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A race between interest rate cuts and recession risks

Jens Magnusson and Daniel Bergvall

It has been a dramatic summer, largely dominated by political turbulence, nervous financial markets and global uncertainty. The assassination attempt on Donald Trump and the switch from Joe Biden to Kamala Harris as the Democratic presidential candidate have redrawn the map ahead of this autumn’s US elections. Suddenly the candidates are neck and neck again in voter polls, and it is just as difficult to know who will win as to say anything certain about what policies will be pursued once a new president is inaugurated. What we do know is that today’s campaign rhetoric is highly polarised, the risk of a global trade war is real ‒ especially if Trump wins ‒ and neither candidate seems especially interested in doing anything about America’s unsustainably large budget deficits. 

As for geopolitics, both the Ukraine war and the Middle East conflict took new turns, as Ukrainian troops began to conquer territory inside Russia and Iran vowed revenge against Israel after the killing of Hezbollah and Hamas leaders in Lebanon and Iran, respectively. Hezbollah recently attacked Israel and the world is now waiting also for Iran’s retaliation, something that may both influence and be influenced by the ongoing negotiations between Israel and Hamas. 

Economically and financially, the summer looked good for a long time. Continued inflation downturns paved the way for interest rate cuts, and optimistic stock markets reached new all-time highs well into July. But in late July and early August, markets were significantly shaken up. An unfortunate combination of weaker US economic signals, a Japanese interest rate hike, geopolitical turmoil and declining confidence in AI-related tech stocks sent chills through the stock market. Japan’s Nikkei index fell by over 12 per cent in one day, and stock markets around the world were dragged along in the decline. With a few weeks’ hindsight, these market reactions can be viewed as exaggerated. They reinforced the market’s reputation as something of a “drama queen”, and most of the losses have been recovered. But the incident is a reminder that we live in uncertain times and that things can move quickly.

Looking ahead, however, we can be somewhat optimistic. The interest rate cuts delivered by Sweden’s Riksbank and the European Central Bank, among others, will continue this autumn. Importantly, the US Federal Reserve will soon follow. Because of rate cuts, lower inflation, rising real wages and the absence of major imbalances, a US recession can be avoided after all. This will benefit both the US and the global economy. But it will be an uncertain and intense autumn, with several key issues to keep an eye on: 

  • How fast will the US economy slow down?
  • Who will win the US presidential election, and will the outcome be accepted?
  • What will happen to Europe as the German economy sputters, French politics are reshaped, and the European Union is squeezed between the US and China?
  • In what direction are ongoing geopolitical conflicts moving? Towards ceasefire? Or escalation?

These are big and important issues that we look forward to continuing to monitor and discuss with you.

This August 2024 issue of Nordic Outlook also includes in-depth themes that address the following topics: 

  • The US elections
  • The US deficit
  • China’s overcapacity
  • Swedish fiscal policy

We wish you pleasant reading!

Jens Magnusson
Chief Economist

Daniel Bergvall
Head of Economic Forecasting

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