Jon Levy: «The Current Momentum Clearly Lies with Europe»
While the US economy grapples with inflation, trade tensions, and slowing momentum, capital is increasingly flowing toward Europe. Economist Jon Levy expects a shallow downturn in the US and sees new growth drivers emerging across the eurozone—particularly in Germany.
Mr. Levy, the US economy is under pressure. What are your expectations for this year?
Our base case is for a shallow downturn in the US as tariffs disrupt investment and supply chains.
Was Donald Trump’s «Liberation Day» the reason for this?
Even before the US President proclaimed the so-called «Liberation Day,» there were some signs of deceleration and concerns about the policy trajectory. Persistent high inflation was particularly concerning.
«Recent developments show that a higher inflation rate does not automatically equate to economic decline.»
Does inflation have to fall to two percent?
Our economic thinking is heavily influenced by the idea that inflation is only considered under control once it drops below the two percent mark. But that doesn’t necessarily have to be the case.
Is higher inflation the new normal?
Recent developments show that a higher inflation rate does not automatically equate to economic decline. Rather, it seems possible to adapt to moderately elevated inflation.
Is the trade war an additional burden for the US economy?
Trump’s initiated trade war raises the question of further strains on the US economy. Undeniably, the risk is real. However, the key will be how the situation evolves. The US has already concluded an initial agreement and is negotiating with numerous other countries. There is also renewed movement in the relationship with China.
The new tariffs: A surprise or a calculated risk?
The intense reactions immediately after «Liberation Day» were loud but not unexpected. Tariffs are part of Trump’s political toolkit. Moreover, after the boom years, an economic cooling in the US was to be expected.
«A strong US economy is also beneficial for Europe.»
Capital flows to Europe. Is this a lasting trend?
Even before «Liberation Day,» investors were pulling capital out of the US and redirecting it to Europe. The tide has turned, and Europe is experiencing a phase of upswing. Whether this trend is sustainable remains to be seen. In any case, the DAX appears robust.
New momentum from the German government?
The softening of the debt brake was an important signal. Expectations for the new German government are high – now it must prove whether they can be met. The recent elections have certainly created political clarity.
Means that: A better environment for Europe?
A differentiated view is necessary: a strong US economy is also beneficial for Europe. However, the current momentum lies with Europe – thanks to ambitious investment programs in Germany and at the EU level. There is especially significant need for catch-up in infrastructure, as the Draghi report compellingly underscores.
Jon Levy is a global strategist at Loomis, Sayles & Company with a focus on European markets. He has 18 years of experience in the investment industry, including positions at the Federal Reserve Bank of New York and the Bank of England.
