Xiao Cui and Nadia Gharbi, Senior Economists at Pictet Wealth Management, on the macroeconomics of the United States and the euro zone.
Despite one of the most aggressive monetary tightening cycles in history, the US and the euro area are currently two-speed economies. Divergence between manufacturing and services sector performance is not uncommon, especially in recent decades, and tends to occur more frequently in the later stage of the business cycle. In fact, past US recessions have almost always been led by contraction in the goods sector as services barely declined.
A resilient labor market is underpinning a solid services sector in the US and Europe. The labor market has always been a lagging indicator, and we suspect its sensitivity to interest rates and economic growth is lower this cycle, especially in the early part of supply/demand rebalancing. If this is the case, it would strengthen the argument for policy rates to be higher for even longer to dampen demand and battle inflation.
In the US, we expect weakness in the goods sector and a slowdown in services to lead to a mild recession, with the worst quarterly contraction occurring around the turn of the year. We now see a peak to trough real GDP decline of -1.0%, revised up from our previous forecast of -1.8% and significantly below a -2.2% contraction in a median recession. The US economy has shown extraordinary resilience, and the lags to monetary policy tightening seem to be rather long and sensitivity rather low. But cracks are showing.
In the euro area, we expect weakness in the manufacturing sector to continue while services should gradually slow albeit still supporting the economy in the coming quarters. The resilient labour market and real wage gains should support households’ consumption while tighter financial conditions should weigh on investment. In all, after a modest rebound in Q2, we expect growth to stagnate in H2 2023. Euro area GDP is expected to expand by 0.5% in 2023 as a whole. There will be some divergence between countries, with more services-driven economies doing better than economies more manufacturing-oriented such as Germany.
