It has not been easy to predict the development of the economy recently. The last four years alone have brought enough twists and turns to fill an economics textbook: a pandemic, supply chain glitches, inflation, loose then tight monetary policy, and much more.
But despite all this, Christophe Barraud somehow managed to always stay one step ahead. Bloomberg ranked Barraud as the top forecaster of the U.S. economy in 2022 and 2023 – and every year from 2012 to 2020. He was also the top forecaster of the euro zone economy in 2022 and China's economy from 2017 to 2020.
If economic forecasting is more art than science, then Barraud is Picasso. The chief economist and strategist at Market Securities wants to continue his successful streak of correct forecasts in 2024. He recently discussed his forecast for the US economy and how investors should approach the new year with Business Insider.
The US economy will hold up better than expected
There was great optimism at the end of 2023 as market watchers realized that poor year-end economic data was good news for the Federal Reserve's efforts to combat inflation. However, optimism faded in the first few weeks of the new year as investors came to terms with the fact that the Fed may not ease monetary policy any time soon.
Barraud has never been as optimistic as some, not even last year. “I was surprised by the resilience of the U.S. economy because I expected some sort of recession in early 2023,” he said. “At one point it appears that the U.S. economy was stronger than expected, particularly in the third quarter. This was partly due to temporary factors, but overall, if you just look at what happened in the fourth quarter, consumption has obviously slowed down a bit, but it should remain fairly strong and very much in line with historical standards .
Barraud expects U.S. GDP to rise 2.5% at the end of the year, slightly above the consensus expectation of 2.4%.
That doesn't mean it will be an easy path. As Barraud pointed out, savings have declined, student loan payments have resumed, wages are returning to normal, and credit scores are still tight.
He is also wary of exogenous shocks to the U.S. economy. Barraud agrees with polls showing that geopolitical tensions, particularly in the Middle East, pose the biggest threat to the global economy.
“To be honest, at the moment it is the political situation and the situation in the Middle East, because it is evolving quite quickly and the reality is that people are not usually able to predict something like this; “That surprises everyone,” he said of the biggest threats to the economy.
But if all goes well, Barraud expects investor optimism that the Fed has beaten inflation to be rewarded with a reversal in monetary policy sometime this year – although not as quickly as investors would like.
“I will not say that the fight against inflation is over, but if there is no exogenous shock, the central scenario is that the consumer price index will be between 2% and 2.5% in the third quarter,” Barraud said.
On the question of when the Fed might cut interest rates: “My guess is it's more likely to do so in May,” he said. “I think March is a bit early, especially when you look at recent comments from several policymakers. March is not out of the question, but it will bring a significant deterioration in the labor market, which I do not currently expect.”
However, the situation is different in the eurozone, noted Barraud, where the fight against inflation will have to continue for a little longer than in the USA. He doesn't believe the ECB will be able to cut interest rates until June at the earliest – and that could provide investors with an arbitrage opportunity.
“Due to the fact that the ECB is likely to cut rates after the Fed, that it may further reduce its balance sheet, and not as the Fed announces the end of quantitative tightening, we will see some kind of interest rate differential supporting the Euro USD, perhaps a balance sheet difference that could also support the euro,” said Barraud. “And that’s why I think the euro could significantly outperform the US dollar, at least in the short term, but perhaps throughout the year.”
“But we don’t need a geopolitical shock,” he added. “This is a key risk. Otherwise, people will return to USD as a safe haven.”
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