Global Growth Outlook 12/2023: No momentum

December Juni 2021 2023 GLOBAL GROWTH OUTLOOK

Juni 2021

No momentum GLOBAL GROWTH OUTLOOK Global economic growth to remain low in 2024

Juni 2022

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The world economy is set to grow at a historically low level of 2.9 percent yet again in 2024. The United States and China are losing steam while Europe continues on its path of moderate growth.

▪

The US economy should manage to avoid a recession and still grow by around 1.5 percent next year. China’s structural problems will keep growth down to 4.5 percent.

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The EU is expected to grow around 0.8 percent, largely on the back of recovering purchasing power of private households.

Die amerikanische der The Weltwirtschaft ▪ Germany’s economy willLokomotive grow only marginally. sluggish international environment and fiscal adjustment will weigh on growth.

Aufschwung im Norden, Risiken im Süden ▪

The global trade in goods should turn around from a drop of one percent this year to expansion of three percent next year.

▪

Inflation rates around the world expected to drop slightly. Inflation will fall back down to around three percent in the United States and the euro area by the end of next year.

▪

Monetary tightening is mostly completed but policy will remain restrictive in the year ahead, both in the United States and in the euro area. First steps towards monetary easing may become possible in the course of 2024.

▪

Fiscal policy directed towards consolidation in 2024, particularly in Europe.

This course will help combat inflation. Budgetary discipline remains difficult in the face of additional defence spending and the investment required for the double transformation.

No momentum | Global economic growth to remain low in 2024 20/12/2023

Content Weak global economic momentum on the cards for 2023 and 2024 ............................................. 2 Growth curbed by high inflation, low disposable incomes and subdued consumer spending .............. 2 Serious economic risks persist for the time being ................................................................................. 5 No momentum in 2024 .......................................................................................................................... 6 Economy not going from weakness to strength but sideways .............................................................. 7 Sharp drops in inflation expected in most major economies ................................................................. 8 Monetary policy levelling out? ............................................................................................................ 10 Federal Reserve holding still as dampening takes effect .................................................................... 10 ECB in waiting mode ........................................................................................................................... 11 UK’s central bank keeps key interest rates steady ............................................................................. 11 Japan’s central bank tightens slightly .................................................................................................. 11 Fiscal policy: consolidation setting in but large problems looming in the medium term...................... 12 Financial markets .............................................................................................................................. 13 Exchange rates ................................................................................................................................... 14 Almost no expansion in store for industrial production worldwide ............................................ 15 Advanced economies: US industry is the only one growing ............................................................... 15 Emerging countries: China back to driving growth; rebound in Eastern Europe ................................ 16 Global trade........................................................................................................................................ 17 United States ..................................................................................................................................... 18 Third quarter 2023 unexpectedly strong ............................................................................................. 18 Slight decrease in inflation and cooling on the labour market ............................................................. 19 Trade deficit slightly smaller than in previous quarters at last count ................................................... 20 High public debt poses long-term risk ................................................................................................. 20 China................................................................................................................................................... 21 No green light for industry and services .............................................................................................. 21 Government announces support for private sector ............................................................................. 22 Monetary policy in a fix ........................................................................................................................ 22 Foreign trade weak apart from some highlights .................................................................................. 23 Skirting deflation .................................................................................................................................. 23 Euro area: gradual recovery in sight ............................................................................................... 24 Germany ............................................................................................................................................. 24 Sources .............................................................................................................................................. 26

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Weak global economic momentum on the cards for 2023 and 2024 Growth curbed by high inflation, low disposable incomes and subdued consumer spending Global economic development over the last six months has been very mixed, but little has changed in the prospects for the year. The global economy is set to grow by around three percent at most (IMF 2023, European Commission 2023; OECD 2023), which is far below average. The first positive results in combating inflation have nonetheless set in, with monthly inflation down substantially, as hoped, in the United States and, more recently, in the euro area. Private disposable incomes are gradually gaining ground faster than prices after registering hefty losses in real terms since last year. Investment activity remained relatively robust despite more stringent financing conditions, sluggish demand, and the cost shock which is only gradually ebbing away. Investment in plant and equipment was particularly sturdy. At the same time, the property market indicators of some major countries came under hefty pressure with slumps in new orders for residential construction a common phenomenon. It remains uncertain whether the global economy will be able to absorb the dampening impact of monetary tightening over a period of several quarters without major disruptions to activity levels (OECD 2023).

Downward global trade additionally slowed down the world economy, with volumes much lower than expected due, in large part, to weak momentum coming from China. The trade in goods this year is likely to be one percent down on last year despite supply bottlenecks easing and energy and raw material prices falling over the summer. Global industrial production is even set to stagnate this year overall (BDI 2023).

The US economy fared much better than expected and is set to reach a solid 2.25 percent growth this year. China, meanwhile, had a very weak second quarter with only a moderate recovery in the third. It should still manage to exceed the five percent target set by the government and expand around 5.5 percent (German Council of Economic Experts, 2023). In Europe, activity was lower than expected, above all in Germany and Central and Eastern Europe, with sharp drops in real consumer spending a primary downward factor. The euro area and the EU should grow by a good half a percent this year, with growth on a similarly low level of 0.7 percent next year.

2023 has had some ups and downs. The first quarter started out well, the second was disappointing all round and the third was subdued in most countries around the world. With steep hikes in key interest rates, it is not really surprising that inflation rates have dropped considerably. Irritations emanating from turbulences on the financial markets cleared up swiftly. Military conflicts, on the other hand, have increased and escalated. Conflicts have flared up in Central Asia and in the Middle East, while Russia’s war in Ukraine is becoming increasingly entrenched. Tensions surrounding Taiwan have also risen.

The decision by OPEC+ to cut oil production caused oil prices to surge yet again, with rises of around one quarter since May restraining disinflation. Furthermore, the calculation basis for core inflation in the United States turned up again at last count.

Solid recovery not happening next year The latest figures on the expectations of companies and citizens around the world have largely been disappointing so far. While consumer confidence in industrialised countries does seem to have bottomed out, there is little indication of an upturn. Business confidence has not improved tangibly over the last few months either.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Economic sentiment indicators*, OECD 103 102 101 100 99 98 97 96

Business Tendency Surveys (Manufacturing)

Consumer Opinion Surveys

*seasonally adjusted (index=100) Source: Macrobond

Purchasing managers’ indices are not showing any big improvements either. The global purchasing managers’ index has dropped down to stagnation, and the manufacturing purchasing managers’ index is languishing well below the threshold. In the euro area, the composite, manufacturing, and services purchasing managers’ indices have all registered steep falls over the last six months and now appear to be bottoming out gradually but have not yet crossed the threshold to expansion. In China, all indices are trending similarly, teetering on the threshold. In the United States, the services purchasing managers’ index lost ground particularly and has dropped to neutral, while the manufacturing purchasing managers’ index is straining hard to re-emerge from contractionary territory.

