The US, China, and Europe’s economies are drifting apart. The global ‘decoupling’ is moving markets.


Global economies are decoupling, according to Bank of America.Cate Gillon/Getty Images

  • The world's largest economies are experiencing “decoupling,” according to Bank of America.

  • The United States is showing surprising resilience, European growth is weak and China is faltering.

  • Global stocks reflected changing trends in trade and supply chains.

The biggest players in Mondial economy are on different trajectories, and markets around the world are reflecting the changing landscape.

According to Bank of America, the US economy continues to show remarkable resilience, European growth has weakened and China faces toughest outlook in the middle of real estate woes, deflationand demographic headwinds.

“Signs of decoupling are present in global growth, trade and equity markets,” Bank of America strategists wrote in a note published Friday.

The United States, in particular, has seen strong GDP growth in recent quarters and a steady slowdown in inflation, along with promising economic data and a stock market rally it will not stop.

Bank of America considers a soft landing and an easing monetary policy from June as a base scenario for the United States. Many on Wall Street share a similar view, and investors have tapped into that optimism, with the S&P 500 hitting a series of record highs in recent weeks.

Stronger-than-expected growth and robust labor market data to close 2023 suggest continued activity positive dynamics for the new yearaccording to BofA.

Tighter financial conditions have put the U.S. commercial real estate sector under more pressure, the company noted, and this is manifested by the office building market suffers more. Treasury Secretary Janet Yellen has expressed concerns about CRE, but remains assured that it will not pose systemic risk to the banking sector.

There is still some uncertainty about what the Federal Reserve will do next to combat the “last mile” of inflation, but this will not significantly influence the positioning of the United States relative to other economic powers.

At this stage, the outlook for the Eurozone looks bleaker.

“[G]“Growth in the Eurozone has been very anemic, including weaker than expected data in Germany,” the strategists said. “Despite this, our base case remains that the ECB starts cutting rates in June.”

BofA forecasts eurozone growth of 0.4% in 2024 and 1.1% in 2025. But Germany, the bloc's largest economy, will be weak at -0.4%, and Spain will show its strength with growth of 1.3%. The wide range of outlooks in Europe will eventually converge, assuming there are no further growth shocks.

“From a market perspective, the weakness in Germany is easier to digest than that in the periphery,” say the strategists. “German domestic demand remains an important driver of exports from other eurozone countries, as do German exports themselves, given the integration of the production chain within the eurozone.”

And China, for its part, faces a unique bearish cocktail of unfavorable demographics, sluggish consumer confidence and a exodus of foreign investors.

Growth forecasts for the United States, the Eurozone and China.Bank of America Global Research

This mixed economic performance has been reflected in stocks, with China lagging behind the rest of the world and struggling to shake up the stock market. “ultra-bearish” narrative.

“SPX outperformed the MSCI World Index, while European stocks underperformed in comparison,” BofA strategists said. “Furthermore, the decoupling of Chinese stocks is more pronounced and has yet to show any signs of recovery.”

Chinese stocks have moved in the opposite direction to U.S. and European stocks.Bank of America Global Research

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