Improving growth forecasts matter for markets

On Thursday, markets received preliminary Purchasing Managers’ Index (PMI) figures for August. As a reminder, PMIs are timely indicators of trends in manufacturing and services, with a number above 50 signalling an expansion and below 50 a contraction.

The numbers were broadly positive. In Europe, France and Germany showed better Composite PMI (i.e. the weighted average of the manufacturing and services subcomponents) compared to July and to the Bloomberg consensus. The same is true for the Eurozone Composite PMI. While not spectacular (France 49.8, Germany 50.9, Eurozone 51.1), the data still point to resilience with growth tracking around 1%. The UK showed a steep increase in the composite number, which at 53.0 was propelled by the best Services PMI figure in 12 months. The US also surprised on the upside. The Bloomberg consensus projected a decline in the composite from a very healthy 55.1 to still decent 53.5, largely based on the tariff impact starting to make its way into management teams’ expectations. As it turns out, there was no evidence of this and the index actually increased to 55.4.

Uncertainty regarding tariffs has improved in recent weeks. There are more countries that now have a better idea of what the new rules of the game are, even if these are only preliminary agreements and overall uncertainty remains. In addition, as forecasters have refined their estimates of the GDP impact the whole tariff saga is likely to have, they have on aggregate come to the conclusion that growth might not suffer as much as initially thought. Taking a very open economy such as China, for example, 19% of its GDP currently comes from exports with just over 10% of that figure exported to the US. So, in theory what’s at risk of disruption due to tariffs is close to 2.5% of GDP. Germany’s total goods exports last year were €1.55tr, of which €161bn went to the US. This is equivalent to 3.5% of Germany’s GDP. We are not of the opinion that those exports will go down to zero, and even if volumes to the US fall, some of these goods might end up being exported to other countries.

With that in mind, it is perhaps to be expected that growth projections have been improving. After somewhat severe downward revisions to 2025 growth in the aftermath of April 2, forecasts have begun moving up in the last few weeks. The Bloomberg consensus for Eurozone growth in 2025 now stands at 1.1%, higher than the 1.0% expected at the beginning of the year when tariff expectations were significantly lower than what has been agreed so far. The UK is now expected to grow at an unexciting yet reasonable 1.2%. China was expected to grow at 4.5% at the beginning of the year, while now the prediction stands at 4.8%. At its lowest point in May the Bloomberg consensus for US growth was 1.35%, whereas now the figure is 1.55%. Though the US economy remains resilient, it’s important to note that in early March the expectation was that growth would be 2.3%. The US has suffered the largest downward adjustment to growth projections in the G7 so far this year, but we underline that these levels are nowhere near a recession.

From a markets standpoint this is meaningful news. Spreads are well below their medium-term averages, and therefore the news flow needs to be somewhat consistent with this. With growth forecasts moving upwards, we feel more comfortable that tariffs are a microeconomic issue affecting certain sectors quite severely, as opposed to a major macroeconomic issue where banks reduce their lending significantly, defaults increase, and a recession becomes more probable. That said, the projections already assume growth will slow in the second half of the year, especially in the US. While growth should be well above recessionary levels, we do foresee that when numbers hit the tapes and companies’ earnings are not as rosy, some volatile episodes might occur. It is therefore important to remain liquid and be ready to take advantage of any such episodes.