Purchasing Managers`Index World 60

50

40

30

20

Manufacturing PMI

Services PMI

Composite PMI

Source: Macrobond

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Purchasing Managers` Indices 60

60

Euro area

Germany 55

50 50 40 45

30

40

Manufacturing PMI

Manufacturing PMI Services PMI Composite PMI

60

Services PMI Composite PMI

USA

China

60 55 50

50

45 40 40

35

Manufacturing PMI Services PMI Composite PMI

Manufacturing PMI Services PMI Composite PMI

Source: Macrobond

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No momentum | Global economic growth to remain low in 2024 20/12/2023

In this subdued context, possible drivers to fuel an upswing are noticeably absent. The outlook for 2024 does not look much better either. Economic momentum is likely to lose steam in the United States, though it looks like the brief recession that many analysts, including us, believed would befall the country will not materialise after all. China’s growth prospects have also taken a turn for the worse, with the main purchasing managers’ indices sliding back down into contractionary territory. In Europe, momentum should start to improve tangibly, with consumer spending leading the way provided no new shocks keep it down. Another restraining factor is that most countries will be keeping their monetary policy restrictive next year, with some easing perhaps possible in the second half of the year. Fiscal policy, meanwhile, will be focussed on stabilisation and become more restrictive.

A return of monetary or fiscal policy to pre-crisis standards is looking increasingly unlikely. Key interest rates will settle down at well above zero everywhere apart from in Japan, and fiscal policy is facing its most difficult structural problems in decades with several components deteriorating at the same time.

The short list here includes permanently higher interest rates on the capital markets which will bring interest expenditure up in the medium term, more expenses and less revenue on account of demographic ageing and the support measures this will require, declining growth potential (ageing, erosion of productivity), structurally higher defence expenditure, and shifts in the international division of labour which will produce lower growth. Industrial production and global trade should gradually recover as and when consumers again start to use more of their increased real disposable income to purchase products.

Serious economic risks persist for the time being Despite the relatively robust performance of the US economy this year, the restrictive monetary and fiscal stance of the country is likely to bring activity down to a path of low growth next year. On account of uncertainty about the precise impact of monetary tightening, there is still a risk that activity will drop much lower. Even in this case, the labour market would not be expected to plunge, but ripple effects on the rest of the world would probably impact currency exchange rates, stock markets and credit markets as well as foreign trade.

China is a second factor of considerable uncertainty for global economic development going forward.

The serious problems on the property market are weakening demand for industrial goods. It is also still not clear whether the strong interventions of the Chinese Communist Party in the economy during the Covid years have not led to structural breaks in the behaviour of private households (less consumer spending, lower purchases of owner-occupied apartments) and private enterprises, which have played such an important part in the past in investment in modern services and new technologies, and in economic activity in general (Posen 2023). Furthermore, several key components of the government’s economic policy (dual circulation, treatment of technology companies) have dampened activity, at least in the short term. Permanently lower growth has become a plausible scenario.

Thirdly, it is still not certain whether the monetary tightening in the major OECD countries and the calibration of the central banks will work according to plan. Tightening so far has had a swift and hefty impact on the areas of the economy most sensitive to interest rates without causing major upheaval or financial instability. Nonetheless, interest rates are expected to remain at a higher level for the long term which will pose stability risks, particularly for highly indebted companies, industries and companies. In addition, the conflict in the Middle East is hanging like a sword of Damocles over further economic development, with shocks on the energy markets, inflation, and business and consumer confidence in industrialised countries possible at any moment.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

No momentum in 2024

Growth of real gross domestic product in 2024 compared to previous year (in percent)

Global economy

+2.9

Euro area

+0.8

World trade

+3

EU

+0.8

USA

+1.5

Japan

+1

China

+4.5

Germany

+0.3

Source: BDI

The world economy should grow by a good three percent this year, slightly stronger than we forecast in the summer (2.75 percent). The higher growth will largely be fuelled by the United States, which is in line for growth of over two percent (2.25 percent). Japan is also expanding and should grow by 1.7 percent this year (OECD 2023). Among the major emerging countries, Brazil is on track for a good three percent growth, India more than six percent and Russia two percent, all for very different reasons.

Brazil is benefiting from the favourable weather and good harvests, and Russia from rising oil prices and the circumvention of sanctions. The United Kingdom should successfully avert a recession and grow by one half a percent. Other countries and regions have been more disappointing. China is set to grow by one half a percentage point lower than expected, and the euro area and the EU a quarter of a percentage point. Germany is firmly among the group of countries whose performance has been disappointing, with real consumer spending, construction investment and net exports all lower than forecast and economic growth expected to stand out of line and be slightly negative at -0.3 per cent with downward risks. France and Italy are in somewhat better shape, with growth at three-quarters of a percent. Industrialised countries overall are set to expand 1.5 percent and developing and emerging countries four percent (IMF 2023).

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Forecast summary: Growth in real GDP 2023/2024 in percent 2023

2024

IMF1

OECD2

EUCOM3

IMF1

OECD2

EUCOM3

World

3.0

2.94

3.1

2.9

2.74

2.9

USA

2.1

2.4

2.4

1.5

1.5

1.4

China

5.4*

5.2

5.2

. 4.6*

4.7

4.6

Japan

2.0

1.7

1.9

1.0

1.0

0.8

EU

0.6

1.3

Euro area

0.7

0.6

0.6

1.2

0.9

1.2

Germany

-0.5

-0.1

-0.3

0.9

0.6

0.8

France

1.0

0.9

1.0

1.3

0.8

1.2

Italy

0.7

1.2

0.7

0.7

0.7

0.9

Spain

2.5

2.4

2.4

1.7

1.4

1.7

U. Kingdom

0.5

0.5

0.6

0.6

0.7

0.5

India

6.35

6.3

6.6

6.35

6.1

6.1

Brazil

3.1

3.0

2.8

1.5

1.8

1.6

Russia

2.2

0.8*

2.0

1.1

0.9*

1.6

1: IMF (2023), October, *November 2: OECD (2023), November, *September, Forecast for India for fiscal year beginning April 3: European Commission (2023), November 4: Forecast on basis of 70 percent world GDP (PPP of 2013) 5: Information on India for the fiscal year in current prices

Economy not going from weakness to strength but sideways Prospects for the next year are similarly subdued, albeit with a different mix. The pace of growth is likely to ebb away somewhat with the world’s largest economy, the United States, heading to slow down to one and a half percent growth. Canada’s economy is expected to grow very moderately as well. At the same time, the upturn in China is also going to run out of steam and drop down to 4.5 percent. The euro area and the EU, on the other hand, are likely to turn up to narrowly higher growth of 0.8 percent on the back of successful monetary stabilisation which will see increased real consumer spending, robust gross fixed capital formation and a small positive contribution to growth from net exports. On the periphery of Europe, Turkey is set to grow by a modest three percent, with another slight pick-up forecast for the Ukraine economy from two percent growth this year to three percent next year.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Japan’s pronounced upward trend is gradually coming to an end following a very weak third quarter.

