10/07/2024

If we take stock of the economic situation in 2024, with a quarter still remaining to end the year, we have to recognize that the global economy has been fairly positive despite the overhanging uncertainties. Growth has been steadier than the January consensus, largely due to the surprising resilience of US activity, although emerging markets, excluding China, have also helped. Moreover, this stronger growth has occurred in a context of a global manufacturing crisis.

Following the inflationary scare in the first quarter of 2024, in general terms prices have evolved as analysts expected, which has kicked off the rate-cutting cycle worldwide.

However, a series of events could arise and disrupt the relative economic peace of mind. Geopolitics and the US elections pose supply risks, which could materialize as a result of a rise in energy prices due to the further escalation of the conflict between Israel and Iran.

If the Israeli retaliation focuses on the Iranian oil industry, upon which a major part of the Persian country's budget is dependent, the global oil supply could experience a significant drop. The scenario could also considerably worsen if Iran decides to try to block the Strait of Ormuz or if Yemen's Houthis intensify their attacks on vessels in the Red Sea area, obstructing the most direct sea routes between East and West. 

We can neither rule out a new round of tariff wars if Trump wins the American presidential elections. In this regard, we may not have to wait until November for trade tensions to increase, as we have seen this week with the European Union importing electric vehicles manufactured in China.

On the demand side, the degree of cooling in the US economy and the size of the Chinese stimulus will be key to determining the economic momentum in the coming months, especially for the global manufacturing and raw materials cycle. If, as we expect, the US economy remains strong in the fourth quarter and China finally obtains further political support to break the deadlock of economic stagnation, there could be a boost in global demand.

In this respect, the surprisingly powerful US employment data for September have wiped away fears that the US economy may be entering a significant contraction. Quite the opposite: The economic buoyancy remains almost intact on the other side of the Atlantic, and future expectations seem healthy, as evidenced by the non-manufacturing ISM indicator last week, setting highs since February 2023.

However, this combination of higher global demand and increased energy prices, as a result of geopolitical tensions, could negatively affect the deflation trend. The stimuli in China would also have an effect on prices. China has been exporting deflation to the rest of the world in recent quarters, which could come to an end if the measures announced by the Asian giant's leaders are successful. In this case, central banks would not implement the rate cuts that the markets are pricing in, as inflation would again rise to the top of the world monetary authorities' agendas.

Moreover, if US growth slows down sharply, China's stimulus once again disappoints and the decline in geopolitical risks eases the concerns regarding energy supply, global inflation would moderate even further and possibly pave the way for an even more aggressive rate cycle.

In short, following three relatively calm quarters, the fourth quarter could boost the global economy towards a new direction. The result of the US elections, with its implications in terms of domestic policy and global trade policy, and the conflicts in Ukraine and the Middle East will play a key role. So will China's economic decisions. All this will determine the direction in which the economy will head in coming months and, as a result, the direction of financial asset prices.