Vietnam went through a number of difficulties in 2022 and 2023, related to the deterioration of the international environment, the severe correction in the property sector, the crisis of confidence and liquidity tensions in the banking sector. Economic growth stalled in early 2023, but then quickly accelerated again. Most notably, activity in the manufacturing export sector has been recovering for a few months, buoyed by healthy foreign direct investment inflows. These trends are expected to continue in the short term, with Vietnam being one of the major beneficiaries of the ongoing adjustments to global value chains.
For his return at the helm of Brazil, Lula can look at his first year back in office with some contentment: macro-financial indicators boasted solid prints, social programs were given a new impetus, an ambitious change in direction was initiated on the environment and the government’s capacity to reform ended up being much stronger than anticipated by most observers. This picture, nonetheless, conceals some imbalances most apparent in Brazil’s growth profile, the dynamics of unemployment and the structure of its trade balance. The markets’ renewed skepticism relative to the government's ability to balance its books (despite the new fiscal framework) constitutes another grey area. In 2024, economic growth, inflation and interest rates will be lower than in 2023
After an expected recession in 2023, better growth prospects lie ahead in 2024. Economic activity is expected to be driven by both an improvement in domestic demand and a slight rebound in growth in the Eurozone. The monetary easing cycle initiated at the end of 2023 should continue, albeit cautiously, due to the persistence of strong wage pressure. External accounts remain strong, with foreign exchange reserves having increased for several years. Hungary is expected to post a current account surplus in 2023, after a deficit of -8.2% of GDP in 2022. As to public accounts, the budget deficit has continued to deteriorate, and is expected to exceed 5% of GDP in 2023. Like many European countries, Hungary may face an excessive deficit procedure in 2024.
Despite their many vulnerabilities, including a high dependency on the European market and a complex political environment, the economies of the Western Balkans have held up remarkably well against two external shocks since 2022: the war in Ukraine and Europe’s economic slowdown. The foreign exchange risk has been contained thanks to the support of foreign direct investment and external financing. Buoyant domestic demand has helped to offset the effects of the slowdown in Europe on exports. Inflationary pressures, which were still substantial in 2023, are expected to ease this year. In Croatia, macroeconomic risks will be reduced significantly thanks to the eurozone accession. However, its high dependency on tourism activity is still a factor of vulnerability
Hard hit by the Covid crisis and the consequences of the war in Ukraine, the Tunisian economy is now facing significant financing constraints. External accounts held up fairly well in 2023, but the macroeconomic situation remains very fragile. Debt repayments for this year are significant, and the country is not immune from another shock. In particular, the prospect of rapprochement with the IMF seems less and less likely, fuelling fears about the government's ability to cover all its financing needs. A debt crisis cannot be ruled out.
A breakthrough has recently been made in the process of restructuring the Ethiopian government's external debt. The peace agreement between the federal authorities and the Tigray rebel forces, signed in November 2022, ended two years of civil war and cleared the way for negotiations with international institutions to resume. Consequently, almost three years after requesting a debt restructuring under the G20 Common Framework, Ethiopia reached an agreement on an interim suspension of its bilateral debt service. However, this is only the first step on its journey, as the Ethiopian government must now reach agreements with all of its external creditors in order to fully restructure its debt
Monetary and forex conditions in emerging economies are more favourable in this early part of the year than they were at the end of 2022 and beginning of 2023. The relaxation of monetary policies made possible by lower inflation and upward revisions of growth forecasts have attracted portfolio investment. Despite the increase in geopolitical risk, sovereign risk is likely to reduce except for the most fragile countries, which were already under pressure in 2023. For low-income countries, 2024 will be a high-risk year as governments’ external debt repayments will remain very heavy, just as they were in 2023.
GDP growth, inflation, interest and exchange rates
According to our estimate, the trade deficit (on trade in goods) stood at almost EUR 101 billion in 2023, down from 165 billion in 2022, but still up from 86 billion in 2021. This improvement is primarily due to the drop in oil prices and the return to normal of electricity exports and intermediate-good imports. The good news is that the trade balance is also improving in volume terms, albeit to a more limited extent and due to effects that are likely to be one-offs.
