Macroeconomic Outlook
1Q24 | April 2024
Global recovery from economic shocks shows diverging trends: US and China experience moderate growth, while Germany remains in recession
- Despite the world economy´s unexpected resilience in 2023 and the fact that most major industrial nations were able to recover from economic shocks, the Worlds Bank economic outlook for 2024 portrays a somber global economic scenario. According to the World Bank, global growth is expected to slow further in 2024 – the third consecutive year of deceleration – due to weak global trade growth, the ongoing effects of tight monetary policy, restrictive financial conditions as well as low underlying productivity growth.
- Growing divergences among nations are forecasted in the near-term, with subdued growth in advanced economies as well as China and improved growth in emerging markets and developing countries with strong credit ratings.
- Germany has been hit particularly hard by recent economic shocks, being the only major industrial nation in recession in 2023. Projections currently available do not indicate an economic turnaround in 2024 as significant challenges, such as labor shortages, losses in purchasing power and downbeat investor sentiment, remain.
Real GDP growth forecast for selected geographies (per Mar-24)
Production outputs for the manufacturing industry (per Mar-24)
Unemployment rate for selected geographies (per Mar-24)
Source: PwC Research, Board of Governors of the Federal Reserve System, International Monetary Fund, Statistisches Bundesamt, U.S. Bureau of Labor Statistics, OECD, ING, World Bank Group
Core inflation remains elevated while price growth for food is decreasing and energy inflation rates continue to slow. As such, lower energy prices are the main reason for the notable decline in y-o-y producer prices in Germany
US and German consumer price index
(per Mar-24, change y-o-y)
US Brent oil prices (in USD per barrel, as per Mar-24)
- Inflation rates peaked globally in 2022 and 2023, driven by various causes, including COVID-19 pandemic-related economic shock, supply chain disruptions and the global energy crisis. In 2023 inflation rates in Germany and the US started to decrease as fiscal and monetary measures implemented by the government and central banks started to take effect. In 1Q24, consumer prices in Germany and the US reached levels close to central banks target rates.
- According to the ifo Institute, consumer price growth in Germany is expected to decrease further in 2024 (2.2%) and 2025 (1.6%), particularly as a result of declining gas and electricity prices. Core inflation is forecasted to decline more slowly (2024: 3.3%, 2025: 2.2%). Disinflation is expected to lead to further easing of financial conditions.
- In 1Q24, lower energy prices continued to be the main reason for the y-o-y decline in producer prices for industrial products.
- Continued real wage growth both in the US and Germany is threatening the sustained disinflation and therefore the easing of financial conditions.
Producer price index for industrial products (per Mar-24; change y-o-y)
Real wage growth (per Mar-24, overall unweighted)
Source: PwC Research, U.S. Bureau of Labor Statistics, Statistisches Bundesamt, OECD, Statista, Investing, U.S. Energy Information Administration, Trading Economics
Despite decreasing inflation, central banks maintained their policy rates throughout 1Q24. First interest rate cuts expected to be postponed further into the year
Major central bank policy rates
Policy rate hikes by selected central banks
Despite declining inflation, central banks maintained their policy rates at existing levels throughout 1Q24 in response to persistent challenges posed by inflationary pressures, due to growth in wages in Europe coupled with supply shortages and elevated energy prices as well as excessive demand in the US.
The forecasted quarterly policy rates for the major banks show a trend of easing rates, with the easing phase expected to commence in the second quarter of 2024 and continuing through the forecasted period. For the European Union, policy rate cuts are currently expected to begin in June 2024 with a 25-basis-point cut.
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
Shifts in market expectations regarding future interest rate cuts resulted in a renewed increase in bond yields and swap rates; Euribor rates remained constant throughout 1Q24
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 started to decrease in 4Q23 as a result of anticipated early interest rate cuts by central banks. In 2024, market expectation shifted as central banks remained to hold their key interest rates, leading to increasing bond yields in Germany and the US.
- The Euribor rates remained stable during 1Q24 whereas swap rates started to pick up again with 5y and 3y rates rising 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 rates for housing loans showed a first decrease in 1Q24 but still remain highly elevated
Real Estate Price indices (US & GER) 4Q20 = 100
German effective interest rate housing loans (per Jan-24)
German Mortgage Volumes (per Jan-24, in EUR bn)
- The effective interest rate for housing loans in Germany peaked in Nov-23 at 4.2% - a 243% increase compared to Nov-20.
- While real estate prices in the US have recovered real estate prices in Germany continued to significantly decline until the end of FY23.
- 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.
- Since November, interest rates for housing loans in Germany and the US decreased, leading to slightly increasing mortgage volumes in 1Q24.
US MBA 30y contract rate (per Mar-24)
US Mortgage Applications
(Purchase Application Index, per Mar-24)
Source: PwC Research, Deutsche Bundesbank, Bloomberg, Statista, Fed St. Louis, S&P/Case-Shiller U.S. National Home Price Index, Ifo Institute Munich
In 1Q24, stock markets continued to surge in anticipation of imminent rate cuts by central banks, but divergences in the performance of major equity indices increased further. Meanwhile, European M&A activity likely to have reached a tipping point
- As 2023 ended, equity indices commenced an upward trend driven in large part by a group of major tech stocks propelled by enthusiasm over AI and by the anticipation of interest rate cuts expected in FY24.
- In 2023, volumes of all deals and deal sizes reached a decade-low record due to high levels of inflation, rising interest rates, geopolitical uncertainty and heightened regulatory scrutiny.
- In 1Q24, European M&A activity and IPO activity showed significant increases compared to 1Q23, signaling an end to the bear market. Despite remaining uncertainty regarding the strength and speed of the recovery due to lingering macroeconomic and geopolitical challenges, steady increases in M&A activity may be expected throughout 2024.
Development of major equity indices (index 31-Dec-19 = 100, per Mar-24)
European M&A volume by quarter (left) and European IPO volume by quarter (in USD bn, per Mar-24)
Source: PwC Research, Yahoo Finance, Eikon
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