Is the US set to underperform Europe and the UK?
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Is the US set to underperform Europe and the UK?

The focus is on interest rate cuts, but the story is still about the economic soft-landing

I think the pessimism over the failure of US inflation to keep falling should reverse over the next few months. That should halt the steady decline in the scale of expected interest rate cuts across Europe, UK and US. Current expectations are 75 basis points (bp) off in Europe but only 50bp in the UK and even less in the US. That’s a dramatic change compared with the optimism we saw at the start of the year.

The US economy is set to underperform current expectations as spending eases as the US consumer rebuilds depleted savings. That will take pressure off wage inflation and leave room for interest rate cuts. By contrast Europe, and especially the UK, are set to beat expectations on growth as they move onto recovery after their own soft-landings. A virtuous downward spiral of wages and inflation will allow their consumers to ease back on precautionary savings. That doesn’t mean that Europe will beat US, but the growth gap will close, in sharp contrast to current forecasts. 

There are a set of elections to come. In the UK the timing is uncertain, the outcome less so. While in the US the timing is fixed, but the outcome is anything but. That is especially significant as Trump’s Project 2025 represents a radical agenda, especially if the Republicans also win the Senate and retain the House.

In terms of financial markets, continued growth, albeit slower in the US, lower inflation and therefore interest rate cuts across the board makes bonds and equities both attractive. For the longer-term, valuations favour bonds and make US equities appear expensive.

Interest rate optimism has declined steadily this year

Source: Columbia Threadneedle Investments and Bloomberg as of 25 April 2024

Declining wage inflation will be the key to unlocking a Fed rate cut

The improvement in inflation figures has stalled and with the economy resilient, the Fed is under no pressure to cut.

We think that the disinflationary trend remains intact. Wage inflation is set to fall further as small businesses cut back on their hiring plans, while the surge of unauthorised migrants, currently running at
nearly 2.5 million a year, represents a significant addition to the US labour force1.

US business hiring plans are tumbling

Source: Columbia Threadneedle Investments, Bloomberg and Macrobond as of 25 April 2024

UK economic recovery is my highest-conviction,
non-consensus, view

Over in the UK, we ended 2023 with an economic contraction. But all that is changing, and I expect firm growth in the year ahead. This is my highest-conviction, non-consensus view and I’m pleased to say it’s going my way as other forecasters start hiking their expectations for the UK economy.

UK inflation should be at or below the Bank of England’s 2% target for the next 12 months. Wage inflation is falling fast assisted by a marked
increase in immigration, with 1.1million National Insurance Numbers issued to adults from overseas in 2022 and another 1.1million were issued last year2. I think the Bank of England will cut rates by 0.25% in June and begin a slow process of reducing rates further.

UK ahead on economic surveys

Source: Columbia Threadneedle Investments and Bloomberg as of 25 April 2024

European growth to recover slowly in 2024, but still faster than expected

Real wages are rising in Europe as the wage-price spiral operates in reverse, with falling inflation driving up real incomes. Although real wages won’t get back to the pre-Ukraine peak until the end of next year, a big turnaround is already underway. European consumers are likely spend ahead of their income growth as confidence improves with lower inflation and lower interest rates.

The ECB have come as close as they ever get to promising to start cutting rates in June and slow steady cuts are likely to follow.

Real wages set to recover in Eurozone

Source: Columbia Threadneedle Investments and Societe Generale as at 14/01/2024. Estimates and forecasts are provided for illustrative purposes only. They are not a guarantee of future performance and should not be relied upon for any investment decision. Estimates are based on assumptions and subject to change without notice.

Lower interest rates will make bonds and equities attractive. Gold to shine

The shift from -1% to plus 2% in real returns for US TIPS might not sound much, but for long-term secure returns that’s huge. To deliver $100 in real terms in 30-years’ time would have required $135 at a yield of -1%, today, you need just $50. That’s a much healthier investment proposition and, at its simplest, it’s why we regard bonds as attractive.

Higher bond yields typically mean lower stock prices. But this has not been the case over the last 18 months or so, meaning equities, particularly in the US, are expensive on this measure. But this
metric is only useful in the longer-term, and experience suggests that equities can get more expensive before they peak. Therefore,
given the positive short-term fundamentals, we remain overweight equities, but only modestly.

The reason US equities have kept on getting more expensive this year is the ‘Magnificent 7’ of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. They have done this on the back of superior profit margins in over the last year. Note that the rest of the S&P 500, the remaining 493, saw a decline in margins in 2023.

One market that I have liked all year is gold. Gold has also bucked its trend of falling as interest rates rise since the invasion of Ukraine. It was not just Russian FX Reserves that were frozen, but no less than 2,000 entities and wealthy Russians. That has driven a safe-haven demand for gold, and I think prices have further to go.

Magnificent 7 have magnificent margins

Source: Columbia Threadneedle Investments and Bloomberg as at 25/04/2024. Estimates and forecasts are provided for illustrative purposes only. They are not a guarantee of future performance and should not be relied upon for any investment decision. Estimates are based on assumptions and subject to change without notice.

22 May 2024
Steven Bell
Steven Bell
Chief Economist, EMEA
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Is the US set to underperform Europe and the UK?

1. Source: Columbia Threadneedle Investments and Congressional Budget Office as at 18 January 2024

2. Source: Columbia Threadneedle Investments, ONS and Macrobond as at 25 April 2024

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial
advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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