Finimize - 🇺🇸 Europe vs. the US

What’s going on here?

The OECD predicted that the global economy will pick up more than expected this year, and suggested that Europe might be the first to bring out the rate-cutting scissors.

What does this mean?

The OECD now expects the global economy to grow by 3.1% this year, up from its previous prediction of 2.9%. What’s more, the Paris-based think tank expects that trend to stick around, forecasting a 3.2% uptick next year. But not everyone’s in the same boat: while the US bagged an upgrade to 2.6%, the fact that Europe’s biggest economy, Germany, is still lagging meant the eurozone’s projection stalled at 0.7%. So while the OECD expects global inflation to cool down, it might be the European Central Bank that’s pushed to snip economy-crushing interest rates first.

Why should I care?

Zooming out: There’s always a “but”.

The OECD tossed in a curveball, warning that any Middle East flare-up could blow this forecast off course. See, oil prices spiking 25% could push inflation higher, force central banks to hike interest rates, and potentially shave 0.4 percentage points off global growth. Plus, while the global economy is managing inflation better than most expected, the OECD is still worried about the hefty debts that governments piled up during the pandemic. With interest rates stubbornly high, the burden of servicing those debts will only get heavier.

The bigger picture: Holding the line.

The Federal Reserve (the Fed) has held steady on interest rates, deciding to stay heavy on inflation since the economy seems to be handling the impact well. Now, much is made of the impact of lower rates, which tend to increase stocks’ valuations and make it cheaper for companies to borrow money. But a resilient economy bodes well for stocks too: the Fed can only afford to keep rates high because companies are still managing to grow, after all.

What’s going on here?

The US added fewer jobs than expected in April, but the details aren’t as devilish as they seem.

What does this mean?

The number of workers in paying jobs can make or break an economy, so US job numbers coming in below predictions might seem like a bad omen. The country added 175,000 jobs in April, below the expectation of 240,000. But that’s still an impressive 40th consecutive month of employment expansion, indicating that the labor market is still holding strong. Average hourly wages came in roughly in line with expectations, rising by 3.9% from the same time last year. That figure was 4.1% in March, suggesting a slight decrease in stubborn wage inflation. Unemployment, meanwhile, picked up ever so slightly more than expected.

Why should I care?

For markets: Small fish could fry.

Job growth was a little lower than it was last month, granted, but it still indicates a strong economy. Combine that with seemingly contained inflation, and that should bode well for businesses – and the bigger the company, the better. That’s because they’re more able to handle expensive borrowing costs: not only do they tend to have more cash in the bank than smaller firms, but they also have more robust business models. No wonder the S&P 500 – made up of the biggest stateside companies – has outperformed the Russell 2000, which tracks much smaller firms, by 7% this year.

The bigger picture: Money in your pockets.

Pay rises might sound promising, but if prices increase at the same pace, your savings account will be flatlining. Sadly, that’s the case these days: the McDonald’s cheeseburger is 55% more expensive than it was three years ago, for instance. Problem is, if wages increase faster than inflation, folk will keep buying their usual baskets – and that’s a surefire way to keep prices on the up.