GDP growth, inflation, interest and exchange rates.
Our central scenario of a Eurozone take-off and a US soft landing, confirmed by the latest available indicators, is characterised by an expected convergence in growth rates. This base case could, however, be impacted by political uncertainties on both sides of the Atlantic (uncertain outcomes of the early parliamentary elections in France and the US presidential election). Furthermore, while the ECB began its easing cycle in June, as expected, providing timely support for growth, the Fed is still holding back. This extension of the status quo, even if it seems justified for the time being, constitutes another downside risk. However, growth is benefiting from other supportive and resilient factors, chief among them real wage gains
According to the expression “goods things come in threes”, France would meet Germany for the third time in the three lasts Euro football tournaments and win a third consecutive success. On the economic front, French results have already outpaced German results in three important areas over the past five years: job creation, investment growth and the transition to services. As a result, it is not surprising that France generated an additional 0.5 percentage point growth per year compared to Germany.
US inflation seems to have resumed its downward trajectory in Q2 2024, after a Q1 of price acceleration that led the Federal Reserve (Fed) to revise, in June, its expectations for rate cuts for the year (from three to one, in line with our own forecasts). At the same time, economic activity remains strong, although it has lost some of its momentum.
In China, manufacturing activity has remained dynamic, driven in particular by strong growth in exports of high value-added goods. However, the global market share gains made by Chinese companies, bolstered by public subsidies, have exacerbated tensions with most of its trading partners. The proliferation of protectionist measures is now negatively affecting export prospects. At the same time, China’s domestic demand is being undermined by the ongoing crisis in the property sector, and monetary easing measures are failing to stimulate credit activity. Therefore, the authorities are expected to continue to ease cautiously their economic policy in the coming months.
While quarterly growth and inflation are expected to rise in the second quarter, the Bank of Japan is proceeding cautiously following its decision in March to end negative interest rates. A new plan for the pace of bond purchases will therefore be presented in July, while we expect just one further rate hike this year, probably in September. In addition, the domestic currency has continued to deteriorate, prompting the authorities to intervene in the foreign exchange market and fuelling fears of imported inflation.
The first cut in policy rates by the European Central Bank on 6 June came as no surprise, as the committee members had largely prepared the ground ahead of the decision. The timing and scale of future easing is more uncertain, given the continuing strong pressure on wages, high inflation in services, and the resurgence of tensions in global shipping. We expect two further interest rate cuts in 2024, at a pace of one per quarter (September and December).
German growth is expected to be supported, in the short term, by the upturn in the country's industry, which should offset some of the loss of production associated with the rise in the cost of energy following the outbreak of the war in Ukraine. As an open economy, Germany is also expected to benefit from the rebound in growth in the eurozone since the beginning of 2024. However, in the longer term, German growth potential is likely to continue to suffer from labour shortages, from the weight of its industry (weakened by the low-carbon transition), and also from the consequences of insufficient investment against a backdrop of a surge in new competitors.
The French economy is characterised by growth, a statement that is all the clearer following the changeover of the national accounts to the 2020 base and the publication of the 2023 annual accounts, which led INSEE to raise its 2023 GDP estimate by almost EUR 20 billion. However, there are winners and losers from this growth. In 2024, it should be sustained mainly by market services, which account for the bulk of job creation and growth in demand. However, this growth in services substitutes that for goods, while inflation and interest rate shocks continue to weigh on investment.
In Q1 2024, the Italian economy slightly accelerated. Real GDP rose by 0.3%, with a mixed evolution by sector. Valued added of construction rose, while that of manufacturing declined, suffering from the slowdown of exports. Services increased moderately, benefitting from the recovery of tourism. Domestic demand contributed positively to the overall growth and households profited from the improvement of labour market conditions. Economic and financial conditions of firms further improved. In Italy, in the first five months of 2024, on average, the consumer price index increased by less than 1% y/y per month.
In Q1 2024, Spanish real GDP growth was, as expected, one of the highest in the euro zone (+0.7% q/q). It was mainly driven by foreign trade (contributing +0.5 pp), which was directly supported by the record tourism figures recorded at the start of the year. In the second quarter, we expect activity to remain strong (+0.7% q/q) due to a gradual recovery in private consumption, continued growth in exports, and support for investment from future disbursements of NGEU funds.
The Dutch economy was confronted with a new decline of its GDP in the first quarter of 2024, due to an unexpected drop in exports. The future does not look too gloomy though, since a new coalition was formed and presented friendly purchasing power measures that are likely to support private consumption. The agreement however plans to limit the budget deficit to 2.8% of GDP through spending cuts which could deteriorate the country’s productivity in the longer run.
Belgian economic growth remains close to trend rates, even as a shift in the underlying drivers is taking place. Corporate investment rebounded from last quarter’s one-off dip. More encouraging is the bottoming-out of household investment in dwellings. Real estate prices have remained on an upward trend throughout the ECB’s now ended hiking cycle and the depressed activity levels are expected to slowly recover. Public finances remain a challenge, as the spectre of prolonged government formation talks once again casts a shadow over the Belgian economy.