2023 closed on a note of hope, with expectations of rate cuts and signs of stabilising, perhaps even improving confidence surveys. This hope has not dissipated in the early weeks of 2024. In the absence of a new shock, inflation seems to be on course for a return to the 2% target. This opens the way to the first steps in monetary easing, expected in the second quarter. These twin falls, in inflation and interest rates, and the encouraging pattern in the bulk of the economic data, fuel the expectations of a soft-landing scenario. But this is not to say that there are no risks or points worthy of continued attention. Geopolitical tensions remain high and capable of disrupting this scenario, most notably through their inflationary effects
The possibility of a US recession triggered by monetary tightening is looking less and less likely given the resilience of an economy that continued to grow by 0.8% q/q in Q4 2023 and by 2.5% on average over the year. Our central scenario is now that of a marked slowdown albeit without an economic recession in H1 2024. The Federal Reserve can now look forward to a soft landing and consider rate cuts in 2024 – a year in which political events will take centre stage.
The post-Covid recovery in China’s economic activity was not as strong as expected in 2023. The property sector crisis seemingly deepened further at the end of the year, the demand for housing did not pick up again despite support measures from the authorities, and weak household confidence weighs on private consumption. Conversely, the export-oriented manufacturing sector has performed better than expected over the past few months, in contrast with the performances of domestically oriented sectors.
Faced with a natural disaster and a political crisis, 2024 is off to a rocky start for Japan. However, the economic impacts of the earthquake that struck the country’s west coast on 1st January 2024 are expected to be fairly limited due to the authorities’ effective preparations and quick response in dealing with this type of event. After an expected growth of +0.4% q/q in the fourth quarter of 2023, activity should slow in the first quarter of 2024, although it will remain positive at 0.2% q/q. The fall in inflation and bond yields at the end of 2023 is providing some breathing room for the BoJ, which is expected to end its negative interest rate policy in March or April
Eurozone activity is expected to pick up moderately in 2024, buoyed by the fall in inflation and the start of a cutting cycle of policy rates, which, according to our forecasts, will take place in April. The labour market continues to surprise on the upside. However, industrial production is falling sharply and remains highly exposed to escalating tensions in the Red Sea and the repercussions on shipping and supply chains. 2024 will see a number of national parliamentary and presidential elections (Finland, Portugal, Belgium, Austria) and the European elections (6 to 9 June), which are likely to redraw the political landscape in the region and the balance of power within the European Parliament.
The cyclical slowdown in the German economy, which is similar to the one being experienced in the Eurozone, is part of a longer-term stagnation, with Q3 2022 standing out as the last quarter with significant growth. Even so, this figure is biased upwards, as the period benefitted from the post-Covid rebound. While the rise in energy prices was steep enough in 2022 to highlight the clear weaknesses of the German economy, which is specialized on energy-intensive sectors, some of these weaknesses had existed earlier. Against this backdrop, the prospect of a return to growth, which is our scenario for spring 2024, due to the drop in inflation in particular, is still shrouded in deep uncertainty and downside risk.
French growth weakened in 2023, as evidenced by the low figures for the business climate indicators in December. However, 2024 should kickstart the road to recovery. The major drop in energy prices from the levels seen at the start of 2023 will contribute to inflation continuing to fall, which is not expected to be jeopardised by most of the price-cap mechanism still in place for electricity being removed. The upturn in real wages, the healthy state of the aeronautics sector and the continued greening of the economy should enable a soft landing for growth in 2024, with an annual average figure of +0.6%. The expected slight rise in unemployment and the more pronounced increase in business insolvencies pose downside risks, however.
In 2023, the recovery of the Italian economy slowed in a somewhat bumpy way. On the one hand, after supporting the first part of the recovery, fixed investment declined. But on the other hand, consumption surprised on the upside (+1.5% with respect to Q4 2022). Italian households benefited from both a significant improvement of labour market conditions and deceleration of inflation. Consumer confidence recovered, supporting private expenditures. In Q4 2023, inflation marked a decisive slowdown: the declining trend is mainly due to the deceleration of energy prices (up +1.2% on average in 2023 compared to +50.9% in 2022).
