgian ballot boxes appears surprisingly less complicated than usual for the formation of a government required to consolidate the budget. But the big surprise came from Paris, where the President decided to dissolve the National Assembly and called early general elections that could put the current government's relative majority in serious trouble and open the door to extremes or political deadlock. This sudden uncertainty, seen by some as unnecessary and risky, has seriously dampened investors' spirits at a time when the budgetary situation is hardly rosy. As we await the rematch of the Biden-Trump election, which could have economic repercussions for Europe if the former Republican President wins, there is no doubt that political and geopolitical risk will predominate over the coming months and perhaps cause a stir on the financial markets. To be continued.