Horizon Q4│2024 - Economics
Reading time:10 MIN
In a nutshell
US: Economy cools down slowly.
Europe: Growth will not gain momentum until 2025.
Inflation: Continuing towards the 2% target for the time being.
Monetary policy: Descent from the interest rate peak in Europe and the US.
US: Soft landing in sight
US economic growth once again surprised on the upside in the first half of 2024 thanks to an expansive fiscal policy and robust private consumption. However, the restrictive monetary policy has also left its mark on the US, with the result that the economy is now losing some of its momentum. In particular, the previously overheated labour market, residential construction and industry have recently cooled down. So far, all indications are that the previously overheated US economy is merely cooling down, with no sign of a slump. This can also be seen in the unemployment rate, which has risen from 3.4% to 4.2% since April 2023, but is still at a fairly moderate level by historical standards. Companies are no longer looking for labour as desperately as they were last year. As a result, wage increases are no longer quite as lavish. After hourly wages rose at a rate of 4.5% in summer 2023 compared to the previous year, the increase is currently only around 3.5%. The slowdown on the labour market is also expected to lead to a slight slowdown in private consumption in the coming months. The same applies to fiscal policy, which will remain expansive but will not provide any major new impetus. At present, it does not look as though either party will be able to win the White House in the US elections and gain control of both chambers of Congress at the same time. The adoption of new major fiscal packages after the elections therefore seems unlikely from today's perspective. All in all, a certain weakening of the US economy is therefore to be expected in the coming months. However, the current data situation does not point to a recession. We expect solid GDP growth of 2.5% for 2024 as a whole, followed by 1.5% in 2025.Growth and inflation forecasts
Eurozone economy surprises positively in the first half of the year
The eurozone economy made it through the first half of the year much better than we had expected at the start of the year. In the first quarter of 2024, economic output in the eurozone rose by a solid 0.3% quarter-on-quarter, followed by 0.2% in the second quarter. This was mainly due to the southern member states, where a mix of reforms, a slightly expansive fiscal policy (which is also partly based on EU funds) and booming tourism supported the economy.
Growth in the eurozone is taking place without Germany
In a European growth comparison, however, Germany is not performing well. The eurozone's largest economy has been virtually treading water for more than two years. In the second quarter of 2024, economic strength even fell by 0.1% compared to the previous quarter. There are many reasons for Germany's weak performance. Firstly, global demand continues to weaken, which is hitting Germany particularly hard as an export nation. In addition, Chinese products are increasingly competing with German products on the global sales markets. Political uncertainty, restrictive financial policies and labour shortages in Germany are also having a negative impact.
The German economy is stagnating
Development of real GDP since Q4 2019
New growth impetus not expected until 2025
The current leading economic indicators do not suggest that economic growth in Germany or the eurozone will accelerate significantly in the second half of the year. For Germany, this still means almost zero growth and for the eurozone, expansion rates similar to those seen in the first two quarters of 2024. However, falling inflation and rising real wages will encourage consumers to spend more money again in the medium term. Consumers are still holding back, but this is likely to change in the coming months. Falling interest rates will also have a stimulating effect on the economy, but here too we will probably have to wait until the beginning of next year for this growth stimulus to have a real impact. For the eurozone, we expect GDP growth of 0.7% this year, followed by 1.3% next year. By contrast, the German economy is expected to shrink by 0.1% this year and we expect growth of just 0.6% in 2025.
Joint descent of the central banks from the interest rate peak
Falling inflation rates have allowed the ECB and the Fed to begin their descent from the interest rate peak. After initially underestimating the price rises in 2021 and 2022 and then starting to tighten monetary policy a little too hesitantly, the central banks now want to make sure that inflation has really been brought under control. We therefore believe that further interest rate cuts will be gradual.
This is also supported by the fact that the current easing of monetary policy is not driven by the need to protect the economy from an impending recession. Rather, the nominal interest rate should fall, as otherwise falling inflation would lead to an increase in the real interest rate and thus to an even more restrictive monetary policy. We therefore expect that key interest rates on both sides of the Atlantic will continue to fall slowly in order to loosen the monetary reins and give the economy some tailwind.
Structural reasons such as demographic change and the necessary investments in climate protection are likely to lead to inflation rates in both the eurozone and the US levelling off at a higher level than before the pandemic in the medium term. For the central banks, this means that they will loosen their monetary policy less aggressively than was previously the case. We expect the US Fed to lower its lending rate to 3.75-4.0% by the summer of 2025, while the ECB will probably stop at the deposit rate of 2.5%.
Inflation is moving towards the 2% target
Increase in consumer prices compared to the same period last year in %
Autor
Dr. Felix Schmidt
Senior Economist