The country should manage to keep above its potential growth in 2024 as well with a good one percent growth. Taiwan, South Korea and Singapore should all start to pick up pace next year following their weak performance in 2023, while Australia, New Zealand and Hongkong are in for lower momentum next year. Brazil, Mexico and Russia will also lose pace, while India, the ASEAN countries, the Middle East and North Africa (driven by oil prices), sub-Saharan Africa, particularly South Africa, are all set to accelerate. Latin America is heading for a sideways movement, with a 2.25 percent growth forecast for the region, with South America on track for a weaker two percent and Central America around four percent and the Caribbean a solid eight percent. Overall, 2024 will be very similar to 2023, with growth again at 1.5 percent among industrialised countries and four percent among developing and emerging countries. This picture broadly corresponds to the consensus of forecasts from the international economic institutes, and, for Europe, that of our European umbrella association BusinessEurope (BusinessEurope 2023).

Sharp drops in inflation expected in most major economies The IMF (IMF 2023) expects global inflation for the year overall to drop from almost nine percent down to just over seven percent and then to just under six percent next year. This is somewhat higher for this year and a good one percentage point higher for next year than forecast back in spring. Inflation in the last quarter of the year is expected to decrease from over nine percent in 2022, to under six in 2023, and then to below five percent in 2024. The process of disinflation has taken somewhat longer than expected with prices proving reluctant to fall, particularly among services, and industrialised countries generally making faster progress than developing and emerging countries. A key driver of stabilisation has also been the cyclical drop in commodity prices and energy prices, which were sharply down on last year, at least in the first half of the year. The median inflation rate among industrialised and developing countries declined to under six percent. Core inflation has only stopped rising recently and is currently moving sideways at slightly over six percent with a drop down to a good five percent expected for next year (OECD 2023). Central banks in the United States and in Europe will still need until at least 2025 to bring inflation rates anywhere close to target levels.

In the United States, inflation is set to drop down to just over three percent in the fourth quarter, with a further correction of a good one half a percentage point expected next year. After a successful beginning, the further course of disinflation will be more cumbersome as wages are still pointing upward and prices on the residential property market and services in general are more reluctant to drop.

Despite the substantial hikes in key interest rates, several indicators for the underlying trends in inflation have even turned up again in the last two to three months on account of the persistently strong labour market, upward consumption expenditure and solid momentum in services. Prices for transport and healthcare services have been fuelling prices upwards since the summer. The monthly rise in employment is still higher than the growth of the population of around 100,000 per month. Normally, the central bank has tightened sufficiently when the growth in employment has fallen and remains below this figure for a period of time at least to take the pressure out of the US labour market, which remains very tight. Financing costs are expected to continue rising, the balancing act between combating inflation and unleashing growth is likely to persist for some time to come. The Federal Reserve expects inflation to drop down to 2.8 percent on average for 2023 and then to 2.4 percent for next year (core inflation: 3.2 down to 2.4 percent). The IMF expects inflation to drop from 4.1 to 2.8 percent, the OECD from 3.8 down to 2.6 percent.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

In the euro area, the sharp plunge in energy prices compared to the previous months has already brought quarterly inflation down from around ten percent the previous year to probably a good three percent in the fourth quarter of this year. The ECB expects annual median inflation of 5.4 percent this year and 2.7 percent next year (ECB 2023), the IMF 5.9 percent this year and 3.3 percent in 2024, the European Commission 5.6 percent and 2.9 percent, and the OECD 5.5 percent and 3.1 percent respectively. The ECB forecasts core inflation to drop from 5.0 percent this year to 2.7 percent next year.

The loose monetary policy of Japan, on the other hand, which was only made a little tighter this year, triggered a sizeable deflation of the yen, fuelling exports and growth but also lifting inflation to more than three percent. Inflation should drop back down by one percentage point next year (OECD 2023).

Core inflation was also high this year and should average out at 2.7 percent for 2023 overall and decrease moderately next year.

In China, the pronounced economic slowdown has brought price levels down in the last few months.

The IMF still expects a slight increase in prices of 0.7 percent for 2023 overall and 1.7 percent next year, both historically low levels. The slight stabilisation seen in production most recently and the expansionary momentum of the country’s monetary and fiscal policy will continue to counteract the downward pressure on prices.

Inflation forecasts* 2023 und 2024 8.4 7.7 6.3

2023

6.0

5.6

2024

5.6

4.1 3.7

3.5

3.2

2.8 2.4

2.6

2.9 1.7 0.7

USA

Euro area

Germany

France

Italy

U. Kingdom

Japan

China

*in percent, compared to the previous year Source: IMF

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Monetary policy levelling out?

Key interest rate in the international environment 6 5 4 3 2 1 0 -1 European Central Bank

Federal Reserve Bank

Bank of England

Bank of Japan

Source: Macrobond

The monetary tightening cycle has largely been completed in most countries as expected, although central banks are not willing to rule out a further hike just yet. The hikes in key interest rates in the United States, in the euro area and in the United Kingdom were unusually steep and the restrictive monetary stance here is showing effect. The transmission between monetary policy and lending to the private sector has been very pronounced in the United States and as expected in the euro area. New lending by commercial banks to corporate customers and private households has contracted substantially. In parallel to the rising stringency of financing terms and conditions, the demand for loans dropped on account of the low level of economic activity. The impact on the property markets, investment activity and borrowing are tangible. In Europe, the surge in energy prices triggered by the Russian war is still a dominant factor, fuelling inflation even though the costs have largely been passed on, while, in the United States, the tight labour market is the primary factor fuelling inflation. There have hardly been any noticeable second-round effects of higher wages on inflation around the world. Overall, the restrictive transatlantic stance has already brought inflation down considerably. The situation in East Asia is mixed. Japan is enduring a weak yen and taking too much time to tighten up, while the Chinese central bank has eased the reins in an effort to counteract slumping activity. Key interest rates have also peaked in some emerging countries. Monetary policy is set to start off 2024 on a short leash to ensure that inflation rates and core inflation return to their target levels swiftly. First tentative interest rate cuts could well become possible in the United States and in the euro area in the later course of next year. This will depend on core inflation pointing resolutely downwards over a period of several months and approximating target levels. This has yet to happen in both economies.

Federal Reserve holding still as dampening takes effect The US Federal Reserve’s monetary policy is the subject of much debate as the US economy has so far proved very robust in the face of the current cycle of monetary tightening, which has been much tougher than in the past. The Federal Reserve has now held key interest rates steady in a range of

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No momentum | Global economic growth to remain low in 2024 20/12/2023

5.25 to 5.5 percent since July to allow more time for the hikes to take effect. It usually takes between one and one-and-a-half years for the full impact to spread across the whole economy. In November, Federal Reserve Chair Powell underlined that the more restrictive economic and financial environment should have a dampening impact on activity and inflation. The cooldown on the labour market, which only narrowly created 100,000 new jobs in October but added another 160k in November, indicates that activity and the pressure on price levels is not yet firmly on the decrease. However, since the summer, the short-term and long-term interest rates in real terms are back to well over zero, expected interest is also positive, and the real borrowing costs for companies and private households are at their highest level since 2005, at a good five percent for both mortgages and corporate loans (OECD 2023).

Furthermore, investment in residential construction has plunged. A factor of uncertainty is still the question of what proportion of the extra savings private households accumulated during the Covid years will be spent and thus smooth out or strengthen private consumer spending. While the IMF has reported falling savings levels, Slok (2023) has pointed out that by spring 2023 only around one half of the additional savings had been spent which means cushioning effects are likely until well into 2024.

