THINK AHEAD: Trick or treat? Growth reappears from death

US growth looks unlikely to happen again. The eurozone economy may be about to rise again from its grave. But the central bank continues to whisper of interest rate cuts. Is this a real resurgence in economic growth or just more smoke and mirrors? Read on as James Smith and his team reveal what could spook financial markets in the days ahead

Debt goes on

Let me share one of my most certain views: I hate Halloween.

Yep, I’m the guy who turns off all the lights in the house so it looks like I’m out. Of course, I still bought the snacks, so I could eat them… I mean, just in case someone came knocking. And if they do, I’ll tell them I was too busy watching Christine Lagarde’s post-meeting press call…

This is an absurd excuse – even to a boring economist like me – because as Carsten said in his preview of Thursday’s meeting, this doesn’t look like a thriller. France’s dire fiscal problems no longer scare the markets as much as before. Elections in the Netherlands should not change things. And the lack of ‘new news’ could take the ECB away from its ‘good place’. Tariff cuts are not on the menu, although they are not completely dead and buried.

A stronger Euro (our team expects EUR/USD to rise to the 1.20 level later in the year) or disappointment and a delay in German fiscal stimulus could ultimately push the ECB towards another rate cut. France and its running debt will probably come back to haunt it too. This is not our base case, although the market is still trending towards further easing; Pricing suggests another 25 basis point cut is 50:50 next summer.

If we’re all wrong, perhaps it’s because the economy is stronger than we think. Recent ‘hard’ data has not been great, particularly on the sluggish manufacturing sector. But the latest news is better. The eurozone services PMI was the highest in almost a year. This shows that job creation has also increased.

Trick or treat, this growth conundrum looks very familiar to what is happening across the pond. The Atlanta Fed most recently estimated US GDP in the third quarter at 3.9% annualized. It’s difficult to reconcile apparent strength with fragility in the labor market, a dichotomy emphasized by Fed Governor and Powell’s potential successor, Chris Waller, in a recent speech.

That mystery won’t stop the Fed from lowering interest rates next week. It’s also unlikely there will be anywhere near complete economic data amid America’s never-ending government shutdown.

But this surprising resilience in growth – if it continues – raises the question of whether the Fed needs to lower interest rates. Does this suggest that interest rates are actually less stringent than we currently imagine – or in fancy economics terms, neutral interest rates are higher?

Financial conditions are certainly healthy. The stock market is quite strong because there are no more risks arising from private credit over the past week.

Or does it simply reflect AI? Many people argue that without AI-related spending, the US economy would be in a recession. GDP data shows that quarterly real investment in IT equipment increased by 34% compared to the first half of the year. That may be true, but this overall narrative easily masks the fact that most of these goods are imported – accelerated by the race to avoid tariffs earlier this year.

Whatever the explanation, remember that the Fed itself does not see any need to continue lowering interest rates further. September’s ‘dot plot’ only recorded two further moves after October.

The market disagrees, and so does James Knightley. Inflation has proven to be more benign. But the real reason he expects at least one more cut than the Fed is making is because of the weak labor market.

The little data we have this month is not great. The size of private sector employment according to ADP fell. Again. And most consumers think unemployment will rise. In his own words, James K worries that the current ‘low hire, low fire’ job market could evolve into ‘no hire, let’s fire’.

There are other problems too. Yes, financial conditions are loose, but prices on the haunted house market have been falling for five months in a row. Next week’s data will show whether it is the sixth. That’s before we talk about rate turbulence, which I discussed in more detail last week. Or a government shutdown, the longer it lasts, risks weakening sentiment and causing a more permanent impact on economic activity.

So, as we approach the end of the year, the question remains: is this resurgence in growth a true renaissance or just a ghost story? Whatever the choice, it’s best to keep those lights on. Horrible rates? Credit corpse? The next fear may just be lurking in the shadows…

FORWARD THINKING in developed markets

United States (James Knightley)

The Federal Reserve is expected to follow through with a 25bp rate cut in September and a further 25bp cut on October 29. The economy appears to be in good shape and inflation is above target, but risks to their dual mandate of price stability and maximum employment are starting to shift. Price increases caused by tariffs have not been as strong as feared, and this has given more time for disinflationary factors, such as lower energy costs, weaker wage inflation and slowing home rental prices, to mitigate. At the same time, the labor market looks more worrying, with indicators showing the risk of job loss increasing. This raises the risk of weaker growth and lower inflationary pressures in the medium and long term. Therefore, moving monetary policy in a neutral direction makes sense.

Data-wise, third-quarter GDP is already scheduled, but given the ongoing government shutdown, it is unlikely that this data will be published this week.

Eurozone (Bert Colijn)

GDP (Thursday): Next week’s ECB meeting should be a non-event, as we mentioned in our article earlier this week. Since September, eurozone data has been mixed: PMI and sentiment improved slightly, but August data disappointed. Inflation in September briefly exceeded 2%, but no new figures were released before Thursday. Important releases, such as Q3 GDP and October inflation, will be released on the day of the meeting. Political risks have subsided, the spread of the virus in France remains under control, and officials are not signaling any urgency, with both dovish and hawks postponing decisions until December. While another rate cut is possible if downside risks materialize, next week’s meeting is likely to reaffirm the “good place” stance.

CPI (Friday): Inflation forecast to remain around 2% on Friday. Although inflation increased in September, this was mainly due to the base effect. The fundamental picture remains fairly stable in the short term. For GDP growth in the third quarter, also released on Thursday, sluggish growth appears to be to blame as we expect it to come in at 0.1% quarter-on-quarter. Even though there is global turmoil, this condition is not a recession, but this condition is still far from recovery. So overall, don’t expect the ECB to pay much attention to these data points, as the expectation is that they will simply confirm the current cruising speed.

Canada (James Knightley)

Interest Rate Decision (Wednesday): The Bank of Canada is expected to cut interest rates by another 25bp this week despite stronger than anticipated recent employment and inflation data. Canada’s economy has been shaken by tariffs imposed by the US, with three-quarters of its exports heading south of the border. At the same time, consumers are carrying a lot of debt, and we expect central banks to try to provide more support to the economy.

THINK Ahead in EMEA

Poland (Adam Antoniak)

October CPI Flash (Friday): Our initial estimates show that CPI inflation increased slightly in October, largely due to energy prices. The annual decline in gasoline prices was smaller than the previous month. We’ve also seen a big increase in central heating prices since October, which marks the start of the heating season. Central heating prices were administratively frozen until July this year. Core inflation excluding food and energy prices was broadly unchanged

Hungary (Peter Virovacz)

GDP (Thursday): The most important event next week will be the release of Q3 GDP growth data in Hungary. Our current broadcast paints a rather gloomy picture compared to our structural model. Based on third quarter data, it is likely the rollercoaster ride will continue. After moderate quarterly growth in Q2, we will likely see negative performance in Q3. However, a low base would have a positive impact, lifting the year-on-year figure to 0.6%. Except for the services sector, we see that all other sectors have a negative impact on economic performance.

Czech Republic (David Havrlant)

The Czech economy is likely to maintain solid annual real growth in 3Q25, with household consumption remaining the main driver of expansion. The new thing that might happen is a change in the dynamics of fixed investment into positive territory after six quarters of continuous annual decline. Nevertheless, we will only accept the main figures in the initial estimate, along with an indication of the details as a comment.
Source: ING