After being in recession in 2023 (-0.8% on an annual average), due to falling investment, high inflation and the decline in real wages, Austrian growth is expected to remain weak this year (+0.3% according to the European Commission). In Q1, real GDP grew by just 0.2% q/q, still dragged down by the decline in investment (-4.7% q/q, contributing -1.1 pp to growth), but nevertheless pulled up by the rebound in private consumption (+0.8% q/q, contributing +0.4 pp), itself supported by the return of real wage increases and the resilience of the labour market.
The Greek economy is proving resilient to rising funding costs and geopolitical tensions in Europe. The country is expected to post economic growth once again above the eurozone average in 2024. Real GDP grew by 2.0% in 2023 as an annual average and by 0.7% q/q in Q1 2024, driven by private consumption and investment. Except in real estate, inflationary pressures have eased and fuelled purchasing power gains which, with rising employment, are supporting private consumption, the weight of which in GDP reached a new record in Q1 2024 (76.9%). Because of its size and dependence on the external market, the country nevertheless remains very exposed to economic developments in Europe as well as to the energy market, and oil in particular.
The party that wins the general election on 4 July will inherit an economy running out of steam. The scenario of a slowdown in growth in Q2 (+0.2% q/q), and over 2024 as a whole, remains our central forecast. Surveys data (PMI, GfK consumer confidence index) and investment have recovered, but household consumption remains depressed. While disinflation supports purchasing power, rising unemployment and the persistence of high interest and savings rates are limiting its effects. The rise in mortgage payment arrears indicates that the refinancing shock is continuing to spread. The return of inflation to 2% in May will support the Bank of England in its decision to initiate a first cut in key rates in August, according to our forecasts, which will give households (little) breathing space.
In 2023, Denmark experienced dynamic and above-expected economic growth, in the form of an illusion given the preponderance of the pharmaceutical sector. This sector turned into the country’s main asset, to such an extent that fears of increasing dependence have appeared. Furthermore, inflation has fallen significantly since the 2023 high, while the Danish central bank is expected to continue to ease policy in line with the ECB.
Like their number, the economic weight of corporate bankruptcies has increased to an unprecedented extent since March 2022, starting from an all-time low in 2021. This ratio compares the outstanding amount of bank loans to newly bankrupt corporates to the total outstanding amount of bank loans to corporates (in difficulty or not). These developments are mainly due to the continued catch-up of corporate bankruptcies. This concerns more fragile corporates whose would have already gone bankrupt in the absence of the economic and health measures put in place in response to the COVID-19 pandemic. Furthermore, the repayment of State-Guaranteed Loans does not seem to have an excessive impact on the financial situation of the majority of corporates that have benefited from them
Although we now know the results of the European elections, the implications of these results – in particular the outcome of the snap parliamentary elections in France – remain uncertain. Our central scenario of a Eurozone take-off and a US soft landing, characterised by a convergence of growth rates, could be weakened by political uncertainties on both sides of the Atlantic. However, growth is benefiting from tailwinds and factors of resilience, with real wage gains at the forefront. For the time being, the cyclical situation remains positive for the Eurozone: our nowcast estimates Q2 growth at +0.3% q/q. However, greater uncertainty surrounds the continuation of this recovery.
May’s activity data once again highlights the fairly different dynamics of the various components of Chinese economic growth. Overall performance is still somewhat lacklustre and points to a slowdown in activity in Q2 2024 compared with the previous quarter.
GDP growth, inflation, exchange and interest rates.
For the fiscal year 2023/2024, which ended at the end of March 2024, economic growth in India reached 8.2%, the highest rate among Asian countries. Over the past twenty years, growth reached 6.3% per year on average. Yet, despite this performance, India’s GDP per capita remains low. In addition, income inequalities have increased and unemployment rates are high (especially among young people), despite higher education levels. The low levels of income and employment can be explained by the employment structure, which remains concentrated in agriculture, a sector with low value added. Despite the major reforms adopted by the Modi government to stimulate development of the manufacturing industry, the sector did not create any jobs over the period 2012-2019
Since 2022, South Africa’s external accounts have deteriorated. After two years of exceptional surpluses in 2020 and 2021, the current account has returned into deficit again since Q2 2022, due to the normalisation of trade terms and strong growth in imports (32% of GDP in 2022-23). At the same time, the financial account has not regained its pre-pandemic momentum so far. Net portfolio investment flows, which were close to 3% of GDP on average over 2010-19, have become negative since 2020, while net foreign direct investment (FDI) inflows have remained modest (1.5% of GDP on average over 2020-23).
In the United States, economic policy uncertainty, based on media coverage, fell slightly in May, after increasing for two months in a row. This drop can probably be attributed, at least in part, to the encouraging fall in inflation in April and May, which is feeding expectations of interest rate cuts by the Fed.
