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Macroeconomic house view – February 2024

Global

Global economic activity began the year on a positive note. The economy will continue to grow at a moderate rate, settling down slightly at around the 2023 level. The global economy is thus proving resilient. Any recession to speak of will therefore be avoided. Geopolitical conflicts present further risks to global prospects and will affect the results of forthcoming elections. We expect that the elections all over the world will contribute to an increase in fiscal support and greater protectionism. We regard the former, combined with persistently loose monetary policy, as the main reason for the prolonged economic cycle. The downward trend in headline inflation is faltering, not least because of the tensions in the Red Sea. In principle, the solid growth in the US, tight situation in labour markets, ongoing fiscal support and anticipated increase in trade protectionism potentially hamper the disinflationary process and a rapid return of inflation to 2%. Central banks in advanced economies are aware of the fact that they need more data before considering their battle against inflation to be won. They will cut key rates in 2024, but will start doing so later than expected and proceed less aggressively.

United States

The US economy continues to grow at a solid pace. The current estimate for GDP growth for the first quarter is +2.9%. The latest economic data were mixed, but the US economy continues to defy negative expectations with a solid service sector and a labour market that shows no sign of softening. Retail sales figures were slightly weaker in January following strong Christmas trade, although preliminary surveys on economic activity for February point to a recovery in manufacturing. Without exception, the Fed’s regional economic indicators remain weak. Consumers are confident and interest-sensitive sectors have obviously bottomed out. The labour market clearly indicates that interest rate cuts are not required at this point in time. The labour market report shows a solid pick-up in the recruitment rate. The disinflationary process came to a halt in January with a solid increase in the CPI of +0.3% versus December as well as a 0.4% increase in Core CPI compared with the previous month and 3.9% year on year. Prices in the service sector were climbing at their fastest rate since 2012. The disinflationary trend could continue, but is being held up by a solid labour market, resilient consumer spending and further fiscal stimulus. Nothing has changed in relation to our prediction that key interest rates have peaked. In terms of the timing of the first rate cut, the Fed will keep all options on the table. The restrictive policy will be dialled down this year, but there is no rush.

Eurozone

The Eurozone economy has hardly grown at all since mid-2022 and only narrowly avoided recession in the fourth quarter of 2023. The European Commission revised downwards its growth forecast for 2024, from 1.2% to 0.8%, and expects inflation to fall to 3% this year. Although growth will probably stagnate in the first half of 2024, GDP could actually increase more strongly in the second half in light of falling inflation, expected rate cuts by the ECB, and solid financial support. Purchasing managers’ indices – seen as a leading indicator – improved in February from a low level. While the overall figure rose thanks to better data from the service sector, it remained in contractionary territory due to a further backslide by the manufacturing industry. Weak global demand is causing trouble for the manufacturing sector and export-oriented countries. Despite a solid labour market and record-low unemployment of 6.4%, retail sales figures continue to point to weak consumption. We expect that rising real wages and high employment will shore up private demand in the coming months. Having fallen rapidly in the second half of 2023, inflation seems to be stabilising above the ECB target. Headline inflation fell slightly to 2.6% in February, while core inflation stood at 3.1%. Underlying inflationary pressure remains stubborn. In particular, the trend in wages will be a key factor in the coming months and could hamper the disinflationary process. The ECB therefore remains in wait-and-see mode and will evaluate further data on inflation and wages before deciding how to proceed. In view of the weaker economic outlook, we expect that the ECB will start cutting rates in the summer – ahead of the Fed.

China

China’s economy remains weak and it faces deflationary pressure and real estate woes. It is expected that the economy will grow at a rate of 5% in 2024, roughly the same as last year. However, it will only be possible to achieve this with a likely budget deficit of approx. 8% of GDP. The manufacturing sector is likely to stabilise, while the service sector will remain crucial to economic growth. Consumer confidence remains weak, however, underscoring the headwinds from the real estate sector and the labour market. In January, the economy sank further into deflation. Headline inflation remained in negative territory at -0.8% year to date. Producer prices are still well inside deflationary territory (-2.5%). However, the current disruptions in global trade present a certain degree of upside potential. The surveys on future economic activity point to a slight uptick. The manufacturing sector is still contracting and is battling weak export orders. Thanks to a stronger domestic order situation and higher production, there was some improvement. The service sector is still expanding. Political leaders have resolutely switched to a policy of active economic support through fiscal, monetary and financial measures. After cutting the minimum reserve ratio for smaller banks, the PBoC also cut key rates by 25 basis points – obviously to support the real estate market.