Monthly interview Klaus Wellershoff & Patrick Müller

Economic Growth: Economic Growth: Continued weak economic dynamics in Europe and China

The economic trends of recent months continued at the end of the year. The US economy grew solidly by 0.6 percent in the fourth quarter of 2024. However, the increasing one-sidedness of growth is noticeable: the main driver was once again strong consumer demand, while investments and exports, which are important for the economic cycle, declined. In the euro area, however, the economy stagnated in the fourth quarter, mainly due to the weak performance of the two largest economies, Germany and France. The economic situation in China also remains weak. The only hopeful sign here is that the decline in real estate prices has slowed down, which is due to recent monetary support measures.

 

Inflation: Little change with continued high inflation rates

Inflation rates remain high in many countries and are still well above the central banks' target levels. In the US, core inflation, which excludes volatile components such as energy and food, is currently at 3.2 percent, and in the euro area at 2.7 percent. These levels were already reached in mid-last year and have hardly changed since then. Japan recently recorded an increase in inflation dynamics. There, core inflation rose to 3 percent in recent months, prompting the Bank of Japan to raise key interest rates by 25 basis points to 0.5 percent. The situation is much more relaxed in Switzerland. With an overall inflation rate of 0.6 percent, it is within the range of price stability defined by the Swiss National Bank. 

 

Monetary policy: Will the balancing act between fighting inflation and stimulating the economy succeed?

After a prolonged period of declining interest rates, there is now a slowdown in the monetary easing cycle. This was recently demonstrated by the decisions of the US Federal Reserve (Fed) and the Bank of England, which left their key interest rates unchanged. Additionally, Fed Chairman Jerome Powell emphasised that the current interest rate level could be maintained for a longer period. In contrast, the European Central Bank (ECB) lowered its key interest rate by another 25 basis points to 2.75% in January. This was the fifth cut since the summer of 2024. One reason for this could be the persistently weak economic situation in Germany and France - both economies are struggling with political blockades and slightly contracted in the fourth quarter of 2024.