In Q3 2023, Spanish growth eased slightly to 0.3% q/q. It was primarily driven by household consumption, which was itself supported by the resilience of the labour market and the increase in real wages. After an increase in H2 (from 1.6% y/y in June to 3.3% in December according to the harmonised price index), inflation is expected to fall again in 2024 and drop below the target of 2% in Q3. We expect growth to remain moderate at the end of 2023 and in early 2024 (0.2% q/q), before returning to positive territory. Spain will remain one of the drivers of the euro area for another year, with expected growth of 1.5% on an annual average versus 0.6% for the euro area.
The country fell into recession during 2023, like in Germany across the border, but 2024 is expected to be better as the future government will have the financial resources to revitalise the economy. A little bit of patience will be needed though for things to settle down. The Dutch economy remains heavily exposed to the global environment, which is very tense at the start of this year.
The Belgian economy looks set to grow at its current trend rate for the next few quarters. Despite a challenging international environment, characterised by restrictive monetary tightening combined with economic slowdowns in key trading partners, the economy has held up remarkably well. Consumer spending, supported by wage indexation, and robust investment are leading the charge. Capex expenditures are directed towards automation and climate transition in the wake of energy and labour costs hikes.
Greece is expected to enjoy economic growth once again in 2024, but activity showed signs of slowing down in the second half of 2023. Real GDP stagnated in Q3 2023 and employment fell by 0.5% q/q. While strong tourism activity, against a backdrop of high inflation, is boosting tax revenue, its impact on real GDP is more muted. The sharp drop in the unemployment rate (which is now below 10%), the drastic improvement in public finances and the decline in public and private debt testify to Greece’s solid recovery, which has been welcomed by the rise in equity and bond markets, and by the sharp tightening of spreads between Greek sovereign debt and the German Bund
The UK economy is flirting with recession. The downturn in activity in the second half of 2023 is expected to continue until spring 2024 before an expected sluggish recovery, which nonetheless will be supported by the Bank of England (BoE) beginning its monetary easing cycle. Despite an uptick in December 2023, inflation remains on its downward trajectory, which is clearly reflected in production prices and CBI surveys. The turnaround in the labour market, which is still muted, is helping to reduce upward pressures on wages. While this is good news for inflationary momentum, it is also weakening private consumption. The BoE has little room for manoeuvre, with an initial policy rate cut expected to occur in June 2024
The combination of rising inflation and the monetary tightening to combat it led the Swedish economy into recession. Declining household consumption and residential investment were the main drivers. Although the situation is not expected to deteriorate further in 2024, this does not mean that a dynamic recovery is to be expected. However, although Sweden is experiencing significant difficulties, it still has many assets to support activity in the medium term.
The narrative of the last mile of disinflation being the hardest, which in 2023 became popular in the world of central banking, reflects concern that after having dropped significantly, further declines in inflation would be more difficult.However, it seems that relevance of this narrative is increasingly being questioned. The account of the December 2023 meeting of the ECB governing council mentions that it has been debated. It seemed that the disinflation of 2023 had been faster than in previous episodes, raising doubts about the relevance of the narrative. A paper of the Federal Reserve Bank of Atlanta analyses this topic for the US. Based on recent research on the Phillips curve, it concludes that the ‘last mile’ is likely not significantly more arduous than the rest
The Red Sea conflict has already had a substantial impact on global shipping. While maritime freight prices are, at this stage, still well below the levels seen in 2021, when the global economy was recovering post-lockdown, they have spiked in January 2024. The Freightos index (chart 5) shows that transportation costs have tripled on average compared to the end of last year. Due to their geographical locations, China and Europe have been the regions most directly affected by these disruptions, and are already facing threefold (China-Europe route) to fivefold (Europe-China route) increases in transportation costs. However, the effects are gradually being felt on all global shipping routes
