Macroeconomic Outlook
Per 31 Dec-24
Global economies stabilize in 2024, while Germany struggles in the second year without growth. Looming deindustrialization threatening Europe's economic base
- According to the OECD, the G20 economies are projected to grow by 3.3% in FY24. However, Germany is one of the few economies experiencing contraction, which also blocks the economic recovery of the wider Euro area.
- In response to weak economic performance, China is expanding its stimulus measures to stabilize its economy. These measures are projected to eventually lead to a slight increase in Chinese economic growth rates.
- The German economy faces significant cyclical and structural challenges, resulting in a 0.2% decline in real GDP for 2024 and only moderate expected growth until 2027. The export-oriented industry is pressured by lacking competitiveness mainly due to high energy costs, the transition to a CO2-neutral economy, and demographic challenges. This raises concerns about the deindustrialization of Germany as key sectors like automotive, chemical, and machinery face increased competition from emerging economies, particularly China. Despite these challenges the labor market in Germany remains robust, i.a. as public service sector (healthcare, education) requires increased amounts of workforce.
Real GDP growth forecast for selected geographies (per Dec-24)
Production outputs for the manufacturing industry (per Oct-24)
Unemployment rate for selected geographies (per Dec-24)
Source: PwC Research, Board of Governors of the Federal Reserve System, Deutsche Bundesbank, International Monetary Fund (IMF), OECD, Statista
German and US CPI show signs of a more persistent inflation than expected, fueled by recovered wage growth and higher energy prices especially in Europe and Germany
US and German consumer price index (per Dec-24, change y-o-y)
US Brent oil prices (in USD per barrel, as per Dec-24)
- Inflation in the developed world stabilized above central bank target rates, following earlier peaks in 2022 and 2023 driven by the COVID-19 pandemic, supply chain disruptions, the global energy crisis, and the Russia-Ukraine war. By December 2024, Germany's CPI increased to 2.6% for FY24, after a temporary easing, indicating signs of a more persistent inflation than expected, fueled by wage growth from union agreements, among other factors. In the US, inflation edged up to 2.9%, also remaining above the Federal Reserve's 2% target.
- In Germany, producer prices increased by 1.1% y-o-y, while the US experienced a 0.8% increase
- Real wage growth has recovered in both the US and Germany. In late 2023, both nations experienced declines, with Germany's real wage growth dropping to a low of -5.4% in the fourth quarter. Following this downturn, Germany's real wage growth recovered, reaching 2.9% by the third quarter of 2024. In the US, after a similar decline, real wage growth bounced back earlier and stabilized at around 1.3% by Dec 2024, fueled by economic growth.
- Amid persisting inflation expectations, heightened economic uncertainty, and geopolitical tensions, central banks struggle in balancing economic growth and the suppression of inflation.
Producer price index for industrial products
(per Dec-24; change y-o-y)
Real wage growth (per Dec-24, overall unweighted)
Source: PwC Research, U.S. Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, Federal Reserve Bank of St. Louis, Statistisches Bundesamt, Statista, Investing, U.S. Energy Information Administration
Central banks struggle to balance economic growth and suppressing inflation
Major central bank policy rates
Policy rate hikes by selected central banks
- Easing inflation led to interest rate cuts by central banks. Even though, recent CPI data indicates a more persistent inflation than anticipated, current forecasts still show an expected continuation of the easing policy by central banks, despite first signals of a tightening monetary policy.
- In Europe, the ECB implemented a 0.50% rate cut from Q3 to Q4 2024, aiming to bolster growth across the Eurozone. However, with inflation proving more persistent, the ECB struggles to balance growth of the eurozone and the suppression of inflation. This is further fueled by impending government budget crises in Europe.
- The Fed has reduced the interest rate to 4.3% through December 2024. Despite a more persistent inflation than initially assumed, further policy rate cuts are expected.
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 at 4Q25; 2) PBOC 7-Day reverse repo rate; 3) Including January interest rate cut
German yields stabilized amid economic slowdown, while US yields increased due to the Fed signaling cautiousness with regard to inflation and potential fiscal expansion by the US government
10y government bond yields
1y, 3y and 5y EUR swap rates (left) 1M, 3M and 6M Euribor rates (right)
- In 4Q24, while US government bond yields exhibited further increases continuing the trend observed earlier in the year, European bond yields remained stable in 2024.
- Bond yields in the US show counterintuitive development with respect to expected rate cuts by the Fed. While rate cuts are expected, the Fed has signaled a more cautious approach to its monetary policy casting doubt to rate cut expectations and causing market participants to drive yields up. The upward pressure on bond yields in the US is further fueled by expectations for potential increased government spending.
- In Germany, bond yields remained stable as investors responded to the broader economic slowdown and inflation trends.
- In 4Q24, Euribor rates continued to decline, aligning with the ECB's earlier rate cut and a cautious economic outlook. The 1-year swap rate fell to 2.33%, meanwhile, the 5-year swap rate slightly rose to 2.25%, reflecting lower policy rates.
Source: PwC Research, Bloomberg
Real estate transaction volumes in Germany and the US remain depressed due to high financing costs; US prices continue to rise, while in 3Q24 German prices start to see a rebound from its lows
Real estate price indices (US & GER) 4Q20 = 100
German effective interest rate housing loans (per Dec-24)
German mortgage volumes (per Dec-24, in EUR bn)
- By Q3 2024, US real estate prices rose 10.7% from Q4 2022, with the Case-Shiller Index at 137.1. In Germany, home prices modestly recovered, rising 2% from the previous quarter to 101.7 but still 11.6% below Q2 2022 levels.
- Although German home prices have slightly recovered, transaction volumes are still 49% below their March 2022 peak, highlighting ongoing challenges from high financing costs.
- By the fourth quarter of 2024, the MBA 30-year contract rate in the US stabilized at 7%. However, mortgage applications have decreased by 55.4% since their peak in 2020, reflecting ongoing challenges with affordability.
- Mortgage volumes in Germany and the US remain low due to high interest rates, despite slight increases in Q4 2024 after rate cuts. Affordability challenges continue to impact transactions.
US MBA 30y contract rate (per Dec-24)
US mortgage applications
(Purchase Application Index, per Dec-24)
Source: PwC Research, Deutsche Bundesbank, Bloomberg, Statista, Fed St. Louis, S&P/Case-Shiller U.S. National Home Price Index, Ifo Institute Munich, NAR
Equity indices face mixed performance amid economic concerns; European M&A rebounds slightly while IPO activity stays subdued
- In 4Q24, equity indices showed mixed performance amid shifting market dynamics. The NASDAQ and S&P 500 continued to rise, driven by strong interest in AI and tech stocks, though at a slower pace. Concerns like interest rate changes and geopolitical tensions tempered optimism. Germany's DAX experienced an increase in FY24 despite slowdowns in key economic areas. Meanwhile, the Chinese SSE experienced volatility, with gains in technology and consumer discretionary stocks being offset by regulatory pressures and slower economic growth.
- In 4Q24, M&A activity in Europe demonstrated flat development compared to previous year, with total deal volume reaching $199.6bn. Overall, Q4's M&A landscape in Europe was characterized by a cautious yet improving sentiment.
- IPO activity in Europe remained subdued in 4Q24, with total volume reaching only $3.7bn. This marked a continuation of the decline observed in FY24. The ongoing low levels of IPO activity highlight persistent investor caution, particularly outside the tech sector.
Development of major equity indices (index 31-Dec-19 = 100, per Dec-24)
European M&A volume by quarter (left) and European IPO volume by quarter (in USD bn, per Dec-24)
Source: PwC Research, Yahoo Finance, Eikon
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