Introduction to a Spooky Economy
The author of this article has a confession to make: he hates Halloween. But, as an economist, he’s more concerned about the spooky state of the economy. In this article, we’ll delve into the latest economic news and try to make sense of it all.
The European Central Bank’s Latest Moves
The European Central Bank (ECB) is not expected to make any drastic changes at its upcoming meeting. The French fiscal situation, which was previously a cause for concern, seems to be under control. The Dutch elections are also unlikely to have a significant impact on the economy. As a result, the ECB is likely to stick to its current plan and not make any rate cuts.
But Wait, There’s a Twist
However, there are a few factors that could potentially lead to another rate cut. A stronger euro or disappointing German fiscal stimulus could prompt the ECB to reconsider its stance. Additionally, France’s debt situation could come back to haunt the economy. While these scenarios are not the base case, markets are still pricing in a 50:50 chance of another rate cut by next summer.
The Growth Puzzle
Recent economic data has been a mixed bag. Manufacturing numbers have been disappointing, but the services sector is showing signs of improvement. The eurozone services PMI is at its highest level in nearly a year, with job creation picking up pace. This growth puzzle is not unique to Europe, as the US is also experiencing a similar phenomenon.
The US Economy: A Tale of Two Stories
The latest estimates suggest that the US economy grew at an annualized rate of 3.9% in the third quarter. However, this strength is hard to reconcile with the fragile jobs market. Fed Governor Chris Waller has highlighted this dichotomy in a recent speech. Despite this, the Fed is expected to cut rates next week, largely due to the lack of economic data and the ongoing government shutdown.
The Neutral Rate: A Posh Economics Term
The surprising growth resilience raises questions about whether the Fed needs to cut rates at all. Is the neutral rate higher than we think? Financial conditions are certainly healthy, with stock markets buoyant and private credit concerns easing. But, does this reflect the true state of the economy, or is it just a result of AI-related spending?
The Impact of AI
Some people argue that without AI-related spending, the US economy would be in recession. While it’s true that IT equipment investment rose by 34% in the first half of the year, most of this is imported. The narrative that AI is driving growth conveniently glosses over this fact.
Conclusion
As we approach the end of the year, the question remains: is this growth revival a genuine resurrection or just another ghost story? The Fed itself doesn’t see a need for further rate cuts, but markets and some economists disagree. The weaker jobs market, falling house prices, and tariff turbulence are all concerns that could come back to haunt the economy. So, keep those lights on, because the next scare might just be lurking in the shadows.