On account of these special circumstances, the tighter financing conditions will take longer than normal to impact the spending behaviour of private households. Dynan (2023) expects the Federal Reserve to only start gradually decreasing key interest rates as and when quarterly core inflation (the core PCE price index) has dropped below three percent, which she anticipates will be the case in the fourth quarter 2023.

ECB in waiting mode At its meetings in the fourth quarter, the ECB resolved to forgo further tightening, reasoning that if the current level of key interest rates is held steady for long enough inflation should fall a good bit of the way towards its target level. The pressure on prices is likely to tail off due to the weak economic momentum, particularly in manufacturing, and the low upward trend in new jobs on the labour market.

Economic activity in the euro area indeed declined by 0.1 percent in the third quarter. Prices are also pointing down, with inflation dropping to 2.9 percent in October. Furthermore, the growth of bank lending to the corporate sector declined to almost zero and to private households to under one percent.

The primary factors jeopardising further stabilisation is security policy and the situation in the Middle East.

UK’s central bank keeps key interest rates steady After progressive steep interest rate hikes from 0.1 percent in December 2001 to 5.25 percent in August 2023, the UK’s central bank has now held interest rates steady for the last three months. The Bank of England still regards a deterioration of the situation as a risk but, similarly to the ECB, believes that monetary tightening at the current level will be sufficiently restrictive and that keeping interest rates steady for long enough will bring inflation back down to the target level of two percent by 2026. Monthly inflation is expected to drop to under three percent as early as April next year. The Bank of England expects slim growth in economic output this year of one half a percent but zero growth for 2024 and only a quarter of a percent in 2025. The United Kingdom is thus set to feel the real costs of combating inflation in the form of stagnating activity until well into 2026.

Japan’s central bank tightens slightly The Bank of Japan most recently tightened its monetary stance slightly by unwinding its yield curve control policy. The cap on ten-year government bond yields of 0.5 percent was increased to one

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No momentum | Global economic growth to remain low in 2024 20/12/2023

percent in July and, since 31 October, has been understood as a reference rate. The Bank of Japan is expecting inflation of around three percent for this year and the next and above-average economic growth. Inflation should then approach the target level of two percent in 2025. According to the Bank of Japan, the transfer of import price increases is still a dominant factor supporting inflation but will increasingly tail off.

Fiscal policy: consolidation setting in but large problems looming in the medium term As already identified by us back in spring, fiscal policy has turned towards consolidation. Although some countries may still run a slightly expansionary course this year, policymakers will be firmly consolidating in 2024 in most countries (IMF 2023, Kiel Institute for the World Economy, 2023). Fiscal policy has already become neutral in most emerging countries this year, which is appropriate for the task of returning to growth levels that foster stability in 2023 and 2024. The deficits of industrialised countries at 6.5 percent in 2023 should decrease to 5.6 percent and five percent over the next two years, while the US deficit is expected to drop from 8.2 percent down to seven percent. In the United Kingdom, the public deficit is projected to fall from 4.5 to 3.5 percent, in the euro area from 3.4 to 2.1 percent, and in Japan from 5.6 to 3.3 percent.

Budget deficit 2023/2024 in percent of GDP 0 -1 -2 -3 -4 -5 -6 -7 -8 -9

2023

2024

Source: IMF

Consolidation will be an extremely steep uphill struggle in the next few years. Alongside the additional expenditure needed for the ageing population of between one and five percentage points of economic output in industrialised countries (comparing current levels with those projected for 2040), spending on defence needs to be increased as well as large-scale investment of the public sector in the double transformation. This already represents a huge challenge, given the high taxes and other levies, substantially rising debt servicing costs, and debt ratios that have risen to average well over 100 percent. The subdued growth prospects will additionally lead to hard decisions between consumption and investment, and further impede the financing of measures through taxes and borrowing. The burden on citizens and companies will have to be increased, but setting priorities in the budgets should help contain the overall costs. Structural deficit remains excessive, particularly in the United States, where it is forecast to only drop from 8.8 to 7.3 percent in 2025, which is still much too high. The US government debt ratio is on track to rise from 105 to 138 percent between 2015 and 2025. Japan’s government debt ratio is also expected to rise from 228 to 253 percent in the same period. The euro

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No momentum | Global economic growth to remain low in 2024 20/12/2023

area’s debt ratio is forecast to drop from 90 down to 85 percent despite the two huge crises that have taken place in this period (IMF 2023).

Financial markets Corporate financing terms and conditions have continued to tighten over the last six months. Although the outcome does not amount to a credit crunch as the demand for financing dropped on account of low economic activity, the resulting dampening effect has occurred on a normal scale. Since 2022, credit lending standards adopted by commercial banks have been raised substantially and now seem to have reached a plateau. Bank lending has contracted considerably, particularly in the United States.

Yields on bond markets have increased accordingly, but an overall risk aversion with wider yield differentials for higher risk investments is not in evidence. Incidences of financial imbalances in financial or property companies, apart from the brief interlude surrounding Credit Suisse and some US institutes in spring, have not become more common either. Property companies, in particular, will only start to feel the real impact of tightening in the course of the next few quarters when refinancing will gradually be subject to much more expensive conditions, and projects and balance sheet positions may prove to be too weak. The imbalances on the Chinese property market are on a completely different scale and are already curbing economic activity substantially.

Bond yields 6 5 4 3 2 1 0 Germany

Italy

France

U. Kingdom

USA

China

Japan

Source: Macrobond

The trends on the stock markets were very mixed. S&P500, the main US index, recovered in the course of the year. By mid-July, it had risen 20 percent before dropping down again by eight percent. The cyclically adjusted price-earnings ratio of the S&P 500 even climbed above 30. The NASDAQ rose a good 40 percent between January and July but has lost ten percent since. In Europe, the broad market index, Stoxx 600, recorded solid growth in the first half of the year before losing almost all ground gained. Price-earnings ratios are currently at a moderate level of around twelve. On the Japanese Nikkei, the price-earnings ratio rose from twelve to 15 on the back of strong economic growth. The stock markets of emerging countries lost the gains made in spring in the autumn. The Chinese stock market tread water over the whole year. .

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Stock market (1.01.2023 – today)

44

26 19 12

-1 Euro area

USA (S&P 500)

China

Japan

NASDAQ-100

Source: Macrobond

Exchange rates The major currencies experienced substantial fluctuations this year. While the euro depreciated steeply against the dollar between summer 2022 and summer 2023, triggered by the ECB’s monetary policy copying the tightening stance of the Federal Reserve, it has recovered well since the summer. This has curbed both inflation and economic activity in equal measure. The pound trended sideways over the same period.

The renminbi has depreciated relatively steeply against the dollar since autumn 2022, driven down by the weak momentum of the Chinese economy. At last count, the renminbi was trading well under seven to the US dollar. The yen trended similarly, although for completely different reasons. It depreciated sharply from a good 120 to about 140 yen to the dollar, driven primarily by Japan’s monetary stance and widening yield differentials which buoyed exports and lifted inflation.

