Executive Summary
Upcoming political outcomes will test resilience again. Global growth bottomed-out in H1, but the global manufacturing sector is still in excess supply, with low demand in the Eurozone in particular. Recession risks persist in the Eurozone and are rising in the US as the labor market is softening. Overall, we expect global GDP growth at +2.8% in 2024 and 2025, with growth slowing to +1.7% in the US and reaching potential in the Eurozone at +1.4% in 2025. China will continue to manage its growth slowdown (+4.3% in 2025). Risks remain tilted to the downside given heightened uncertainty in a super-election year and ongoing global conflicts. Our downside scenario (fiscal slippage & rising geopolitical risks) would mean -1.5pp lower global growth and +1pp higher inflation, which would keep interest rates higher for longer.
Central banks have delayed or slowed down their easing cycles because of sticky inflation. Inflation targets are likely to be reached in early 2025, six months later than initially expected. Globally, inflation should reach 3.9% in 2025 after 5.6% in 2024, with the US at 2% and the Eurozone at 2.1%, and China out of deflation (+1.5%). We have pushed back our first rate cut by the Fed to December, followed by five rate cuts in 2025 (to 4%). The ECB will cut once more in September but then wait for the Fed before continuing the easing cycle in 2025 with four more cuts (to 2.5%). Central banks in emerging markets will remain in a cautious easing mode as the Fed delay halts optimism.
The fiscal impulse is only moderately negative in major advanced economies and further fiscal-consolidation efforts will be delayed to after the elections. In Europe, all eyes will be on the adjustment path of the seven countries non-compliant with the newly reinstated fiscal rules (France, Italy, Belgium, Poland, Romania, Hungary). Reducing public debt ratios needs primary surpluses >1.5% of GDP on average (against deficits of >-3% end-2023).
The exit of global trade from recession will support the revival of the investment cycle into 2025. The easing of financial and monetary conditions will accelerate but companies will remain in wait-and-see mode for major investment decisions, given the rise in (geo)political uncertainty. The comeback of the European consumer remains timid as uncertainty prevents ambitious spending patterns and continues to feed into higher saving rates.
Emerging markets stand to benefit from supply-chain diversification. Cost competitiveness has improved almost everywhere since 2015, apart from Central and Eastern Europe. Southeast Asia appears particularly well-positioned to attract investment. Resilient domestic demand will support GDP growth across regions into 2025, even though it is set to remain below the pre-crises level.
Corporate earnings are resilient but the transatlantic divide persists and investments are at the bare minimum. Earnings have been resilient but 60% of US sectors are outperforming European peers. Corporate credit remains sluggish as most firms are investing to compensate for depreciation using own resources – but 20% of sectors are underinvesting compared to depreciation.
Markets continue to push through. Global equity markets are performing well due to strong earnings resilience and mid-term trends like AI and reshoring. Despite high US equity valuations, we expect low double-digit returns in 2024 if the policy pivot remains in place and earnings remain resilient. Gradual policy shifts are likely to lower long-term yields, with German Bunds potentially seeing safe-haven demand. In the US, large fiscal deficits may keep long-term yields higher for longer. Corporate-credit demand remains strong, with attractive yields despite tight spreads. Corporate spreads should remain stable due to the earnings resilience and manageable debt metrics. US offices are not out of the woods yet. We expect Commercial Real Estate (CRE) valuations to bottom out in 2024 with the start of the easing cycle. However, US offices continue to suffer from structural headwinds. Vacancy rates have hit record highs amid weak demand, investment activity remains anemic despite significant corrections in transaction prices and some valuation losses are yet to be internalized by market players.