Macroeconomic Outlook
Per 31 December-23
Geopolitical tension and high interest rates dampen GDP in 2023; Germany only major industrial nation in recession in 2023 – and potentially even into 2024
- The UN's economic outlook for the near term portrays a somber global economic scenario. Despite the world economy's unexpected resilience in 2023, this performance obscures short-term risks and structural vulnerabilities. Projections indicate a slowdown in global economic growth, from an estimated 2.7% in 2023 to 2.4% in 2024, well below the pre-pandemic growth rate of 3.0%.
- Among Europe’s large economies, Germany has been hit particularly hard by recent shocks, with GDP contracting by -0.3% in 2023. Even into 2024 growth outlook is subdued and may even continue to be negative as the German economy faces significant structural challenges, such as labor shortages, reliance on energy-intensive industries, and insufficient investment in digital infrastructure. These factors contribute to the complex economic landscape, and countries worldwide navigate these challenges, striving to address structural issues and promote economic resilience.
Real GDP growth forecast for selected geographies (per Dec-23)
Production outputs for the manufacturing industry (per Nov-23)
Unemployment rate for selected geographies (per Dec-23)
Source: PwC Research, Board of Governors of the Federal Reserve System, Statistisches Bundesamt, U.S. Bureau of Labor Statistics, OECD, ING
With moderate y-o-y energy price development, inflation is gradually decreasing, yet core inflation continues to persist at elevated levels; German producer prices have notably declined on a y-o-y basis
US and German consumer price index
(per Dec-23, change y-o-y)
US Brent oil prices (in USD per barrel, as per 31-Dec-23)
In 2023, the United States and Germany grappled with inflationary pressures due to global economic factors. The initial part of the year saw elevated inflation, prompting fiscal and monetary responses for stabilization. By the fourth quarter, both nations achieved a degree of stabilization, with the U.S. at 3.9% and Germany at 3.5%. In the year 2024, it will become evident whether the geopolitical unrest and disruptions to trade routes will have a noticeable impact on inflation. Real wages, crucial for gauging purchasing power, faced challenges earlier in the year but are expected to be stabilized alongside inflation rates in Q4. The focus now lies on sustaining stability and fostering real wage growth for economic resilience in households.
In Q4 2023, Germany experienced a notable decline in the producer price index (PPI), reaching -8.6%, indicative of deflationary trends. Conversely, the US PPI exhibited a milder decrease of -1.0%. Concurrently, Brent oil prices displayed volatility, with a noticeable decline in early Q4, followed by a subsequent uptick. The dip in PPI for both countries suggests potential economic challenges, while oil price fluctuations might reflect global market dynamics impacting energy costs.
Producer price index for industrial products (per Dec-23; change y-o-y)
Real wage growth (per Dec-23, overall unweighted)
Source: PwC Research, U.S. Bureau of Labor Statistics, Statistisches Bundesamt, OECD, Statista, Investing, U.S. Energy Information Administration, Trading Economics
In 2023, policy rates reached their peak. Central banks are facing pressure to ease monetary policy amid slowing inflation and economic concerns, while heightened interest yields aim to address corporate refinancing needs in the coming months
Major central bank policy rates
Policy rate hikes by selected central banks
In response to persistent challenges posed by inflationary pressures due to excessive demand in the US, coupled with supply shortages and elevated energy prices in Europe, central banks maintained their policy rates at existing levels throughout Q4 2023.
The forecasted quarterly policy rates for the major banks show a trend of easing rates, with the easing phase commencing in the second quarter of 2024 and continuing through the forecasted period until the first quarter of 2026.
With inflation easing, central banks are increasingly pressured to loosen monetary policy in order to avoid a hard landing of the economy
Maturity profile of German high-yield corporate bonds (in EUR bn)
Source: PwC Research, Board of Governors of the Federal Reserve System (US), ECB, BoE, Bloomberg, S&P Capital IQ , Reuters 1) Reflects current market consensus for policy rate decisions of central banks, cumulated expectation until end of 2025 2) PBOC 7-Day reverse repo rate 3) Data only available until 3Q24
Central banks interest policy in 2023 as initial booster for bond yields. However, market expectations of lower rates due to easing inflation and slow economic growth have led to anticipation of early rate cuts, causing recent declines in bond yields
10-Year Government bond yields
1y, 3y and 5y EUR swap rates (left) 1M, 3M and 6M Euribor rates (right)
- European and US government bond yields increased over the first nine months of 2023. However, the yields started to decline in the last two months with yields returning to a similar value they had about a year ago. This occurred due to the anticipation of lower interest rates by the central bank
- The Euribor rates start to stay stable during the last two months of 2023 whereas the swap rates start to fall quickly with 5y and 3y rates falling more than the 1y swap rates in line with market expectation of first rate cuts by central banks in 2024
Source: PwC Research, Bloomberg | 1) 10y Gov Eurozone refers to an index based on a portfolio of Eurozone bonds
Interest rate hikes have resulted in a sharp decline in mortgage volumes. In the US, real estate prices have risen again, while in Germany, despite a significant shortage, there is no stabilization as of yet
Real Estate Price indices (US & GER) 2020Q4 = 100
German effective interest rate housing loans (per Dec-23)
German Mortgage Volumes (per Dec-23, in EUR bn)
The surge in interest rates has led to a substantial decline in mortgage volumes in both Germany and the United States, reaching their lowest levels in several years.
Despite high interest rates and record-low mortgage volumes, real estate prices in the US rebounded in 2023. In contrast, German real estate prices continued their downward trend throughout the year, even in the face of a housing shortage
US MBA 30y contract rate (per Dec-23)
US Mortgage Applications
(Purchase Application Index, per Dec-23)
Source: PwC Research, Deutsche Bundesbank, Bloomberg, Statista, Fed St. Louis, S&P/Case-Shiller U.S. National Home Price Index, Ifo Institute Munich
In 4Q23, stock markets surged in anticipation of imminent rate cuts by central banks. Meanwhile, European M&A activity hit a decade-low record
- During the end of 2023, equity indices started to rise due to expectation of lower interest rates in 2024.
- Despite a slight increase in European M&A activity in 4Q23 compared to 4Q22, it has remained below the average of previous years, reaching a decade-low record. In the face of challenging market conditions, European IPO activity has been sluggish since the beginning of 2022, and it remained very low in 4Q23.
Development of major equity indices (index 31-Dec-19 = 100, per Dec-23)
European M&A volume by quarter (left) and European IPO volume by quarter (in USD bn, per Dec-23)
Source: PwC Research, Yahoo Finance, Eikon
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