Global Fixed Income Strategy - April 2024

The US has pulled ahead of Europe in terms of economic growth. Europe has recovered only tepidly in the aftermath of the COVID crisis, while the US has expanded steadily. On the other hand, inflation has fallen faster in Europe; European inflation was initially more stubborn but is now almost back to target. Even the UK, which until recently was considered a “stagflation” outlier, will likely see headline inflation fall below US inflation for the rest of 2024. This macro divergence has implications for monetary policy, interest rates and currencies, as we discuss below. 

What is driving US growth?

Three key factors have fueled the US economic expansion in recent quarters: gains in labor productivity, increased labor market participation and a surge in immigration. The pick-up in productivity growth has prompted debate over its origins. In particular, there is much hype about the positive impact of artificial intelligence (AI). However, recent strong productivity growth compares to weak growth over the past several years and could represent a reversion to historical trends. Though we are optimistic about improvements that AI can bring, historical experience suggests that it takes time for new technological developments to improve productivity. We believe cyclical factors are more likely driving US productivity growth; as economic growth improves, companies typically optimize their operations to derive more output from their workers and capital.