Europe closes gap on US growth

The economy grew at a slower pace than initially reported in the first quarter of 2024, with GDP rising at an annualised rate of 1.3%, below previous estimates, reflecting softer consumer spending on goods. US manufacturing data surprised to the downside in May, continuing its contraction trajectory.

Nevertheless, the US consumer confidence index increased after being subdued for three consecutive months, although it reflected household concerns over persistent inflation.

Europe surpasses expectations

In contrast, recent economic data from the Eurozone   surpassed expectations, lending credibility to the narrative of an economic rebound in the region with manufacturing PMI in May edging higher, albeit from a low base. Similarly, the UK manufacturing sector continued its positive trend, marking its highest level since July 2022.

Eurozone economic sentiment edged higher in May adding to expectations of continued modest growth in the second quarter of 2024. Furthermore, the labour market remains extremely tight, with Eurozone unemployment dropping to 6.4%, its lowest level since 1999. The narrowing of the gap between growth in the US and Europe suggests that “US exceptionalism” may have peaked.

Weakness in domestic demand in Asia

There are also some encouraging signs emerging from Asian economies, with Chinese data generally surprising to the upside. Despite the improvement, the details of the recovery are less convincing considering the weakness in domestic demand with the real estate sector remaining in distress.

Mixed picture on inflation

Inflation data was mixed in May, with US inflation moderating and UK/EU inflation data slightly higher than expected. However, our thesis of EU and UK inflation undershooting US inflation in 2024 remains unchanged and, therefore, European and UK bonds are anticipated to outperform US bonds. Despite the higher-than-expected inflation release, we strongly expect the European Central Bank to cut rates at their June meeting.