The economy of the United Arab Emirates (UAE) is still one of the most dynamic in the region. The strong performances are due to the UAE's sectoral diversification and the attractiveness of Dubai to tourists and investors. Despite the tense geopolitical environment, the short-term outlook is bright, as hydrocarbon production is expected to increase and the steady growth in services and real estate is expected to continue. However, geopolitical risk, oil market uncertainties and US monetary policy are all factors that could threaten this outlook. Uncertainty about the pace and scope of the low-carbon transition is making the longer-term outlook much more uncertain
The South African economy narrowly avoided recession at the end of 2023. The poor quality of the country’s infrastructure is significantly slowing down activity. In addition, the government lacks fiscal leeway and disinflation is slow and uneven, forcing the central bank to maintain its restrictive monetary policy. Faced with numerous macroeconomic challenges, the African National Congress (ANC) has initiated long-awaited reforms, but at a pace that is deemed insufficient. It is likely to pay the price at the general elections in May and lose its absolute majority in Parliament for the first time in its history. The choice of the party with which to form a coalition could disrupt the momentum of reforms and the trajectory of public debt.
In Morocco, the latest GDP growth and inflation figures were better than expected, but the latest drought in the country undermines its economic recovery. Regional instability is another real risk to bear in mind. However, the country's adequate economic policy management and solid fundamentals remain supportive factors of macroeconomic stability.
At a time when Senegal is preparing to launch its gas and oil production, the reconfiguration of the political landscape is generating immense hope among the population. The opposition candidate, Bassirou Diomaye Faye, won the presidential elections in the first round on the back of a breakthrough project. But the challenges ahead are huge, especially on the employment front. Despite a decade of robust growth, the economy has undergone little transformation and suffers from low productivity gains, which it will be difficult for the sustained investment effort to continue to mask, given the now high level of debt.
GDP growth, inflation, interest and exchange rates.
Historically there is a very close correlation between changes in US Treasury yields and German Bund yields. This is relevant at the current juncture, considering that the recent hawkish twist in the tone of the Federal Reserve might continue to push US long-term interest rates higher and put upward pressure on bond yields in the Eurozone. However, since the start of the year, the increase in Bund yields is lower than expected based on the past statistical relationship. This probably reflects a conviction by investors that the ECB will start cutting its policy rate earlier than the Federal Reserve. This monetary desynchronisation is linked to a notable difference in terms of inflation with the US
In the first quarter, the median economic projections of the FOMC members maintain the scenario of three rate cuts for 2024. “Wait” is now the Federal Reserve’s watchword: wait for the data, wait for more data, wait for the full effects of tightening, and wait for evidence that inflation is definitely on the way to 2% to become more substantial. In this respect, the first quarter of 2024 was disappointing. On the other side of the balance of risks, economic activity is still buoyant and does not need the timetable to be accelerated. Thus, the event of a delayed and smaller decrease in the policy rate has gained credibility, and we are now forecasting two rate cuts in 2024, bringing the Fed Funds rate to 4.75-5.00% at the end of the year.
Against a backdrop of sluggish domestic demand and strategic rivalries, particularly with the US, the Chinese government is further developing its industrial policy to support economic growth and strengthen “national security“. Priority is being given to the high-tech and energy transition sectors. With considerable support from the government, these sectors are moving up the value chain, increasing their production capacity, lowering selling prices and winning export market share. The flood of green tech products is expected to lead to further trade conflicts in the coming months.
The Bank of Japan has made an admittedly expected, yet nonetheless historic, decision to end its so-called Negative Interest Rate Policy (NIRP), against the backdrop of an almost unprecedented long-term rise in the general price level. However, monetary normalisation will be an incremental process, with the current weak business activity, illustrated by an expected negative growth rate in the first quarter of 2024 and low expectations for the entire year, leaving no scope for any significant tightening.
Economic activity in the eurozone is expected to gradually pick up over the course of 2024, buoyed by improving household purchasing power and falling interest rates. However, the industrial sector in the eurozone is facing major structural problems, which will not (or will only slightly) be addressed by lowering the ECB’s policy rates. The ramp-up of the EU’s recovery fund should, in theory, enable southern eurozone countries, which are the main recipients, to outperform again in 2024. However, so far, its effects have been relatively limited and the implementation problems, as highlighted in a recent European Commission report, will not go away completely this year.
The German economy has been significantly underperforming the eurozone average and past standards for just over 6 years. The country might even be in recession again in Q4 2023 and Q1 2024. So has Germany bottomed out? From an economic point of view, this is likely because the moment of weakness, posted this winter, is partly due to exceptional effects. From a structural point of view, the German economy is expected to continue to post moderate growth, which would not allow it to regain its status as a driver of European growth.
