The US continues to be, by far, the strongest economy globally, along with possibly one or two oil producing nations.
The amount of stimulus added over Covid was in the trillions of dollars and this has helped the US economy go from strength to strength. Unfortunately, it did also add inflationary pressures.
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You only have to look at household wealth to see why the US economy will manage a soft landing.
With house prices steadying and stock markets at high levels, household wealth has grown by over $5 trillion dollars in the second quarter of this year, which is around $37 trillion dollars above pre-Covid levels.
Even if you deduct total household debt, it still leaves a net worth of $154 trillion dollars.
Sadly, this wealth is not evenly spread out, with those on a lower income struggling to fight high food and energy prices. Those in the mid-income bracket have spent their Covid savings which has helped to reduce household cash and savings deposits by some $200bn.
On the downside, student loan repayments have re-commenced, and there has been an increase in defaults on credit cards and car loans, whilst the unemployment rate is increasing.
With interest rates now peaking, unless energy supply causes another spike in inflation, it seems likely the Federal Reserve will leave rates where they are until mid-2024 at the earliest.
Europe is still battling inflation
Europe, including the UK are still battling inflation and may need to increase rates once more before pausing.
The economic conditions are much worse than the US which is why I still see more room for the USD to make further gains.
Indeed, it could rely on another mild winter to prevent Europe from entering a recession and that is likely to be decided by El Niño!
Food and energy prices have been slower to drop in Europe with oil prices rallying in September due to OPEC+ keeping supply limited and now we have Australian gas worker strikes that could spike gas prices again.
Fortunately, Europe should have a high level of storage now in preparation for winter and, hopefully, France will restart over twelve of their nuclear reactors soon.
The ECB interest rate decision could go either way on Thursday, and although rates will soon peak in most countries, do not expect them to quickly drop any time soon.
Inflation may be slowly moving towards the central banks 2% target, but the closer it gets, the harder it becomes to achieve.
Rate hikes take time to feed into an economy and it may take the rest of this year for those more recent hikes to be felt by the economy.
This will be key to whether any final hikes are needed and could already be enough to push Europe into recession.
The fact that Germany seems to be the weakest link in Europe, flirting with recession, with low investment and even lower manufacturing data, highlights the risk for the whole of Europe!
Central banks now fear inflation and even when the next crisis hits, I believe they will be more cautious in cutting rates. It is possible zero rates may never be seen again!
Perhaps it’s time they found a plan B to stimulate economies rather than Quantative Easing (QE) which is the easiest solution, but not the best.
