- The world’s biggest economies are seeing a “disconnect,” says Bank of America.
- The US is showing surprising resilience, European growth is weak and China is faltering.
- Global stocks have reflected changing tides in trade and supply chains.
The biggest players in the global economy are on different trajectories and markets around the world are reflecting the changing landscape.
In Bank of America’s view, the US economy continues to show remarkable resilience, European growth has weakened and China faces the most challenging outlook amid real estate woes, deflation and demographic headwinds.
“Signs of decoupling are present in global growth, trade and stock markets,” Bank of America strategists wrote in a Friday note.
The US in particular has seen strong GDP growth in recent quarters and continued cooling of inflation, as well as promising economic data and a stock market rally that will not recede.
Bank of America maintains a soft and accommodative monetary policy starting in June as its base for the US. Many on Wall Street share a similar view, and investors have traded on that optimism, with the S&P 500 hitting a string of record highs in recent weeks.
Stronger-than-expected growth and strong labor market data to close 2023 suggest continued positive momentum in the new year, according to BofA.
Tighter financial conditions have put the US commercial real estate sector under more pressure, the firm noted, and this is manifesting itself with greater pain in the office building market. Treasury Secretary Janet Yellen has expressed her concern about CRE, but remains confident that it will not turn into a systemic risk for the banking sector.
There is still some uncertainty about what the Federal Reserve will do to address the “last mile” of inflation, but it will not dramatically affect the US’s position relative to other economic powers.
Until that point, the outlook for the euro area looks softer.
“[G]The bounce in the Eurozone has been very anemic, including weaker-than-expected data in Germany,” strategists said. “Nonetheless, our base case remains for the ECB to start cutting rates in June.”
BofA expects Eurozone growth of 0.4% in 2024 and 1.1% in 2025. But Germany, the bloc’s largest economy, will be weak at -0.4%, and Spain will show its strength with 1.3% growth. The broad spectrum of prospects within Europe will eventually converge, assuming no additional growth shocks.
“From a market perspective, weakness in Germany is easier to digest than weakness in the periphery,” the strategists asserted. “Domestic German demand remains a major driver for exports to other Eurozone countries, but so do German exports themselves given the integration of the production chain within the Eurozone.”
And China, for its part, faces a unique cocktail of unfavorable demographic decline, bleak consumer confidence and an exodus of foreign investors.
These contrasting economic performances have played out in stocks, with China lagging behind the world and struggling to shake the “uber-bearish” narrative.
“The SPX has outperformed the MSCI World Index, while European stocks have underperformed by comparison,” BofA strategists said. “Furthermore, the disconnect in China stocks is larger and has yet to show any signs of recovery.”