US strength points to renewed policy divergence

With risks surrounding the Iran conflict receding, the focus is shifting back to domestic economic fundamentals, which point to widening growth and policy divergence across the major economies. The US is set to remain the clear growth leader among major DMs, supported by a powerful AI-driven investment cycle, resilient corporate profits and a healthy labour market. China should remain resilient, with strong exports in AI-related and advanced manufacturing sectors helping to offset weak domestic demand. By contrast, Europe is likely to remain stuck in a period of subdued growth. 

Assuming energy markets continue to normalise and weak activity keeps second-round inflation effects contained, we do not expect further rate hikes in the euro-zone, while several emerging-market central banks may also have less need to tighten policy. In the US, however, stronger growth and sticky core inflation are likely to prompt more Fed tightening than markets currently anticipate, even if some of that is ultimately reversed later in the cycle as the stock market turns.

Note: We’ll be discussing key takeaways from our latest Global Economic Outlook and answering your questions in an online Drop-In briefing on Wednesday, 1st July. Register here to join the session.