Swiss Re's US economic outlook: normalisation continues - Reinsurance News (2024)

Through the second quarter, strong consumer fundamentals boost GDP forecasts, but persistent inflation prompts revisions, while anticipated interest rate adjustments reflect a cautious approach by policymakers, as noted by global reinsurer Swiss Re.

The US economy’s normalisation continues into Q2, reports the firm. Strong consumer fundamentals have led to an increase in the GDP forecast for 2024 to 2.5% (up 30 basis points) and for 2025 to 2.1 percent (up 20 basis points). Persistent inflation has pushed the 2024 CPI forecast up to 3.1% (up 40 basis points) and the 2025 forecast to 2.5 percent (up 20 basis points).

Only two interest rate cuts are now expected in 2024, followed by four in 2025, with a policy rate of 3.875 percent by the end of 2025. Consequently, the year-end 10-year Treasury yield forecast has been raised by 20 basis points to 4.4 percent.

Despite difficult CPI inflation in Q1 2024, there’s optimism about disinflation. April’s CPI report shows encouraging softening in both headline and core inflation. Though core services inflation persists, shelter costs are gradually disinflating.

Suspected exaggeration in motor vehicle insurance inflation in CPI data. FOMC likely remains committed to easing policy later this year, especially with core PCE inflation at a three-year low of 2.8 percent in March. Regardless of disinflation turbulence, anticipation is for a cautious easing cycle from the FOMC to support growth while managing inflation expectations.

In the May FOMC meeting, policymakers held a stance, delaying the easing cycle. Chairman Powell cited the need for “greater confidence” before rate reductions, given insufficient inflation progress. The revised forecast aligns with the Taylor Rule, indicating potential rate cuts later in 2024 due to anticipated declining inflation and slower GDP growth.

Expecting only two rate cuts starting in Q3, with year-end rates projected between 4.75 percent and 5.0 percent. Looking to 2025, robust growth and persistent inflation prompt a downward revision to 100 basis points of rate cuts from the earlier 150 basis points projection.

April’s nonfarm payrolls report reflects a healthy labour market adjustment. With 175,000 new jobs, the three-month average job gains decreased to 242,000. The unemployment rate rose slightly to 3.9 percent, and wage growth slowed to 3.8 percent, its weakest in three years. Additional data confirms this trend, with lower job openings and quits rates indicating increased stability. Despite a decline in consumer confidence, real consumer spending surged by 0.8 percent, outpacing income growth.

While labour income growth has slowed from early 2022’s double-digit rates, it remains strong at 5.8 percent annually, indicating steady income growth and sustained consumption. This optimism is seen in S&P 500’s forward earnings-per-share growth at 9.3 percent, up from 0.9 percent in April 2023.

However, purchasing manager surveys show contraction. The ISM manufacturing survey dropped to 49.1 in April, and the services index fell below 50 for the first time since December 2022. Survey data from consumers and businesses is expected to stay subdued amid uncertainty over policy and a loosening labour market.