By Audrey Bismuth, Global Macro Researcher, La Française AM
Japan, the United Kingdom, and Germany are among the developed G7 countries that officially entered a technical recession at the end of 2023, with two consecutive quarters of economic decline. UK and German economies contracted by 0.3% in Q4 2023, while Japan's GDP shrunk by 0.1%. These declines highlight the fragility of global economic recovery after the COVID-19 pandemic, Russia's invasion of Ukraine and the continued erosion of purchasing power.
While US activity is showing greater resilience thanks to households that have drawn on their accumulated savings since the pandemic and to rising public spending, the European economy is facing weak consumer confidence given the rising cost of living as well as weak business confidence given rising energy costs, accelerating nominal wages and low productivity gains in a context of high borrowing costs, linked to the very restrictive monetary policy of central banks. These challenges underline the need for targeted policy responses, tailored to the specificities of each economy. Growth momentum is expected to rise in the European Union (EU) and the UK this year, as per official forecasts. The European Commission's winter economic projections anticipate a growth rate of 0.9% in the EU and 0.8% in the Euro Area (EA), up from 0.5% in both regions in 2023. The International Monetary Fund’s (IMF) January 2024 World Economic Outlook predicts a modest increase in growth for the UK, from 0.5% in 2023 to 0.6% in 2024.
However, uncertainties loom over the economic landscape, casting shadows on the prospects for sustained recovery. The Economic Expectations Survey (EES), conducted by the IFO Institute in cooperation with the Institute for Swiss Economic Policy (IWP), reveals concerns about the potential for recession in some countries by year-end notably in Germany and in the United Kingdom with a probability of 38%, compared to 26% for the United States. Factors such as geopolitical events, energy prices, political instability and consumer spending dynamics contribute to the heightened risk perception among economic experts. These uncertainties underline the importance of proactive government measures (fiscal consolidation, structural reforms to improve European supply capacity) and prudent calibration of monetary policies to avoid lowering interest rates either too early or too late, thereby minimizing risks and ensuring the resilience of the European economy.
Optimism for the UK and European economies in 2024 rests on three primary catalysts: a gradual decline in inflation, robust wage growth and a looser monetary policy stance throughout the year. Leading indicators such as the ZEW and the Sentix show an improvement, particularly in the manufacturing sector, which should recover after two years of sluggish growth. This resurgence of the manufacturing sector, which is a necessary boost for employment and capital expenditures, bodes well for world trade despite geoeconomic fragmentation which should persist.
Inflationary pressures, which have been a cause for concern, are projected to ease in 2024, offering a reprieve to policymakers. The IMF forecasts lower annual average headline and core inflation for about 80% of the world's economies in 2024. The European Commission predicts a decline in HICP inflation from 6.3% to 3.0% in the EU and from 5.4% to 2.7% in the EA, with similar projections for the UK. These forecasts provide a more favourable outlook for price stability, allowing central banks to adopt accommodative monetary policies to support economic growth. Indeed, it is likely that the European Central Bank (ECB) and the Bank of England (BoE) will start to cut interest rates as of June 2024, which is already reflected in the slight easing of credit conditions since the fourth quarter of 2023. This dovish turn comes after aggressive monetary policy tightening in response to inflation peaks.
In conclusions, UK and Euro Area growth is expected to strengthen in early 2024, supported by rising real disposable income, robust wage growth and a tight labour market. Stimulus measures, such as the Next Generation EU program (temporary measure from 2021 to 2026) and tax cuts in the UK, which should be announced on March 6th, are also expected to contribute positively to growth. Regarding monetary policy, the ECB and the BoE are expected to adopt a cautious approach to the calibration of monetary policies due to the risk of persistent core inflation (excluding volatile items, energy and food) and geopolitical risks. The priority for central bankers remains controlling of inflation, unless major economic disruptions are to occur (deterioration of the macroeconomy, financial stability risks).
Source: Bloomberg
This commentary is provided for informational and educational purposes only. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management (314 024 019 R.C.S. Paris ; 128 bld Raspail, 75006 Paris) was approved by the AMF under no. GP97076 on 1 July 1997.