Global economic outlook; Sustainability research

This week, we published the quarterly update of our economic outlook. Furthermore, we released a new episode of our podcast and wanted to emphasize our very strong sustainability research. Happy Easter Holidays!

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Global economic outlook: It’s a wrap!

Special effects for growth, inflation is acting up. We expect sluggish economic momentum ahead, with global GDP growing by less than +3% between 2024-25. While growth in the advanced economies will remain stable at +1.6% in 2024, it will slow down to +4% (-0.3pp) for emerging markets, mainly driven by Asia excluding Asean and Latin American countries. The divergence in growth performance between the US and Europe from 2023 is expected to narrow starting in H2 2024. The US is expected to grow by +1.7% in 2025 after +2.4% in 2024 while the Eurozone’s growth should accelerate to +1.5% in 2025 after +0.7% in 2024 based on the upcoming positive real income effect. Global? trade is exiting recession, but the recovery will be limited by the inventory glut. Continued geopolitical tensions may also limit the rebound in Chinese exports, while downside pressures abound domestically and policymakers ramp up fiscal and monetary easing to cushion the economic slowdown.? In the meantime, inflation should be getting closer to target by the summer. The pick-up in sequential core inflation in Europe and the US over the past couple of months has reignited concerns. Yet, we think that disinflation will continue: in Europe due to prolonged stagnating domestic demand and the unwinding of remaining supply constraints, and in the US because aggregate demand is now clearly cooling down.

Central bankers‘ much expected twist: The summer pivot. Beware of the curtain call for fiscal policy. The Fed is expected to pivot in July and deliver a total of 100bps in rate cuts by the end of 2024 amid progress on inflation. The ECB will be compelled to cut rates before the Fed due to a diverging economic backdrop marked by lower inflation and stagnant output. This slight precedence may exert downward pressure on the euro. The BoE is expected to pivot in August as the economy is bottoming-out already. At the same time, almost all major emerging markets will start a cautious cutting cycle to avoid disturbing portfolio flows. Fiscal consolidation in Europe will be scrutinized and could shave off as much as -1pp off European GDP growth cumulatively in 2024-25. In the US, November election results will determine the course for fiscal, industrial trade and certainly monetary policy. This policy bifurcation may increase transatlantic divergence.

Does someone have subtitles for markets? The 2024 soft landing is the trailer; 2025 will be action-packed. Markets continue to navigate in an unstable equilibrium context in which both fixed income and equities will continue to be influenced by reflation, geopolitics, heightened defense expenditures, reshoring efforts, advancements in artificial intelligence and the transition towards a greener economy. In this context, we expect long-term interest rates to decline in 2024 and 2025 as upward pressure from supply-side factors and higher terminal rates constrain a significant fall (3.8% for the US 10y and 2.2% for the 10y Bund in 2024). Corporate credit will continue to perform on the back of strong balance sheets, normalizing default rates and strong investor demand. In this context and aided by the expected policy pivot in H2 2024, we expect credit spreads to remain close to current levels for the next two years: ~100-120bps for investment grade and 350bps for high yield. Lastly, equity markets will continue to trade between short- and long-term themes, with AI and reshoring being the dominating forces for the time being. Strong trailing and forward earnings paired with a more resilient than expected economic momentum should set the pace for the current equity momentum to turn structural but we believe most good news has already been priced in, thus leaving little room for upside surprises moving forward. Consequently, we expect close to double-digit returns (~10% yearly performance) while we have slightly downgraded our 2025 projections to mid-single digit returns.

The plot is a bit hard to follow for corporates – although the premise was intriguing. Corporate profitability will be tested as pricing power is waning in most of the manufacturing sectors while some exceptions in the services sector are still on (transportation, warehouse and food & accommodation services). Unsurprisingly, an increasing number of firms are expected to implement cost-cutting in the coming quarters. Capex is slowing down amid sluggish growth prospects, high interest rates and lower capacity utilization rates. Lower interest rates ahead mean the corporate debt-repayment wall (40-50% of debt due by 2026) should be manageable, without any major hiccups. But highly leveraged sectors could be increasingly distressed, keeping business insolvencies at high levels: we expect them to increase further in 2024 (+9% after +7% in 2024) before stabilizing at high levels in 2025. Four out of five countries will see business insolvencies increasing in 2024 (+12% y/y on average), with the largest increases likely in the US (+28% y/y), Spain (+28%) and the Netherlands (+31%).

The full report and the slide deck can be found here.

Sustainability Research

Climate change is becoming increasingly important - for us and for our clients. Our Sustainability Research therefore offers various products to help navigate this complex issue and prepare investment decisions.

Net zero pathways: How to drastically reduce greenhouse gas emissions has become one of the most important questions of this century. Tackling this challenge, however, requires timely climate action by policy makers, industry sectors and financiers. the Allianz Research Sector Pathway publications explore transformation pathways for six main sectors - namely energy, utilities, transportation, industry, buildings, and agriculture. Discover our reports: Net Zero Pathways ( allianz.com )

SAMEpath Tool: Explore our online tool that outlines how the green transition can be achieved within the shrinking timeframe. The tool provides granular analysis of the transition pathway needed for more than 50 industries worldwide. It charts the required emission reductions and associated investments needed to achieve climate commitments. SAMEpath also examines the energy mix and how the speed of implementation can vary by region, country and sector. Test out SAMEpath: Samepath Tool ( allianz.com )

Investing in a Changing Climate: The national commitments made so far fall short of what is needed to keep global warming under the iconic 1.5°C target, and so do the investments envisioned. But even with the best of intentions, it is hard for policymakers and potential investors to decide where, in the multitude of initiatives and technologies, it would make sense to focus their attention and resources. The book “Investing in Climate Change” offers a clear view of how far along the decarbonization path of the economy we are and which areas and technologies are promising in terms of investments. You can find the book here:? Investing in a Changing Climate: Navigating Challenges and Opportunities | SpringerLink

In our video series “Ask me anything“ by Allianz Research we ask our audience via social media to tell us their “burning“ questions about climate economics. Watch our answers on how climate change impacts economies and what the next steps could be to reduce the worlds carbon footprint for a better, more sustainable and resilient future here: Videos ( allianz.com )

Tomorrow Podcast – a fresh episode

After the high-speed and broad-based rebound in 2023, what's the outlook for business insolvencies in 2024? We find out in this episode of our Tomorrow Podcast with from Ano Kuhanathan, Head of Corporate Research, and Maxime Lemerle, Lead Analyst for Insolvency Research. The conversation stirred your interest, and you’d like to get deeper insights? Read our full report "Global Insolvency Outlook: Reality check ":