Executive Summary
Special effects for growth, inflation is acting up. We expect slugg ish economic momentum ahead, with global GDP growing by less than +3% between 2024-25. While growth in the advanced economies will remain stable at +1.6% in 2024, it will slow down to +4% (-0.3pp) for emerging markets, mainly driven by Asia excluding Asean and Latin American countries. The divergence in growth performance between the US and Europe from 2023 is expected to narrow starting in H2 2024. The US is expected to grow by +1.7% in 2025 after +2.4% in 2024 while the Eurozone’s growth should accelerate to +1.5% in 2025 after +0.7% in 2024 based on the upcoming positive real income effect. Global trade is exiting recession, but the recovery will be limited by the inventory glut. Continued geopolitical tensions may also limit the rebound in Chinese exports, while downside pressures abound domestically and policymakers ramp up fiscal and monetary easing to cushion the economic slowdown. In the meantime, inflation should be getting closer to target by the summer. The pick-up in sequential core inflation in Europe and the US over the past couple of months has reignited concerns. Yet, we think that disinflation will continue: in Europe due to prolonged stagnating domestic demand and the unwinding of remaining supply constraints, and in the US because aggregate demand is now clearly cooling down.
Central bankers‘ much expected twist: The summer pivot. Beware of the curtain call for fiscal policy. The Fed is expected to pivot in July and deliver a total of 100bps in rate cuts by the end of 2024 amid progress on inflation. The ECB will be compelled to cut rates before the Fed due to a diverging economic backdrop marked by lower inflation and stagnant output. This slight precedence may exert downward pressure on the euro. The BoE is expected to pivot in August as the economy is bottoming-out already . At the same time, almost all major emerging markets will start a cautious cutting cycle to avoid disturbing portfolio flows. Fiscal consolidation in Europe will be scrutinized and could shave off as much as -1pp off European GDP growth cumulatively in 2024-25. In the US, November election results will determine the course for fiscal, industrial trade and certainly monetary policy. This policy bifurcation may increase transatlantic divergence.
Does someone have subtitles for markets? The 2024 soft landing is the trailer; 2025 will be action-packed. Markets continue to navigate in an unstable equilibrium context in which both fixed income and equities will continue to be influenced by reflation, geopolitics, heightened defense expenditures, reshoring efforts, advancements in artificial intelligence and the transition towards a greener economy. In this context, we expect long-term interest rates to decline in 2024 and 2025 as upward pressure from supply-side factors and higher terminal rates constrain a significant fall (3.8% for the US 10y and 2.2% for the 10y Bund in 2024). Corporate credit will continue to perform on the back of strong balance sheets, normalizing default rates and strong investor demand. In this context and aided by the expected policy pivot in H2 2024, we expect credit spreads to remain close to current levels for the next two years: ~100-120bps for investment grade and 350bps for high yield. Lastly, equity markets will continue to trade between short- and long-term themes, with AI and reshoring being the dominating forces for the time being. Strong trailing and forward earnings paired with a more resilient than expected economic momentum should set the pace for the current equity momentum to turn structural but we believe most good news has already been priced in, thus leaving little room for upside surprises moving forward. Consequently, we expect close to double-digit returns (~10% yearly performance) while we have slightly downgraded our 2025 projections to mid-single digit returns.
The plot is a bit hard to follow for corporates – although the premise was intriguing. Corporate profitability will be tested as pricing power is waning in most of the manufacturing sectors while some exceptions in the services sector are still on (transportation, warehouse and food & accommodation services). Unsurprisingly, an increasing number of firms are expected to implement cost-cutting in the coming quarters. Capex is slowing down amid sluggish growth prospects, high interest rates and lower capacity utilization rates. Lower interest rates ahead mean the corporate debt-repayment wall (40-50% of debt due by 2026) should be manageable, without any major hiccups. But highly leveraged sectors could be increasingly distressed, keeping business insolvencies at high levels: we expect them to increase further in 2024 (+9% after +7% in 2024) before stabilizing at high levels in 2025. Four out of five countries will see business insolvencies increasing in 2024 (+12% y/y on average), with the largest increases likely in the US (+28% y/y), Spain (+28%) and the Netherlands (+31%).