As 2024 unfolds, the global economy remains caught between fragile recovery and looming uncertainties. Central banks worldwide have been maneuvering carefully, trying to achieve a "soft landing" – a scenario where the economy slows down just enough to avoid a recession while containing inflation. The Creditreform Economic Briefs for September 2024 examine whether this objective has been met and what lies ahead for the major economies.
Global Economic Overview: Navigating Geopolitical and Economic Headwinds
The global economic outlook is still overshadowed by geopolitical tensions and the aftereffects of recent crises. The wars in Ukraine and the Middle East continue to exert significant pressure on global growth prospects, threatening to cause renewed commodity price spikes and disruptions to international supply chains. Despite these challenges, the International Monetary Fund (IMF) has maintained its global GDP growth forecast at 3.2% for 2024, with a slight upward revision to 3.3% for 2025.
In the United States, economic activity appears to be on track for a soft landing. The US GDP grew by 0.7% quarter-on-quarter in Q2 2024, driven mainly by domestic demand. While there are fears of a recession due to signs of cooling in the labor market and declining sentiment in the manufacturing sector, consumer confidence remains relatively stable. The Federal Reserve is expected to cut interest rates by a total of 50 basis points by the end of 2024 and another 75 basis points by mid-2025, positioning the federal funds rate at 4.00-4.25%.
In China, the government aims to stimulate domestic demand amidst a challenging external environment. The IMF raised its forecast for China's GDP growth to 5.0% in 2024, with a slight deceleration to 4.5% in 2025. Despite these positive revisions, the country's real estate sector remains a critical downside risk, and geopolitical tensions, particularly concerning Taiwan, could add further uncertainties.
Euro Area: Recovery Without Germany?
The Eurozone's economic landscape is characterized by uneven recovery, with growth prospects varying significantly across member states. The Eurozone GDP grew by 0.3% in both Q1 and Q2 of 2024, driven by strong performances from Spain and, to a lesser extent, France. Spain continues to outperform other major Eurozone economies, with growth rates of 0.8% quarter-on-quarter, largely buoyed by tourism and a robust service sector. France is expected to receive a temporary boost in Q3 from the 2024 Paris Olympics, which could add 0.3 percentage points to GDP growth.
However, Germany—the Eurozone's largest economy—continues to struggle. Its GDP is expected to remain flat in 2024, with only 0.1% growth forecasted. Business sentiment indicators, such as the Ifo Business Climate Index, have deteriorated, suggesting limited recovery in the near term. The construction sector, which had shown some signs of stabilization, faces renewed challenges due to high interest rates and elevated costs for materials and energy. Meanwhile, corporate defaults are on the rise, with expectations of further increases through 2025. Nonetheless, a more favorable growth environment, driven by monetary policy easing, could provide some relief next year.
The European Central Bank (ECB) has embarked on a gradual monetary easing path following a rate cut in June 2024. The main refinancing rate is projected to decrease to 2.9% by mid-2025. However, this easing comes amid a renewed focus on fiscal discipline under the EU's new fiscal governance framework. Eight EU members, including France and Italy, are currently under an excessive deficit procedure, reflecting the region's delicate fiscal balance.
Germany: Mired in Economic Challenges
Germany, once the powerhouse of the Eurozone, finds itself grappling with stagnation. The economy contracted by 0.1% in Q2 2024 after a modest 0.2% growth in Q1. The downturn was broad-based, with declines in private consumption, investment in machinery and equipment, and construction, alongside falling exports. Business sentiment has weakened across all sectors, particularly in manufacturing and construction, where companies remain pessimistic about future prospects.
Consumer confidence, which had shown signs of recovery earlier in the year, declined in August. Although the labor market remains relatively robust with low unemployment rates, weak employment growth and muted hiring intentions suggest that the economic outlook will remain challenging. Additionally, rising defaults among German companies—up 15.9% in the first half of 2024—indicate persistent financial strain. However, the expected easing of monetary policy could mitigate some of this pressure in 2025, fostering a more conducive environment for recovery.
United Kingdom: A Surprising Rebound Amid Fiscal Uncertainty
The UK economy has surprised many with a stronger-than-expected recovery in the first half of 2024. Following a technical recession in the latter half of 2023, the UK GDP expanded by 0.7% in Q1 and 0.6% in Q2 2024, mainly driven by domestic demand. Consumer confidence has improved, supported by easing inflationary pressures and rising real incomes. Inflation fell to 2.0% in June, providing some relief for households, although service inflation remains relatively high due to wage pressures.
Looking ahead, the Bank of England is expected to continue its rate-cutting cycle, albeit at a slower pace than initially projected. The key policy rate is anticipated to be 4.25% by mid-2025. Meanwhile, the Labour Party's landslide victory in July's snap election has brought a new political dynamic to the UK, with a focus on fiscal consolidation and closer cooperation with the EU. This shift could affect future economic policy and growth prospects, especially as the government seeks to balance its commitment to fiscal prudence with measures to support growth.
China: Balancing Growth with Geopolitical Tensions
China's economy remains on course to achieve its official growth target of around 5% in 2024, driven by a combination of increased domestic consumption and export growth earlier in the year. However, the real estate sector continues to pose significant risks, and the recent loosening of monetary policy aims to support domestic demand further. China's leadership remains focused on modernization and economic control, as highlighted by the Third Plenum of the Communist Party in July 2024. However, heightened geopolitical tensions, particularly regarding Taiwan, and the continuation of protectionist trade policies globally could impact China's medium-term growth outlook.
Conclusion: A Delicate Balancing Act
While central banks have managed to prevent a hard landing, the global economic outlook remains fraught with uncertainties. Geopolitical tensions, fiscal challenges, and inflationary pressures continue to shape the trajectory of recovery across the world. For now, the path to sustained growth appears uneven and filled with risks, requiring careful navigation by policymakers and central banks alike.
Table: IMF forecasts for World, China, US
