Global economic outlook and policy responses

The global economic landscape is marked by significant divergence, with the US demonstrating resilience while Europe faces increasing recession risks. Central banks are expected to continue cutting rates and we expect the Federal Reserve (Fed) and Bank of England (BoE) to cut rates by more than is currently priced in between now and the end of next year.

In Europe, recent PMI business survey data highlights a contraction in activity, particularly in the manufacturing sector, with the service sector also slowing, raising concerns about a potential recession. The potential for US tariffs on European exports increases this risk.  We believe the ECB will implement a further 25 basis point rate cut this year, although internal ECB debates about the neutral rate suggest they may not cut rates any faster than is priced in.

The UK economy is also showing signs of strain, with business surveys indicating a slowdown. The recent budget has influenced the BoE's stance, leading to market expectations of more gradual rate cuts. The focus remains on inflation and wage growth, with the potential for more rate cuts than are priced if wage growth moderates further. 

In contrast, the US economy remains robust, buoyed by consumer spending and potential policy measures from the Trump administration. While there are some concerns about the labour market, overall growth prospects are positive, with the potential for above-trend growth in the coming year.

Credit fundamentals and investment strategies

Despite the risk of a European recession, European banks are likely to remain resilient,  supported by robust regulatory capital ratios and healthy profitability. With an average common equity tier 1 ratio of 15.4%, these banks are well-positioned to withstand economic shocks. The regulatory buffer to requirements is substantial, averaging 400 basis points, providing a significant cushion against potential downturns.

Our investment strategies are emphasising maintaining high credit quality, focusing on single A rated names and above. This approach enhances portfolio resilience amid tight spreads on lower-rated credits. We are also selectively adding duration to our portfolios when market conditions present favourable opportunities, particularly in the US and UK, where rate cuts are less aggressively priced.

Conclusion

While recession risks have increased in Europe, the US outlook remains strong. Our liquidity strategies are well-positioned to navigate these conditions, focusing on credit quality and active duration management to optimise returns.

Source for all data is Bloomberg, J.P. Morgan Asset Management, as at 3 December 2024.