For once, growth in the European economy was the positive surprise in the first quarter of this year. Gross domestic product for the eurozone as a whole rose by 0.3% quarter-on-quarter, recording its strongest growth in a year and a half, note Guy Wagner and his team in their latest monthly market report "Highlights".
“The four main economies of the eurozone – Germany, France, Italy and Spain – all exceeded analysts' expectations and contributed to the favourable growth,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. In the United States, GDP growth slowed slightly in the first quarter, coming in at +1.6% annualised versus the fourth quarter of last year. “Nevertheless, the slowdown was mainly due to weak inventories and strong imports, with underlying growth stronger than the headline figure would suggest.” In China, GDP growth of 5.3% year-on-year suggests that economic activity appears to be growing in line with the official target of 5%.
Following the considerable slowdown in inflation on both sides of the Atlantic over the past 18 months, the return to the 2% target is becoming more challenging. Guy Wagner
Inflation: the return to the 2% target is becoming more challenging
“Following the considerable slowdown in inflation on both sides of the Atlantic over the past 18 months, the return to the 2% target is becoming more challenging,” believes the Luxembourgish economist. In the US, headline inflation rose to 3.5% in March. In the eurozone, overall inflation was unchanged at 2.4% in April.
Central bank rates in the United States and in Europe remain unchanged
In line with expectations, the US Federal Reserve left its key interest rates unchanged in March. Nevertheless, ChaiIn line with expectations, the US Federal Reserve left its key rates unchanged at its May 1 meeting. Following the latest disappointing inflation figures, however, Chairman Jerome Powell tempered hopes of imminent monetary easing, acknowledging the recent lack of progress towards the 2% inflation target. The top US monetary official maintains the view that the next move on interest rates should be a downward one, the timing of which will be data dependent. In the eurozone, the European Central Bank also left its key rates unchanged at its April meeting. Nevertheless, President Christine Lagarde suggested that, in the absence of unfavourable inflation data, a first rate cut at the next meeting in early June would be highly likely.
Significant rise in long-term interest rates
The deterioration in US inflation statistics triggered a significant rise in long-term interest rates. European long rates followed the trend of their US counterparts, even though inflation figures in Europe remained more favourable. Thus, the benchmark 10-year rate rose in Germany, France, Italy and Spain.
Upward trend on the stock markets temporarily halted
After five months of consecutive gains, stock markets retreated slightly in April. Guy Wagner: “The tenacity of US inflation, prompting a rise in long-term interest rates, and uncertainties regarding the start of monetary easing by the Federal Reserve have, at least temporarily, interrupted the upward market trend established since November 2023.” The earnings season has been rather favourable so far, with many companies benefiting from economic resilience. Overall, the euro-denominated MSCI All Country World Index Net Total Return fell, following successive record highs in previous months. “Sector-wise, utilities, energy and consumer staples were the best performers, while consumer discretionary, technology and real estate posted the biggest declines.”
