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The world's largest economy is experiencing “decoupling,” says Bank of America.
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The US has shown remarkable resilience, growth in Europe is weak and China is stagnant.
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Global stocks reflect changing trends in trade and supply chains.
The biggest players in the global economy are on different trajectories, and markets around the world are reflecting changing conditions.
Bank of America sees the U.S. economy continuing to show remarkable resilience, European growth sluggish and China facing the most challenging outlook amid real estate issues, deflation and demographic headwinds. .
“We are seeing signs of decoupling in global growth, trade and equity markets,” Bank of America strategists said in a note Friday.
The United States, in particular, has seen strong GDP growth in recent quarters and steadily subdued inflation, as well as encouraging economic data and an unstoppable stock market rally.
Bank of America has been advocating a soft landing and monetary easing policy as its base scenario for the United States since June. Many on Wall Street hold a similar view, and investors are trading on that optimism, with the S&P 500 setting a series of records in recent weeks.
BofA said better-than-expected growth and strong labor market data to end 2023 suggest continued strong momentum into the new year.
Tight financial conditions are putting added pressure on the U.S. commercial real estate sector, which is hurting the office building market, the company said. Although Treasury Secretary Janet Yellen has expressed concerns about CRE, she is confident it will not develop into a systemic risk to the banking sector.
There is still uncertainty about what the Fed will do next to address the “last mile” of inflation, but it won't dramatically shake up the U.S.'s position relative to other large economies. Dew.
In that regard, the outlook for the euro area looks softer.
”[G]”Eurozone economic conditions are very weak, with German economic data being weaker than expected,” the strategists said. “Nonetheless, our base case remains that the ECB will start cutting interest rates in June. ” he said.
BofA forecasts growth in the euro area to be 0.4% in 2024 and 1.1% in 2025. However, Germany, the eurozone's largest economy, will stagnate at -0.4%, while Spain will perform well, growing at 1.3%. Assuming no further growth shocks, the broader outlook within Europe will eventually converge.
“From a market perspective, Germany's weakness is easier to digest than that of its neighbors,” the strategists argued. “German domestic demand remains a strong driver of the exports of other euro area countries, but also German exports themselves, given the integration of production chains within the euro area.”
And China faces a uniquely weak situation with unfavorable demographics, bleak consumer confidence, and an exodus of foreign investors.
These contrasting economic conditions are also reflected in stocks, with China lagging behind the rest of the world and struggling to change its “super bearish” profile.
“While SPX has outperformed the MSCI World Index, European stocks have underperformed in comparison,” BofA strategists said. “Furthermore, the decoupling of Chinese stocks is even more pronounced, with no signs of recovery yet.”
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