Voices of Moneyfarm: US growth slows & Eurozone data remains sticky

US growth cools

“The U.S. economy expanded at a subdued annual rate of 1.3% in Q1 2024 according to revised figures and is a step down from the initial estimate of 1.6%. This tepid growth, the smallest in nearly two years, underscores concern of a broader economic slowdown.

Several factors contributed to the underwhelming GDP figures, which included subdued consumer spending, wider trade deficits, flatlined business investments and a decline in corporate profits.

 Consumer spending, which is a primary driver of the economy, increased by only 2% compared as opposed to the 2.5% estimated previously. This is also a significant slowdown from the 3%+ growth observed in the previous two quarters.

Meanwhile, the widening trade deficit and reduced inventory production weighed heavily on GDP, subtracting 0.9 and 0.5 percentage points, respectively.

Gross business investment remained robust, growing at a 3.2% rate, unchanged from previous estimates, indicating continued confidence in certain sectors.

Finally, corporate profits saw a slight decline of 0.6%, the first drop in four quarters, reflecting the pressure on businesses from consumers’ resistance to higher prices. 

All this circles back to the current rate of inflation, which showed little change. The PCE Price index, which is the preferred gauge of the Federal Reserve, rose by 3.3%. The combination of persistent inflation and high borrowing costs has constrained consumer purchasing power, pushing households to maintain spending levels and dip into savings.

While the first-quarter data painted a cautious picture, some positive indicators emerged. Final sales to private domestic purchasers, a metric of underlying economic strength, grew at a 2.8% annual rate, albeit down from 3.3% in the final quarter of 2023. Any rate above 2% is generally considered favourable.

Looking ahead, forecasts suggest a potential rebound in GDP for the second quarter, with estimates pointing to growth rates of 3% or more, similar to the robust performance seen in the latter half of 2023. However, several factors could temper expectations for the rest of the year, including the state of inflation, high interest rates, and the impending presidential election. All these factors may force businesses to adopt a cautious stance on new investments.”

You can read Richard’s incisive analysis on the Guardian business blog by Graeme Wearden here.

Eurozone inflation data proving stickier than expected

“Eurozone inflation rose to 2.6% in May, coming in above the predicted 2.5% and higher than April’s 2.4% growth. This development poses a challenge for the ECB, which is on the brink of reducing rates next week. Additionally, core annual inflation rose in May, raising concerns that it may stabilise around 3% rather than 2% in the coming months. Although this situation might not alter the ECB’s plans for June, future data trends could prompt a reassessment.

“The challenge here for the ECB is that reaching the last mile target inflation rate of 2% may prove more arduous than anticipated.”

Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed-income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.