- Backtrack – Allianz Trade expectations hold up: In the fourth quarter, the momentum of growth weakened, but remained resistant, disinflation continued, and interest rates reached a plateau (with their peak already behind us in some emerging markets, including Poland). What caused interest rate drops in Poland as well as other countries like Hungary, Chile, Peru, and Brazil? After a turbulent 2022, the imbalance in the current account of emerging markets began to decrease (partly due to the stabilization of energy commodity markets), which allowed central banks to take early and decisive hikes, granting some room for the first rate cuts. At Allianz Trade, we expect that our regional counterparts will follow suit within the next six months.
- The uncertainty associated with geopolitical and economic policies will act like a negative supply shock in 2024. After a series of shocks in recent years – from the pandemic to an energy crisis – the packed election calendar in 2024 will increase economic uncertainty, as countries responsible for 60% of global GDP head to the polls.
- Populism is at a record high, and more than 25% of countries are ruled by populist leaders. After 15 years, the GDP per capita in countries governed by populist leaders is, on average, 10% lower compared to a country governed by a non-populist government [1].
- Elections occurring in a polarized context can lead to greater economic uncertainty, but high uncertainty can also lead to more polarized and populist election outcomes. Uncertainty about economic policy is, on average, 13% higher in the month before and the month of the national elections compared to other months [2].
- Soft landing in the USA; challenging situation in the Eurozone: As the American economy defied gravity in 2023, a soft landing scenario in 2024 is increasingly probable. The GDP of the United States will grow by about +2.4% in 2023 despite the Federal Reserve’s tight monetary policy. Households and businesses have built solid balances overall, prolonging the maturity structure of their debt before the Federal Reserve tightens monetary policy and locking in low fixed interest rates. Debt servicing costs account for less than 10% of American household income at the end of 2023, the lowest level in recent history.
- Eurozone – has been grappling with near-zero growth for four quarters, and short-term prospects do not change this picture. In fact, we anticipate a mild technical recession due to another quarter of negative growth in Q4 after -0.1% QoQ in Q3, 2023. However, we are cautiously optimistic that the Eurozone will emerge from this stagnation in the second half of 2024, and economic growth should accelerate as several economic challenges begin to recede. Firstly, aggressive monetary policy tightening is expected to ease, which will also alleviate financial conditions. Secondly, the energy crisis that has been a significant hurdle for the manufacturing sector due to high electricity prices is showing signs of relief. Although prices remain high compared to pre-Ukrainian war levels, any further drops in global prices will ease the pressure, which is currently happening as Brent oil prices have fallen by -20 USD/bbl since September. Moreover, the Eurozone (and broadly – the EU) is grappling with low real wages, which still lag behind pre-Covid-19 pandemic levels, suppressing consumer spending. These trends have left the Eurozone far behind the United States in terms of economic activity. Fortunately, indicators suggest a change in tide. Nominal wage growth, combined with falling inflation, is expected to boost real wages, potentially reviving consumer demand. Finally, the region will likely experience a negative output gap, suggesting that without recalibrating potential growth – which is currently not expected – economic activity is likely to rebound mechanically, barring unforeseen shocks. This automatic adjustment promises a degree of revival, laying the groundwork for economic activity growth in the Eurozone in the medium term.
- “There’s no doubt that 2023 belongs to Taylor Swift,” according to Forbes. Looking ahead, we decided to push Swiftonomics into 2024, so Taylor rules! While we identified ten key themes to keep an eye (and ear) on in 2024, we matched each one to a hit by Ms. Swift and created a (carnival) playlist.
Swiftonomics – ten carnival hits:
… Ready for it? – The year 2024 will be full of political events. European voters will elect their representatives in the EU; Portuguese, Belgian, Austrian, Indian, Mexican, British voters will elect their MPs, while the USA, Mexico, Taiwan, and Romania will also elect new presidents. Faced with growing populism and numerous uncertain elections, households and firms will likely adopt a wait-and-see attitude and postpone key economic decisions, from major purchases to major investments.
