Global economic growth will be moderate

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Macroeconomic house view – January 2024

Global

The IMF’s current estimate (January 2024) for global economic growth of 3.1% for 2024 is below the long-term average but can still be called moderate. On the one hand, solid growth and the ongoing deflationary trend is ensuring that a global recession is getting more unlikely. On the other hand, strong fiscal support, solid labour markets and geopolitical uncertainties are putting the medium-term deflationary process in limbo. The outlook for 2024 will be strongly influenced by the path of monetary policy easing, the upcoming elections around the world and the course of geopolitical tensions. In the coming months, central banks will start cutting key rates. However, this will be a slower and more incremental process than expected by the markets thus far. In more than 70 countries, in total more than half the world’s population will take to the polls. Not only will incumbents seek to secure their re-election through fiscal programmes but the results will also have an impact on the future course of fiscal, trade and immigration policies as well as geopolitics.

United States

With GDP growth of 3.3% in the fourth quarter of 2024, the U.S. economy has once again been surprisingly positive. This is the highest rate of U.S. economic growth for seven months, and is down to strong order volumes. The outlook for the first quarter of 2024 points to healthy expansion. While industrial activity is stagnating, consumer sentiment has recovered strongly. Considering this, it is no surprise that economic growth continues to be bolstered by solid retail sales figures. The labour market is also continuing to normalise and balance is being restored. In addition, falling mortgage interest rates are helping the housing market, which could thus show signs of improving in the coming months. While the deflationary trend is weakening, it seems to be intact so far. The consumer price index did rise to 3.4% in December but the PCE data favoured by the Fed is more encouraging. Core PCE dropped below 3% in December and, in addition, inflation expectations still seem to be well founded. The slowing rate of inflation is a welcome development. Above all the solid labour market, robust consumer spending data and further fiscal stimulus ahead of the presidential election in November will probably prolong the deflationary cycle and jeopardise the rapid return of inflation to the target of 2%. Therefore, despite the positive news on the inflation front, in our view the conditions for cutting interest rates are not met. The Fed should wait a while to observe the full effect of their tightening campaign. Of course, it is currently facing the dilemma that if it reacts too late, it will firstly risk putting the brakes on the economy too much and secondly be seen to be politically motivated ahead of the election. We definitely expect that the market has made the wrong call in expecting interest rates to be cut as early as March. We also expect that continuing good economic data will dampen the optimism concerning a loose policy.

Eurozone

Eurozone data remained weak in the fourth quarter of 2023. The eurozone economy was in a technical recession in the second half of 2023 but, based on the data available to us, we expect that the worst could be over. Growth in the first half of 2024 will also remain low but we expect more of a stagnation in economic growth than a sharp recession. Unemployment in the eurozone hit an all-time low of 6.4% in December. In contrast to the U.S., consumer confidence again weakened in January and retail sales figures fell further at the end of 2023. Rising real wages and record-low unemployment should, however, shore up private demand in the coming months. Improved consumer demand and rising labour costs could, however, lead to stickier inflation and thus prevent rapid deflation. Weak global demand is causing trouble for export-oriented countries and sectors. The German manufacturing sector is particular hard hit. Incoming orders and production in industry remain down. The ECB’s bank lending survey shows that although credit conditions remain tight, tightening could have peaked already. Core inflation fell to 3.6% year-on-year, but is still well above the central bank’s target rate. The ECB will remain data-dependent and wait and see what happens in the next few months. Since the macroeconomic data point to a stabilisation of the economy in the eurozone up to the middle of the year and sovereign bond spreads do not show any sign of fragmenting, there is no reason for the ECB to be overhasty.

China

China’s economy is still weak and continues to face deflationary pressure and real estate woes. Overall, Chinese growth reached 5.2% last year, corresponding to the official growth target of around 5%. Last year ended on a mixed note: with weak inflation, a weakening services sector and ongoing subdued bank lending on the one hand and a stabilisation of the manufacturing sector and an improvement in exports from a low base on the other. Consumer spending remains one of the key growth drivers, with a solid increase in services-related retail sales. While there are signs of a upward trend in industry, too, the real estate sector remains the weakest sector despite the introduction of affordable housing projects, various easing measures and liquidity boosts. The economy remains deflationary, although core inflation was positive year-on-year, at +0.6%. The surveys on future economic activity remain weak and point to a stagnating economy. In response, political decision-makers are stepping up their activities. Although no details have been announced as yet, the budget deficit is likely to remain at 8% of GDP. Monetary policy will support the expansionary fiscal policy. The PBoC recently surprised markets not only with a 50-basis-point cut in the minimum reserve requirements, which was steeper than expected, but also hinted at further measures. The outlook for China is slightly more constructive than in the months prior but the pace at which the problems in the real estate sector are resolved will continue to determine the course of developments.