Exchange rates against the US dollar 1,25

1,00 0,90

1,20

0,80 0,70

1,15

155

7,4

145

7,2

135

7,0

125

6,8

115

6,6

105

6,4

95

6,2

0,60 1,10

0,50 0,40

1,05

0,30 0,20

1,00

0,10 0,95

0,00

Euro (left axis) Pound Sterling (right axis)

Renminbi (right axis) Yen (left axis)

Source: Macrobond

14

No momentum | Global economic growth to remain low in 2024 20/12/2023

Almost no expansion in store for industrial production worldwide In the first quarter 2023, global industrial production (excluding construction) increased by a narrow 0.5 percent year on year according to figures from the Netherlands Bureau for Economic Policy Analysis (CPB). Industrial output fared slightly better in the second quarter, rising by 1.1 percent. In both quarters, the pace of growth was well down on the previous year. In September, global industrial activity failed to pick up and just managed to keep ahead of last year with industrial production up 0.7 percent as of September.

There are no signs that industrial activity is set to gather pace in the further course of the year. The purchasing managers’ index for manufacturing did register its second consecutive rise in September but turned down by the same amount in October. At 48.8 index points, it has now been in contractionary territory for a little over one year. For 2023 overall, global industrial production could register growth of around one percent if current production levels are maintained for the rest of the year.

World: Industrial production*, Purchasing Managers Index 60

20

55 10 50 0 45 Emerging economies Advanced economies Purchasing Managers Index seasonally adjusted (left axis)

40

35

-10

-20 2020

2021

2022

2023

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis, own calculations

Advanced economies: US industry is the only one growing In the advanced economies, industrial production in the first quarter of this year was one percent down on the same quarter last year. The downtrend accelerated in the second and third quarter, with production contracting by 1.1 percent and 2.1 percent respectively. As of September, industrial production was 1.4 percent lower year on year. Industry in the other advanced Asian states registered the strongest drops in production levels. Other advanced economies only saw industrial output slip down 0.2 percent. Among the group of advanced economies, the US industry was the only one to increase its output slightly. While industrial production in Japan and the euro area decreased 1.8 percent and 1.9 percent respectively, production levels in the United Kingdom were only down by a much lower 0.5 percent.

Industrial activity is heading for further decline in the further course of the year. The purchasing managers’ index for manufacturing for this group of countries rose once again in October but, at

15

No momentum | Global economic growth to remain low in 2024 20/12/2023

47.5 index points, is still well below the 50-point threshold to expansion. In view of the performance this year so far and the sentiment indicators, we expect production to decline somewhat in the fourth quarter. If this turns out to be the case, industrial production among advanced economies will be down in 2023 overall by more than one percent compared to 2022.

Advanced economies: Industrial production*, Purchasing Managers Index 60

25

55

15

50 5 45 -5 40

other Advanced economies Euro area Japan USA Purchasing Managers Index seasonally adjusted (left axis)

35

30 2010

2021

2022

2023

-15

-25

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)

Emerging countries: China back to driving growth; rebound in Eastern Europe In the first quarter 2023, emerging countries registered growth of 1.7 percent year on year thanks to China’s fast rate of expansion. In the second quarter, Central and Eastern European countries contributed to growth by recovering robustly, bringing expansion of industrial production in emerging countries to 3.2 percent in total. The upswing lost momentum slightly in the third quarter with industrial production only up on the first nine months of last year by 2.4 percent as of September. Chinese industry returned to its role as the principal driver of growth, growing by 3.8 percent. Industrial production in Central and Eastern Europe posted above-average growth of 3.2 percent on account of the rebound effect. The rise in industrial production in Asian emerging countries excluding China was slightly below average at 2.6 percent. Industrial production in Latin America tread water in the first nine months, nudging up 0.5 percent overall. On account of the lower prices for fossil fuels, among other factors, production in Africa and the Middle East was 1.1 percent down in this period.

After a break of one year, China’s industry is back in its role as the strongest driver of growth among emerging countries, albeit with only half the momentum shown on average over the past decade.

Industrial output in emerging countries is thus set to be much lower this year. The purchasing managers’ index for manufacturing for this group of countries dropped for the second consecutive time

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No momentum | Global economic growth to remain low in 2024 20/12/2023

and was at 50.1 index points as of October 2023, only just above the threshold to expansion of 50 index points. In view of the course of the year so far, even if output moves sideways in the fourth quarter, industrial production in emerging countries in 2023 overall will be around two percent higher than in 2022.

Emerging economies: Industrial production*, Purchasing Managers Index 60

20 15

55 10 5

50

0 45

-5 Africa/Middle East Latin America Central and Eastern Europe Asia (excluding China) China Purchasing Managers Index seasonally adjusted (left axis)

40

35

-10 -15 -20

2020

2021

2022

2023

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)

Global trade Global trade activity already started to flounder at the start of 2023. In the first quarter 2023, the global trade volume was 0.8 percent down on the previous quarter, according to figures from the Netherlands Bureau for Economic Policy Analysis (CPB). In the second quarter, the downward trend continued but at a slightly flatter minus 0.4 percent. As per September, global trade was down on the first nine months of last year by 2.2 percent.

Emerging countries exported 0.3 percent less goods overall in the first three quarters of this year than last year. Exports from Asian emerging countries (excluding China) recorded the biggest drop, contracting 4.5 percent. Exports from Latin America and from Africa and the Middle East decreased by 0.9 percent and 1.1 percent respectively. Going the other way, exports from Central and Eastern Europe expanded by a robust 5.3 percent. China’s exports also rose, increasing by 1.5 percent.

The exports of advanced economies were 1.6 percent down overall as of September 2023 compared to the same period last year. Trends in exports were very mixed in this group of countries. Japan’s exports declined 1.6 percent in the first nine months of this year. The drop among the group of other advanced Asian economies was much larger, at 6.2 percent. Exports from the United Kingdom also dropped by a substantial 4.2 percent, while exports from the euro area decreased 2.3 percent year on year. Going the other way, the strongest positive impetus was from the United States which increased

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No momentum | Global economic growth to remain low in 2024 20/12/2023

goods exports by 3.4 percent. Exports from the other advanced economies did not grow quite as much, rising 0.7 percent.

The latest figures point to a bottoming out. In August 2023, global exports increased by 1.1 percent compared to the previous month. While exports from advanced economies rose 0.5 percent at last count, exports from emerging countries had expanded by a somewhat larger 2.2 percent. If trade activities stagnate until the end of the year, the global trade in goods this year overall is set to drop by around one percent rather than grow by more than two percent as predicted in spring 2023.

World: Exports according to region of origin 30 25 20 15 10 5 0 -5 Advanced economies Emerging economies

-10 -15 -20

2019 2020 2021 2022 Index: two-month average, after calendar and seasonal adjustments, in percent, year on year

2023

Source: Macrobond

United States Third quarter 2023 unexpectedly strong The United States seems to have managed a soft landing, combating inflation without causing too much of a slowdown in economic activity so far. Private consumption and investment activity even proved particularly robust in the third quarter. US GDP grew at an annualised rate of 5.2 percent in the third quarter of 2023, according to the second estimate of the Bureau of Economic Analysis (BEA).

