The likelihood of a soft landing in major advanced economies has risen, according to economists at NAB, due to ongoing falls in inflation and stronger-than-expected growth.
However, the bank’s economists have warned that a number of headwinds are still clouding the outlook, including uncertainty surrounding how far inflation will fall as well as ongoing tightness in labour markets, which mean that further monetary policy tightening remains a key risk.
NAB’s global consumer price index (CPI) indicator rose by 5.3 per cent year-on-year (y/y) during June, marking the smallest increase since October 2021. The bank said that inflation was softer in advanced economies (AEs), where prices rose by approximately 4.5 per cent y/y in June.
Notably, “considerable disparity” was observed when inflation in the US (3.1 per cent y/y) was compared with the EU (6.4 per cent y/y) and the UK (8.0 per cent y/y).
NAB senior economists Gerard Burg and Antony Kelly and chief economist Alan Oster noted that the slowdown in US inflation has lowered the odds of further rises from the US Federal Reserve.
“Following its July hike, markets are not fully pricing in any further hikes and anticipate an easing cycle commencing in March 2024,” they said.
Given the higher levels of inflation seen in the Eurozone, the economists said that was a slightly higher probability of further rate rises there. But markets have put the odds of a hike by December at 60 per cent, while rate cuts are currently expected to commence mid next year.
Meanwhile, further increases from the Bank of England were considered to be a greater risk. Markets are pricing in two further hikes following the latest increase earlier this month.
Japan was also highlighted as an exception, as the Bank of Japan has only “marginally” tightened policy, including last month when it effectively increased the cap on its yield curve target. However, NAB said the central bank would likely continue to move cautiously.
“The tightening in bank lending standards and weaker loan demand in a range of advanced economies has added additional monetary tightening, reducing the extent to which central banks have needed to raise rates,” NAB’s economists added.
Improvements across advanced economies
Economic growth generally improved across AEs in the second quarter, including in the US, Eurozone, the UK, and particularly Japan.
The NAB economists pointed out that these regions had all experienced one or more quarters of negative growth since late 2021, and growth has otherwise been subdued except in the US.
But despite this, little to no upwards movement has been observed in unemployment rates. NAB’s economists said that, at this stage, the adjustment was occurring through an easing in job vacancies, which remain high but have moved lower both this year and last year.
“Resilient labour markets, particularly given the growing likelihood that we are nearing the peak of the monetary policy tightening cycle (at least outside of Japan which hasn’t really started), raises hopes of a soft landing across the major AEs,” they said.
“While we expect growth in Europe is likely to be subdued, and we still think the US is still likely to see a modest correction, risks around the outlook have clearly become more balanced.”
