A US interest rate cut by the end of 2023? Maybe, says Steven Bell of Columbia Threadneedle Investments

As for inflation, the US appears to be on track. A fall in core inflation is welcome, but more importantly, core inflation is also falling. If wages follow this trend — and there are clear signs that they will — the U.S. could be in for a soft landing. On the other hand, Europe and the UK lag behind. Here, the outlook for growth and inflation are closely intertwined, as sustained inflation means higher interest rate hikes – and therefore higher risks to growth. “Overall, we are raising our expectations, although the risk of a mild recession is off the table,” said Steven Bell, chief EMEA economist at Columbia Threadneedle Investments. “Government bonds remain attractive, but the outlook for equities has improved.”

US on track for ‘harmless inflation’

“U.S. headline inflation is already approaching 3.0 percent and the Federal Reserve’s target is on the horizon,” Bell said, summarizing the U.S. situation. Although core inflation is still at 4.8 percent, it is also gradually decelerating. “Our projections point to rental inflation, a key component, heading towards 4 per cent. Wage inflation alone is at 5 percent — which the central bank needs to fall below 4 percent to meet its overall inflation target.

But here too there are signs of decline: Recent data shows that companies are not paying their employees more amid pressure on profit margins.

Figure 1: Change in Wage Inflation Percentage, Compared to Previous Year – Firms no longer lose employees to better-paying competitors

Low levels of inflation mean that even low wage increases strengthen purchasing power, thus helping to moderate wage demands. That’s reassuring for Bell: “We’re hoping that the U.S. is actually going to have a soft landing.”

Significant weakness in Europe

A completely different picture emerges in Europe. Here, economic data is surprisingly poor and the Eurozone is in a technical recession. The manufacturing sector, which plays a major role in the European economy, has been hit hard by the current recession.

Consumer spending is also moderate: while Eurozone consumer sentiment is low, they are reluctant to spend their savings, unlike US and increasingly UK consumers.

While the sluggish European economy risks another mild recession, Steven Bell still sees a path to recovery: “Consumers will eventually start spending some of their savings, and the manufacturing cycle will accelerate as the global economy revives,” he said. Chief Economist.

Chart 2: Composite PMI Indices – Purchasing Managers’ Indexes (PMI) Decline with Notable Weakness in the Euro Zone

An outlier in UK inflation – but progress is in sight

Inflation figures in the UK are also disappointing. “This result is due to the delayed impact of higher import costs, which is only felt after 12 months in the supply chain,” explains Steven Bell. But progress is in sight: after last year’s weakness, the pound sterling has regained strength. “This means the 2 percent rise in inflation will reverse this year and a further 1 percent drop is expected in 2024,” Bell predicted.