Growth was fuelled by rising private consumption and outlays in inventories (in response to expanding manufacturing and retail) and in public expenditure (federal, state, and local). Fixed investment also increased. So did imports and exports. Overall, net exports brought GDP growth down slightly.

A closer look at private consumption in the third quarter shows rising demand for both goods and services. Among consumer durables, recreational goods and vehicles increased the most (BEA 2023a). As pointed out by analysts, late summer is generally a strong season for consumption as many holiday trips take place in this period and children are kitted out for the new school year (De Thier 2023).

Over the course of the year, the figures for US GDP growth were upwardly revised. While our June edition of the Global Growth Outlook was still based on information that the US grew by only 1.3 percent

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No momentum | Global economic growth to remain low in 2024 20/12/2023

in the first quarter, the BEA has now upwardly revised first quarter growth to 2.2 percent. Growth remained similarly solid in the second quarter, with a rise of 2.1 percent.

US GDP growth, quarterly (annualised) 8

7.0

7 6

6.2 5.2

5.2

5 4

3.3 2.7

3

2.6

2.2

2.1

2 1 0 -1

-0.6

-2 -2.0

-3 Q1

Q2

Q3 2021

Q4

Q1

Q2

Q3 2022

Q4

Q1

Q2

Q3

2023

Source: Bureau for Economic Analysis

Forecasts for the United States in terms of GDP growth overall in 2023 and 2024 have also been considerably upwardly adjusted. In November 2023, the OECD forecast a GDP growth of 2.4 percent for 2023 and 1.5 percent for 2024 (OECD 2023). That corresponds to 0.8 percentage points more for 2023 than expected in June, and 0.5 percentage points more for 2024. The IMF now expects (as of October 2023) the US economy to grow by 2.1 percent this year and 1.5 percent next year (IMF 2023).

Similarly, we forecast growth of about 2.25 percent in real terms for the current year.

Slight decrease in inflation and cooling on the labour market Inflation has continued to decrease. According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (All Urban Consumers, CPI-U) compared to the same month of the preceding year was at 3.7 percent in September 2023, 3.2 percent in October and only 3.1 percent in November before seasonal adjustment. Compared to the previous month, the index increased by 0.1 percentage points in November (BLS 2023a). Nonetheless, inflation is still far off the target level of two percent.

In November 2023, new jobs totalled 199,000 (not including agriculture). Employment growth was thus below the average monthly gain of the past 12 months (240,000) but higher than in October (150,000).

The unemployment rate stood at 3.7 percent in November, slightly lower than the 3.8 percent and 3.9 percent registered in September and October (BLS 2023b). After real average hourly earnings even decreased in August and September, real wages again rose slightly in the last few months. Real average hourly wages increased by 0.2 percent both between September and October and between October and November (BLS 2023c).

Private consumer spending has followed a gentle upward curve since April, rising 0.2 percent in October compared to the previous month. The savings rate of private households (in percentage of disposable incomes) travelled upwards in the first half of the year, up to 5.3 percent in May, but then turned around and has headed downwards since, reaching 3.4 percent in September. It climbed back to

19

No momentum | Global economic growth to remain low in 2024 20/12/2023

3.8 percent in October (BEA 2023b). As consumption traditionally accounts for a very large share of GDP of around 70 percent (most recently, in the third quarter 2023 it was at 67.8 percent), the trend in consumption is decisive for the overall economic outlook for the next few months. By now, consumers were expected to have spent their excess savings accumulated over the pandemic and which have been providing economic momentum since. However, this does not appear to be the case with the latest estimates putting the excess savings of US households at around one trillion US dollars (Economist 2023). As soon as these excess savings have been used up and consumers again have to rely on borrowing, they will feel the bite of higher interest rates. Another factor which is decisive for economic development going forward is the point in time at which the higher interest rates start to have a downward impact on corporate investment. Smaller companies, whose loans tend to have shorter terms, are already under big pressure as reflected by the increased number of insolvencies (Economist 2023). The risk that the United States will slide into a recession seems very small by now, but still should be ruled out entirely.

Trade deficit slightly smaller than in previous quarters at last count US exports of goods and services decreased between the first and second quarter 2023 before rising modestly in the third quarter 2023. Imports, on the other hand, were strongest in the first quarter. At last count, in the third quarter 2023, the US exported goods and services to the value of 768 billion US dollars. Imports amounted to 953 billion US dollars in the same time period. The trade deficit (goods and services) was thus at 185 billion US dollars in the third quarter (BEA 2023c).

High public debt poses long-term risk The expansionary fiscal policy of the United States over the last few years, including the Covid aid packages and the Inflation Reduction Act, has left a big extra dent in public coffers. At the end of the recently concluded fiscal year 2023, the budget deficit on the federal level stood at almost 1.7 trillion US dollars according to the Congressional Budget Office (CBO). That corresponds to 6.3 percent of GDP, well above the 50-year average of 3.7 percent. Compared to the deficit last year, it was up by 320 billion US dollars, or 23 percent (CBO 2023). Public deficit reached a new record level of 33.17 trillion at the end of the fiscal year, according to US Treasury figures (Treasury 2023). Even though the United States is still regarded as a very secure place of investment, concerns about possible defaults are growing on account of these developments. In August, the rating agency Fitch reduced the creditworthiness of the United States from the best possible rating AAA down to AA+ because of the expected deterioration of the country’s budgetary position in the next three years, the high and growing public debt, and what it terms an “erosion of governance” over the last two decades. This refers to the repeated debt ceiling standoffs, and that the US, unlike most peers, does not have a medium-term fiscal framework, and that its budgetary planning process is complex. Fitch is the second major rating agency to downgrade the rating of the United States, following a downgrading by S&P back in 2011 (Fitch Ratings 2023).

The US Congress has not yet adopted a regular budget for the fiscal year 2024, which already started on 1 October 2023. A government shutdown was narrowly averted on 30 September, with Congress agreeing to a continuing resolution until 17 November in the final hours. On 15 November, Congress passed another stopgap measure, which will expire on 19 January for some areas and on 2 February 2024 for others. The current transitional budget largely keeps government spending steady but does not include any additional financial aid for Ukraine. If the government fails to reach agreement in January and February another shutdown is on the cards. The adoption of a final budget for the fiscal

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No momentum | Global economic growth to remain low in 2024 20/12/2023

year 2024 is proving to be particularly difficult because of the internal divisions and disputes within the Republican Party in the House of Representatives.

CHINA With growth of 4.9 percent in the third quarter, China’s economy performed better than analysts expected. Since the start of the year, Chinese GDP has expanded 5.2 percent. This means that 4.4 percent growth in the final quarter of the year would be enough to meet the government’s growth target for the year of five percent. In view of the weak baseline with Covid lockdowns affecting last year’s results, this should be well within reach.

Quarter on quarter, Chinese economic output increased by 1.3 percent between July and September, following growth of 0.5 percent in the second quarter. While these figures show that the economy is stabilising, structural problems remain. The property crisis is still unresolved as shown by the most recent defaults of the two heavyweights Evergrande and Country Garden. Consumer confidence is still shaken, and foreign trade remains weak. Foreign direct investments also plunged 8.5 percent in the first six months of the year following the record performance in 2022. German companies are still showing faith in China as a business location, with investments totalling 10.3 billion euros by the end of June which is above the long-term average and close to the record level of twelve billion euros in the same period last year.

