2024: A year of political turmoil and economic uncertainty

The US is on course for a 'soft landing,' despite facing economic headwinds. The economy, which expanded by 2.4% in 2023, is expected to continue growing, though at a slower pace. Strong household and corporate balance sheets have laid a solid foundation buoyed by financial manoeuvres such as lengthening debt maturities and locking in low-interest rates prior to the Fed’s monetary tightening. However, some segments are straining under the high interest rates, with consumer loan delinquencies on the rise and a noticeable slowdown in cyclical hiring.

Conversely, the Eurozone is grappling with near-zero growth and is forecast to dip briefly into a technical recession. However, Allianz Research is cautiously optimistic for a recovery in the latter half of 2024. Easing monetary policies and diminishing energy crisis pressures are expected to bolster this. Inflation relief and anticipated wage growth could rejuvenate consumer spending, potentially driving a rebound in economic activity across the continent.

Both regions, however, face significant risks. The Eurozone's recovery is fragile, with potential threats including a deeper recession, a troubled commercial real estate market and geopolitical tensions. Similarly, the US economy could be destabilized by external shocks. As the global economy continues to recover from recent health and energy crises, these uncertainties underscore the delicate balance of the economic recovery process.

The global economy is experiencing a notable decline in inflation, driven by easing supply chain constraints and falling commodity prices. The US has seen a normalization in core goods inflation since September, and the Eurozone is experiencing a rapid decline.

While central banks are maintaining a hawkish stance to avoid being caught twice in calling inflation wrong, they could start easing monetary policies in the summer of 2024 to balance economic growth and inflation control. The Bank of England, European Central Bank and Federal Reserve are poised to implement modest rate cuts, reflecting a strategy to avoid underestimating inflation risks. This shift would mark a critical juncture in the global economic recovery process.

Globally, trade is expected to rebound modestly, led by European and Asian economies. In 2023, trade volumes contracted by about 0.4% year-on-year. The decline was mainly due to Europe's slow economic momentum and an ongoing energy crisis impacting the manufacturing sector. In contrast, South America experienced unexpected export growth.

For 2024, a modest increase of 3% in global trade volume is anticipated. Europe is expected to recover from its trade recession, with significant contributions from Asia. Critical European countries like France, Germany, Italy and the Netherlands are projected to see substantial export gains, collectively bolstering global trade despite these increases not representing huge boost for their domestic economies.

However, China's economic situation remains complex. The country is grappling with a downturn in its property sector and historically low confidence, affecting consumer spending. Despite the recovery in export values and volumes, the sustainability of this growth is questionable due to price cuts by exporters and declining corporate margins. China's GDP growth is forecast at 4.6% in 2024 and 4.2% in 2025, with a cautious outlook on the sustainability of its export strength.

Corporations have adapted to the high-yield environment, with larger firms faring better than smaller ones. However, the construction, real estate, renewable energy and utilities sectors face significant challenges due to high leverage and considerable asset devaluations, especially in office and wind assets.

Although Allianz Research does not foresee a risk of widespread corporate defaults, weaker firms with high leverage and heavy reliance on external financing for operations and  investment will be increasingly challenged in 2024.