What happened last week?
US
- Time was running out for student loan relief and consumers were bracing for the impending crisis as repayments were set to resume next week.
- The Federal Reserve (Fed) kept interest rates steady but dropped hints of a hike later this year.
Europe
- Britain’s inflation rate unexpectedly fell to its lowest level in 18 months in August.
- The Bank of England (BoE) kept interest rates stable after 14 rate hikes.
Asia
- The OECD lowered its global growth forecast for 2024, mainly because of China.
What does it all mean?
U.S. student debt has more than doubled over the past two decades and now stands at a massive $1.8 trillion, more than car loans or credit card debt. Monthly student loan repayments were suspended more than three years ago at the height of the Covid crisis, but this relief is about to end. And that puts the burden of those payments on Americans again, typically $200 to $300 a month. Combined with a nearly 30% rise in oil prices since June, this could take more purchasing power away from consumers.
The Fed left its target range for its key interest rate unchanged at a 22-year high of 5.25% to 5.5%. However, the Fed’s latest “dot plot” forecasts showed that 12 of 19 officials want to raise interest rates again in 2023 to curb inflation once and for all. The presentation also revealed that most officials now see a much slower path to rate cuts in 2024 and 2025. They expect it to fall to about 5.1% by the end of 2024, significantly more than the 4.6% they had expected in June. They forecast a further decline to 3.9% and 2.9% by the end of 2025 and 2026, respectively.
Britain’s stubborn inflation rate posted a small but surprising decline in August, falling to its lowest level in 18 months. UK consumer prices rose “only” 6.7% on an annual basis in August, defying economists’ expectations that they would actually increase from July’s 6.8%. Adding to the good news, core inflation, which excludes food, energy, alcohol and tobacco prices, fell even more sharply, falling to 6.2% in August from 6.9% in the previous month. Economists had expected the rate to remain stable.
A sharper-than-expected fall in inflation gave the BoE confidence last week to keep interest rates stable. It kept its key interest rate at 5.25%, marking the first break after 14 consecutive rate hikes dating back to December 2021, when rates were just 0.1%. However, the decision was not unanimous: five officials voted to keep interest rates unchanged, while four voted to increase them to 5.5%. Regardless, the BoE stressed that this was merely a pause and that interest rate hikes would resume if inflation did not fall further as expected.
The OECD raised its global growth outlook for 2023 to a (still sluggish) 3% after starting the year stronger than expected, buoyed by lower energy prices, China’s reopening and a robust US economy. However, the organization cut its 2024 forecast to 2.7% from a previous forecast of 2.9% as high interest rates weigh on economic activity and China’s once-vaunted recovery disappoints. Without Covid-plagued 2020, this would be the weakest annual expansion since the global financial crisis.
This week’s focus: the US economy
Fed officials released a set of new economic forecasts last week along with their interest rate decision, predicting stronger growth and a milder inflation outlook this year compared to estimates released in June. They lowered their core inflation forecast for 2023 to 3.7% from 3.9% previously. For 2024, they kept their forecasts at 2.6%, but predicted that inflation would not return to the central bank’s 2% target until 2026.
Officials’ estimates of economic growth for this year rose sharply from 1% to 2.1%, and the forecast for 2024 was revised upward by 0.4 percentage points to 1.5%. That’s not too far from estimates from the OECD, which also raised its forecasts for U.S. economic growth this year to about 2.2% and 1.3%, respectively. All in all, a “soft landing” in the US – the dream scenario in which the economy slows just enough to reduce inflation, but not so much that it falls into recession – is becoming increasingly likely, after previously seemed like a complete wrong decision just a few months ago. This will certainly be a reason to celebrate for investors.
Next week
- Monday: German Ifo business climate survey (September).
- Tuesday: US Consumer Confidence (September), US New Home Sales (August) Earnings: Costco.
- Wednesday: US durable goods orders (August). Earnings: Micron Technology.
- Thursday: Economic sentiment in the Eurozone (September). Revenue: Accenture.
- Friday: Japanese unemployment (August) and retail sales (August), Eurozone inflation (September).
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