While China has made swift progress in high-end technologies and modern production facilities not least due to massive support from the government’s industrial policy, it has not yet managed the transition from a one-sided investment-driven economy to a consumer-oriented economy. Consumers remain uncertain, unsettled by the experience of three years of unbridled zero-Covid policy, and the sustained crisis on the property market. It remains to be seen whether the economic policy adjustments announced in the summer with measures to promote the private sector will have tangible results. The IMF expects the country to only grow by an average of four percent over the next four years, which is 0.6 percentage point lower than it forecast one year ago.

The economy may receive more stimulus from the upcoming third plenum of the 20th Central Committee. At this plenum, roughly one year after its National Congress, the Chinese leadership traditionally sets the basic course for economic policy over the next few years. In late October, meanwhile, Beijing announced the issue of one trillion renminbi (135 billion euros) in special treasury bonds to support local governments and their infrastructure expenditure. This will bring this year’s budget deficit higher than the maximum defined by the government of three percent, up to 3.8 percent.

No green light for industry and services Industry expanded by four percent in the first nine months of the year (first six months: 3.8 percent), growing less than the economy overall. Manufacturing output rose 4.4 percent in that period, with five percent growth at last count in September. Producers of plant and equipment registered six percent expansion, which is relatively low for this segment. The private sector remains sluggish. While stateowned industrial enterprises increased their value added by 4.6 percent between January and September, private-sector enterprises only managed a 2.3 percent rise. Earnings are still lacking substance. Industrial profits were 11.7 percent down in the first three quarters of the year, but the downward trend is slowing down. In the first six months of the year, the drop was 16.8 percent.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

The services sector had grown six percent as of September. Hotel and restaurants did especially well, rising 14.4 percent. Obviously, the baseline here is low as the same period last year coincided with the height of the lock-down, largely putting a stop to eating out and travelling. In actual fact, activity is lower than expected in this sector as well, despite the return to normality. During the holiday season in October, travel was 71 percent up on last year and even 4.1 percent higher than in 2019, but tourist revenue was only 1.5 percent higher than in the year before the outbreak of the pandemic. As in the two previous waves of travel at the start of the year and in spring, per capita tourist spending is down.

So, even though travel has picked up, consumers are being careful with their money.

The purchasing managers’ indices are also not looking too healthy. Although the official purchasing managers’ index for manufacturing did manage to cross the threshold to expansion of 50 points in September for the first time since March, climbing to 50.2 points, it then dropped down to 49.5 points in October, surprising analysts. The purchasing managers’ index published by business magazine Caixin, which primarily represents the activity of small and medium-sized private enterprises, also dropped to 49.5 points in October. In the months beforehand, this index had shown more optimism, at 50.6 in September and 51 in August. The Caixin purchasing managers’ index for services ended its downward trend that had started in March, after rising to 50.4 points in October following a low of 50.2 in September. The official purchasing managers’ index for services slid down from 50.9 points to 50.1 points in the same period, coming close to the threshold between expansion and contraction.

Government announces support for private sector In the first three quarters of the year, fixed-asset investment increased by six percent. Infrastructure investment and manufacturing investment both rose 6.2 percent. Investment in leading-edge technologies expanded 11.3 percent, and in related services 11.8 percent, reflecting the high level of government support for this segment. The pace of growth here has tailed off slightly in recent months, with investment only growing 2.3 percent in September.

Private-sector investment decreased by 0.6 percent mainly on account of the troubles brought about by the ongoing property crisis. Investment by property developers in construction projects contracted 9.1 percent. Commercial space sold was 7.5 percent down on last year in the first nine months of the year. The number of new construction projects plunged by as much as 23.4 percent.

The government is providing targeted support to the private sector with its 31-point plan presented in July. Rather than detailing concrete measures in regulatory and fiscal policy, the plan centres primarily on encouraging local governments and authorities to stop the institutional, systemic discrimination against the private economy. In return, private enterprises are to follow the stipulations of the Communist Party more closely in future. It remains to be seen whether this will be enough to restore the trust of the private sector. Furthermore, China’s State Council published 24 measures to attract foreign direct investment in August. These measures also pledged fairer treatment and a range of market access facilitations. Concrete measures announced include steps to increase the transparency of regulations on cross-border data flow, which would make things a lot easier for many foreign investors.

Monetary policy in a fix The People’s Bank of China (PBOC) faces a dilemma. On the one hand, it wants to create an environment that allows corporate lending to be eased, but, on the other, it wants to prevent an

22

No momentum | Global economic growth to remain low in 2024 20/12/2023

increased outflow of capital abroad. The central bank also has to keep an eye on the escalating debt of local governments and protect the banking sector from the impact of the property crisis.

In order to stabilise the economy, the PBOC lowered the reserve requirement ratio for most banks for the second time this year in September. The reduction of 25 base points triggered an estimated inflow of 500 billion renminbi (68 billion euros) into the financial system. The central bank had already tried to support companies in August by cutting the key interest rate for one-year loans from 3.55 to 3.45 percent. In September, the major commercial banks also announced lower mortgage rates for first-time home buyers. The reduction in interest rates will, however, be limited as the higher interest rates in the United States are already putting persistent pressure on capital to flow out of China. After a short pause in the second quarter, foreign investors have again started taking more funds out of the stock and bond markets. Capital outflows have already contributed to a depreciation of the Chinese yuan of more than five percent against the US dollar this year so far.

Foreign trade weak apart from some highlights Foreign trade is currently not delivering any substantial momentum to economic growth in China due to the international crises and conflicts hampering the global economy. In the first nine months of the year, Chinese exports based on US dollars were down by 5.7 percent. Demand for goods, inputs, and commodities from abroad also remained weak, with imports down by 7.5 percent in the same period.

The divide in foreign trade has therefore expanded, with China’s trade surplus rising to 630 billion US dollars in the first three quarters, only one billion US dollars short of the record level posted in the same period last year.

Among China’s trade partners, the ASEAN countries accounted for an increased proportion of trade.

Although the foreign trade volume with the Association of Southeast Asian countries was below average, decreasing by 5.5 percent, trade was down by as much as 7.7 percent with the EU and 14 percent with the United States. Geopolitical factors are decisive for the level of trade with individual countries and regions. Trade with China’s closest strategic partner, Russia, increased by 29.5 percent on the back of rising exports. The US sanctions on semi-conductors affected trade with Taiwan and South Korea, which decreased by 20 percent and 23 percent respectively in the first three quarters.

The automotive sector is a rising star of the Chinese export industry, with exports here shooting up by almost 84 percent compared to the first nine months of last year. This surge was fuelled mainly by the booming electric vehicle segment. This segment is not dominated by Chinese producers, US carmaker Tesla and European brands also have substantial shares in the market.

Skirting deflation Retail sales increased by 6.8 percent between January and September according to the National Bureau of Statistics China (NBSC), driven primarily by catch-up spending in the restaurant sector.