Just as in 2022 and 2023, the French economy got off to a weak start this year and is expected to see its growth accelerate in Q2. Although not in the same way as in previous years, headwinds affected the French economy in Q1 2024. Beyond this purely cyclical upturn, to return to more durable growth, we will need to wait for the return of French consumers, which we also expect to see in Q2. And lastly, corporate investment should once again bolster French growth, with the implementation of the France Green Industry plan in particular.
In 2023, Italian real GDP rose by almost 1%. The recovery of the economy was broad-based. Private consumption rose by 1.2% in 2023, benefitting from the further improvement in labour market conditions. In 2023, investment continued to be the main driver of the Italian recovery. Expenditures on machinery and ICT equipment were 20% higher than in 2019, with some first positive effects on Italian potential growth. The growth in investment since the post-pandemic period has increased the number of firms using technologies relying more effectively on digital transformation to boost productivity.
In 2023, Spanish real GDP (up an annual average of 2.5%) grew much more than Eurozone real GDP (0.5% y/y). Household consumption, the main driver of growth, was buoyed by the strong labour market and slowing inflation. We are forecasting growth of 0.4% q/q in Q1 2024, before it accelerates in the subsequent quarters. Therefore, for the fourth year, Spanish growth is expected to be one of the Eurozone’s driving forces (2% y/y versus 0.7% y/y).
The short Dutch recession seems to be over, thanks to dynamic private and public consumption. Inflation continues to cool down, even though it remains stickier than thought in some sectors. A new government has still not been formed yet, but there is a consensus about the fact that once it is the case, public spending is set to increase further, giving the economy an extra boost. The Dutch economy is therefore likely to navigate a different, more positive, path from its neighbors’.
Our first quarter nowcast confirms the outlook for the Belgian economy: it keeps cruising at close to trend-growth rates (0.3% q/q), despite the challenging external environment. One-off factors temporarily sped up normalisation in both firm investment and international trade, but private consumption once again carries the brunt of economic growth. Consumption patterns are changing however, with more e-commerce and share of total outlays spent on services. Belgian firms continue to demonstrate resilience, while the labour market cools down.
After eight years of socialist government, the centre-right Democratic Alliance coalition won the snap general election held on 10 March. This shift in the political landscape, where no party now has an absolute majority in Portugal’s Parliament, could be a source of instability in the country. Nevertheless, the sweeping consolidation of public finances during António Costa’s term, as well as sound macroeconomic fundamentals, give the future government considerable economic and fiscal leeway. Portuguese growth is expected to remain well above Eurozone growth in 2024 (standing at 1.2%, according to the European Commission, compared to 0.7% for the Eurozone).
The economic outlook in the UK is still challenging. After a year 2023 marked by a gradual deterioration in activity (a slowdown in the first half of the year, followed by a contraction in the second half), GDP growth is expected to remain slightly positive in 2024. With the general election, scheduled to be held at the end of the year, Prime Minister Rishi Sunak, who is facing difficulties within the Conservative party, is struggling to reassure households who are bearing the full brunt of rising costs of living and interest rates. Despite a recovery in purchasing power and the resilience in the labour market, private consumption remains depressed
US inflation March figure, again higher than expected, put an end to our scenario of a simultaneous first rate cut by the Fed, the ECB, and the BoE in June. We now expect only two rate cuts by the Fed this year, the first in July and the second one in December. The possibility is even rising that the Fed will not cut rates at all this year. On the ECB’s side, we maintain our expectation that the first cut will occur in June, but we have ruled out our back-to-back cuts forecast (i.e. June, July and September), favouring a more gradual easing of one cut per quarter (in June, September and December). The ECB would end up cutting rates before the Fed.
GDP growth, inflation, exchange and interest rates.
The data dependent nature of monetary policy has intensified the mutual influence between economic data, financial markets and central banks. Inflation releases play a dominant role given that central banks pursue an inflation target. In the United States, when CPI numbers are published, the change in the financial futures contracts on the federal funds rate has the highest correlation with the monthly change in core inflation. Going forward, Fed watching will consist of monitoring the inflation surprises -the difference between the published number and the consensus forecast- as well as the ensuing market reaction
GDP growth, inflation, exchange and interest rates
According to the latest economic data, the divergences in growth between the US, Europe and Japan are expected to remain at the beginning of 2024. In Europe, the economic situation in Q1 was once again disrupted by exceptional factors, this time linked to the Red Sea crisis, which particularly affected automotive production in January and, by extension, industrial production.