Is it over now? – We expect a soft landing in the United States and Eurozone, with a rising risk of a prolonged recession in Europe in the first half of 2024, as so far only 60% of the increase in key interest rates has been passed on to borrowers in Europe (so they will still feel it). We forecast 2024 GDP growth at +1.4% in the USA, +0.8% in the Eurozone, +4.6% in China, and +0.6% in the UK.
Shake it off: – With waning demand and the positive base effects on energy and food, disinflation is gaining traction. We expect that central banks will make the changes earlier than economic forecasts predict (i.e., the summer of 2024), but later than the market anticipates as cooling down the heated job market takes time. Indeed, service inflation and wage growth still drive inflationary pressure, particularly in the United States. At Allianz Trade, we expect that by the end of 2024, interest rates will be at 4.5% in the USA, 3.5% in the Eurozone, and 4.5% in the UK.
You’re on your own, kid: – Fiscal safeguards in Europe are loosening as most countries have committed to moderate deficit reductions. The German government managed to reach a budget agreement at the eleventh hour, but we do not expect it to significantly impact economic activity. However, fiscal consolidation in the United States remains more in word than in deed for now.
Out of the woods: – Global trade is set to slightly rebound after two successive years of global GDP growth below average. As European countries emerge from a trade recession, Asian countries (excluding China) that continue to benefit from the reshuffling of global value chains will lead the bounce back. Moreover, the destocking in the global business cycle should reach its end in 2024, further contributing to the rebound.
Anti-hero: – Hopes were high at the beginning of the year that Chinese consumers would rejuvenate the global economy, but they didn’t save the day. China is still wrestling with a difficult real estate market situation, and consumer confidence remains constrained. To offset some of the losses in global export markets and weak domestic demand, China has increased and will maintain political support while ramping up foreign investments to consolidate its influence.
Everything has changed: – Most emerging markets have successfully managed to curb inflation while battling higher financing costs and sometimes tense social situations. Managing a decline in interest rates, a weaker dollar, and lower deficits while benefiting from friend-shoring should prove easier. However, it won’t be a walk in the park as policy mistakes can wipe out earlier successes. Countries like Egypt, Argentina, and Ghana will still wrestle with considerable obstacles related to large amounts of debt that need to be refinanced at high costs.
I knew you were trouble: – So far, companies have successfully navigated in an environment of higher yields. However, insolvency numbers are increasing in most countries, suggesting a vast gap between SMEs that struggle with liquidity and profitability issues and larger firms that remain resilient. Moving forward, rising interest rates should continue to affect profitability and liquidity as revenue growth is expected to slow down. Some sectors, like real estate, renewable energy and construction, are in the middle of a storm with high financial leverage, depreciating assets, and significant financing needs for both operational and investment expenditures.
Bad Blood: – In 2024, long-term interest rates are unlikely to fall significantly as policy cuts are already factored in, and the supply factor will maintain upward pressure. Equity returns in developed economies are expected to be close to 5% with increased volatility. Corporate credit spreads have shown resilience, indicating the market’s faith in a soft landing. While the overall outlook is cautiously optimistic, caution should be exercised for potential risk in specific market segments (i.e., commercial real estate, energy, etc.).
Delicate: – Despite a challenging environment and some financial cracks beneath the surface revealed by a short-lived banking crisis in the United States, markets are dismissively dealing with increasing liquidity pressure. At Allianz Trade, we expect liquidity drop to intensify, exerting pressure on corporate spreads. However, the risk does not seem systemic, as both firms and decision-makers have certain buffers.
[1] Manuel Funke, Moritz Schularick and Christoph Trebesch (2023). Populist Leaders and the Economy. American Economic Review, forthcoming.
[2] Scott Baker, Aniket Baksy, Nicholas Bloom, Steven Davis, and Jonathan Rodden (2020). Elections, Political Polarization, and Economic Uncertainty, NBER Working Paper 27961.
