“The effects of higher rates will start biting domestic demand during the next few quarters and investment stemming from incentives such as the IRA and CHIPS Act would only partly mitigate the slowdown.”

The US economy has proven to be stronger-than-expected in 2023, with domestic demand supported by a strong labour market, excess savings and investment through government incentives, while inflation has been moderating consistently. The most recent activity and price data suggest that the services component may remain elevated through to the year end. Despite its resilience thus far, we continue to expect economic growth to slow notably over the coming quarters as the renewed surge in long-term Treasury yields compounds the impact of Fed tightening. The usual lags associated with monetary policy imply that the full impact has yet to materialise. And this effect will be amplified by a further tightening of financial conditions stemming from the recent increase in bond yields across the yield curve.

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