Consumer sentiment remains subdued, with the property crisis, partially declining wages and salaries, and job security concerns, among young people especially, all contributing to general unease. This is also reflected in price levels. In the first three quarters, the consumer price index only increased by 0.4 percent, far below the official annual inflation target of three percent. Since April, prices have hovered above the zero-percent mark, skirting deflation. In July, consumer prices were even down by 0.3 percent. Producer prices for industrial products were 3.1 percent down over the first nine months.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Evaluating the situation on the labour market has become more difficult because of the deterioration in data. After the unemployment rate in the 16 to 24-year age group reached its all-time high of 21.3 percent in June this year, the NBSC stopped publishing this figure which it has published for every month since 2018. This year is set to be particularly challenging for this age group, with a record number of around 11.6 million university graduates flooding the labour market since the summer. Urban unemployment, in contrast, was average at 5.3 percent in the first three quarters overall. The situation is tense nonetheless with underemployment, precarious jobs and declining wages all bubbling under the surface.

Euro area: gradual recovery in sight Economic development in the euro area over the last six months has been disappointing given the hopes raised in spring. The first quarter of the year was already weak with zero growth, the second quarter was marginally better at plus 0.2 percent, before negative growth of 0.1 percent set in over the autumn (based on the first eleven countries to report). The EU fared similarly with 0.1 percent, zero percent, and 0.1 percent growth respectively in the first three quarters of the year. Germany, France and Italy were at around zero growth in the third quarter. Spain was the only major economy to manage any kind of growth, rising by 0.3 percent. The first indicators for the fourth quarter point to a very slight improvement. For the year overall, the euro area should manage growth of a good one half a percent (European Commission: 0.6 percent; IMF: 0.7 percent; OECD: 0.6 percent). Spain and Italy are set to grow somewhat more, France about average, and Germany slightly negative year on year.

The weak economic momentum is primarily due to low consumer spending. Rising inflation has made consumers reticent about making purchases despite higher employment, upward wages, and low unemployment. The savings rate is still at a very high level of over 13 percent. The falling energy prices were not able to compensate this. Investment activity was additionally bowed by tighter financing terms and conditions which have directly impacted the property market and the construction industry and have also substantially lowered lending to the private sector overall. The sluggish pace of global trade has not produced any momentum either.

It will take until next year for some components to become positive. Consumer spending should pick up in real terms as wages in the euro area are set to outpace prices. Investment activity is expected to gather steam a little further down the line. Global trade is also forecast to make a modest recovery which should turn net exports for the euro area positive. Overall, this environment should be enough to lift economic activity in the euro area by 0.8 percent. Spain will continue to grow slightly above average.

Germany In the six months over the winter 2022/2023, Germany did not experience a recession according to the latest calculations and revisions of Germany’s Federal Statistical Office. The German economy has nonetheless tread water since the beginning of the year. The unfortunate combination of high interest rates curbing residential construction, declining consumer spending due to high inflation, and weak exports is behind the anticipated drop in GDP for 2023 overall of 0.4 percent. Economic output would then be down for the second time in the last four years in real terms. The German economy has not been as weak as this for a very long time indeed, apart from the crisis years of 2002 and 2003.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

The German economy should return to minimal growth in 2024. The most recent forecasts of the IMF and the European Commission, however, predict a much lower rate of growth than expected in their mid-year forecasts. The federal government and the leading economic research institutes had still expected GDP growth of over one percent in 2024 back in the early autumn. In comparison, the latest forecasts of the IMF, the European Commission, the OECD, and the German Council of Economic Experts are only half as high, ranging between 0.5 and 0.7 percent growth.

The situation is, indeed, far from promising. On the positive side, as price levels start to rise less rapidly, the high nominal wage agreements concluded in the past will increase real purchasing power in 2024.

The record level of growth in the number of employees should also fuel an increase in private consumption spending. However, the planned spending cuts of the federal government in the wake of the ruling of the Constitutional Court of November 15 will likely weigh on public and private consumption in the range of 0.3-0.4 per cent of GDP. A full assessment is still not possible as many details and the broad key figures of the agreement are not yet available.

Despite the high level of investment required, we do not expect much momentum for growth to come from gross fixed capital formation. The major support programmes of the government for fixed investment will remain in place, even though there is a nominal cut of 12.7 bn euro in planned spending of the Climate and Transformation Fund. However, the spending of the full envelope was not to be expected, and in 2024 now we expect a substantially higher rate of spending of allocated funds.

Investment in military weapon systems and the catch-up demand in investments in vehicle fleets should support fixed investment, too. In construction investment, the sharp slump in residential construction caused by the steep increase in interest rates has overshadowed the positive trends, above all, in commercial civil engineering and infrastructure. Cuts in programmes for the construction sector will dampen sentiment and output a bit, too.

Finally, Germany is only set to benefit below average from the pick-up in global trade and, with imports increasing, net exports are not expected to contribute to growth. All in all, we expect the German economy to grow around 0.3 percent. The recent budget deal did not cope with all fiscal contingencies.

Key budget risks include another 2.7 billion euros in flood aid spending supposed to be exempted from the debt brake and adjusting to a much lower growth forecast for 2024 (the budget still being based on 1.3 percent real GDP growth). Real growth is more likely to disappoint and remain flat at zero than to regain ground to one percent. Downside risks from a further round of belt-tightening and from weakerthan-expected global manufacturing and trade rebounds are material. Also, structural constraints on growth, in particular high electricity costs, will dampen output of the energy-intensive branches going forward. This time, Germany will not get by with a little help from its friends (i.e. external demand).

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Sources BDI (2023). Industry Report. 29 November. Berlin.

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19 October.

--(2023b). Investment in Chinese Real Estate Dropped 9.1% in First Three Quarters. 20 October.

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--(2023b). Consumption, Showing Positive Economic Signs. 9 October.

Congressional Budget Office (2023). Monthly Budget Review: Summary for Fiscal Year 2023.

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Dynan, Karen (2023). A soft landing beckons but are not assured. PIIE. September. Washington, D.C..

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European Central Bank (2023). Combined monetary policy decisions and statement. 14 September.

Frankfurt/M. Fitch Ratings (2023). Fitch Downgrades the United States' Long-Term Ratings to 'AA+' from 'AAA'; Outlook Stable. 1 August. New York.

IMF (2023). World Economic Outlook. October. Washington, D.C..

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Institut für Weltwirtschaft (2023). Weltwirtschaft im Herbst 2023. Kieler Konjunkturberichte Nr. 105.

Keel.

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No momentum | Global economic growth to remain low in 2024 20/12/2023

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu German Lobbyregister Number R000534 Authors Dr. Klaus Günter Deutsch T: +49 30 2028 1591 k.deutsch@bdi.eu Stefan Gätzner BDI-Vertretung, Peking T: +86 1085 322862 s.gaetzner@bdi.eu Julia Howald T.: +49 30 2028 1483 j.howald@bdi.eu Thomas Hüne T: +49 30 2028 1592 t.huene@bdi.eu Anna Kantrup T: +49 30 2028 1526 a.kantrup@bdi.eu Editorial / Graphics Marta Gancarek T: +49 30 2028 1588 m.gancarek@bdi.eu

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