Highlights:

• After a strong H1, activity in Q3 looks healthier than expected thanks to increasing real income, low savings and fiscal support. Yet the economy will slow down and flirt with recession: growth will turn slightly negative in Q1 2024, followed by subpar growth thereafter. Risks are balanced: demand may prove more resilient than expected to high rates, but the full impact of tighter finance has yet to be felt and fiscal support will fade.
• How soft the landing will critically depend on the labour market. So far easing labour demand has coexisted with record low unemployment (3.6% in July), as employers prefer to hoard workers, but this may be tested in a case of more severe downturn.
• Employment cost growth is cooling, but at 4.5% yoy remains some 1pp higher than the level consistent with 2% inflation. Production and import prices are decelerating too, but robust demand will slow disinflation. Indeed, we see core PCE inflation still above 3% by Q1 2024.
• The July’s rate hike was followed by overall hawkish communication. We think that the Fed is done hiking, but see no cuts before June next year. Only very negative inflation surprises might trigger another rise in November. Quantitative tightening should end by mid-2024.
  
   

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