Major players in the global economy are following different paths, and markets around the world are showing a changing landscape.
In the Bank of America’s view, the US economy remains very strong, European growth has weakened, and China faces its most challenging outlook amid housing problems, deflation, and demographic headwinds.
“There are signs of decoupling in global growth, trade, and equity markets,” Bank of America strategists wrote in a note on Friday.
The United States, in particular, has seen strong GDP growth in recent quarters and a steady cooling of inflation, as well as promising economic data and an unstoppable stock market rally.
The Bank of America maintains a soft landing and an expansionary monetary policy starting in June as the base hypothesis for the US. Many on Wall Street have the same view, and investors have been carried away by that optimism, leading the S&P 500 index to break several records in recent weeks.
According to BofA, stronger than expected growth and strong labor market data at the end of 2023 suggest that there will be continued positive momentum in the new year.
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Tightening financial conditions have put the US commercial real estate sector under more pressure, the firm notes, and that is manifesting itself in more pain in the office building market. US Treasury Secretary Janet Yellen expressed concern about the commercial real estate sector but continued to ensure that it does not become a systemic risk for the banking sector.
There is still some uncertainty about what the Federal Reserve will do to address the “last mile” of inflation, but that will not significantly influence the position of the United States compared to other economic powers.
In this sense, the view of the euro zone seems more moderate.
“Growth in the euro zone has been extremely anemic, including weaker-than-expected German data,” the bank’s strategists said. “Despite this, our base case remains for the European Central Bank to start cutting rates in June.”
BofA predicts growth in the euro zone of 0.4% in 2024 and 1.1% in 2025. But Germany, the bloc’s largest economy, will perform slowly at -0.4%, while Spain will show its growth strength of 1.3%. The broad spectrum of prospects within Europe will eventually converge, assuming no further disruption to growth.
“From a market perspective, weakness in Germany is more easily digested than weakness in the periphery,” the strategists continued. “German domestic demand continues to be a big driver for exports from other euro zone countries, but so are German exports themselves, given the integration of the production chain within the euro zone.”
And China, for its part, faces a cocktail of bleak prospects due to poor demographics, weak consumer confidence, and the exit of foreign investors.
These opposite economic results are already reflected in the stock market indices, with China lagging behind the rest of the world and struggling to change the current situation.
“The S&P 500 (United States) outperformed the MSCI World index (index of companies in developing countries), while European equities underperformed in comparison,” noted BofA strategists. “Furthermore, the decoupling of Chinese equities is more marked and has yet to show signs of recovery.”