First economic & financial outlook update in 2024 from Baltrag
Following a slowdown in 2023, inflation has started to increase again at the beginning of 2024 in many economies. This uptick is partly due to seasonal factors. However, strong wage growth, core services inflation, and rising maritime freight rates have led many central banks to hold off on cutting interest rates for now. Nonetheless, year-on-year inflation rates are expected to approach target levels by mid-year in many economies.
The US economy appears to be transitioning towards a soft landing. The financial stability of households and businesses suggests that the impact of monetary policy tightening has peaked. However, several factors that have supported exceptional growth in the US, such as household savings, fiscal support, labor participation rates, and productivity improvements. They are awaited to diminish somewhat in 2024, leading to a slower pace of growth.
The UK and Eurozone will most likely gradually emerge from recession-like conditions in 2024, supported by positive real wage growth. However, Germany may continue to face challenges due to cyclical and structural factors affecting its growth model.
Economic activity in Switzerland is awaited to remain sluggish in the first part of 2024 amid euro area weakness but should pick up gradually from Q2 onwards. Inflation in Switzerland has fallen rapidly from its peak of 3.5% in August 2022, helped by the Swiss franc’s strength and base effects from energy. But domestic price pressures are expected to increase due to higher rents, electricity prices and VAT hikes.
Major developed market central banks are anticipated to start cutting interest rates around mid-year. The Federal Reserve (Fed), European Central Bank (ECB), and Bank of England are all forecasted to make initial rate cuts in June. Switzerland’s SNB surprised mid of March 2024 all central bankers with a frist rate cut of 0.25% as inflation comes close to the target rate.
There are significant macro uncertainties surrounding US government policy, particularly due to the upcoming election. Potential policies proposed by former President Donald Trump, such as tariffs, could impact global trade, inflation, and growth. Fiscal easing could support growth but also lead to upward pressure on interest rates.
Chinese policy is easing, with recent interventions aiming to stabilize weak equity markets. However, real estate activity and property prices continue to decline. China remains a significant downside risk to the global economy, particularly if a balance sheet recession occurs due to a sharp correction in real estate without sufficient policy intervention.
India’s growth is foreseen to slow from its rapid pace in 2023 but will likely remain a global growth leader due to favorable structural factors. Continued reforms and avoiding protectionist measures after Prime Minister Narendra Modi’s anticipated re-election are crucial for further economic growth.
An escalation of conflict in the Middle East could lead to higher shipping rates and oil prices, resulting in a significant inflation shock and potentially necessitating upward adjustments in interest rates.
