Germany, the United Kingdom, Japan, China and the US: The fine line between falling into a technical recession and achieving a soft landing

In the 2024 outlook, managers agreed that if central banks’ actions were correct and there were no external events, The world’s major economies will avoid recession, but not recession, At the moment, Germany, the United Kingdom and Japan are in a technical recession, China is facing growth problems and on the contrary, the United States seems to be succeeding with its soft landing.

Where are the world’s major economies headed? in the opinion of Vincent Mortier, Investment Director of Amundi GroupAnd Matteo Germano, Deputy Investment Director of Amundi GroupIn terms of growth, “We see fears of a prolonged recession in the US, which will be concentrated by the middle of the year. In Europe, we have revised down growth forecasts for this year and we expect inflation in China to remain below consensus.”

Laurent Benaroche, fund manager in the multi-asset and overlay team at Edmond de Rothschild AM, identifies three main risks to the growth of the global economy: a surge in energy prices due to geopolitical concerns; that China fails to come back; And that the main central banks are reluctant to lower rates. ,The economies most sensitive to these risks remain Europe and emerging markets., However, our key scenario remains a soft landing, and we are relieved by improving global manufacturing PMIs against the backdrop of improving credit conditions and rate cut expectations,” he says.

old continent

Everyone agrees that the world economy is slowing down, but let’s look region by region. In Europe, In the post-COVID-19 recovery phase, demand for manufactured goods has been declining regularly, mainly affected by weak Chinese demand and high interest rates. However, demand for services remains stable around the world. “so, European economies most affected by weak manufacturing cycle will have the weakest growth, For this reason, Germany has also joined the club of countries with technological recession, while peripheral countries manage to move ahead. However, with ongoing deflation, improving debt conditions and recent growth in real wages, the most likely scenario looks like a soft landing for Europe as a whole,” he explains. Laurent Benaroche, fund manager in the multi-asset and overlay team at Edmond de Rothschild AM,

A situation in which the United Kingdom is also. Its data for the fourth quarter of 2023 was disappointing: its activity declined by -0.3% on a quarterly basis, but with mixed readings of the components, given that the weakness was driven by public expenditure (-0.3%) and private consumption (-) Has come from decline. 0.1%), while investment jumped (+1.4%).

in the opinion of Ruben Segura-Cayuela, Chief European Economist at Bank of America, The country’s situation is not simple, so what its central bank does will be essential: “In the United Kingdom, inflation in January was slightly weaker than expected, and December GDP data was weak. But the blame for the latter lies on strikes, and as far as inflation is concerned, the report on the labor market has made it sufficiently clear that internal pressures have still not completely disappeared. “We are comfortable targeting August for the BOE’s first move.”

According to Benaroche, European growth largely depends on stable oil prices, If energy prices rise in the context of rising geopolitical risks, inflation fears will prevent the ECB from easing its monetary policy and Europe would risk suffering a severe recession. “Given that the risk of a severe recession remains high for major countries, the ECB may soon become more sensitive to cutting rates if energy prices remain stable. “Should the Fed delay its rate cut cycle due to mixed economic signals in the US, we believe the ECB could also be the first to cut rates,” he added.

At Amundi, its experts believe the euro zone will manage to avoid a recession, but they believe the risks are high. “Weak public spending and restrictions, particularly in Germany and France, are likely to weigh on the economy, but household consumption and wage growth are positive for the region. The latter is also important for ECB decision-making,” Mortier and Germano explain.

Looking towards Asia: The case of Japan

The weak manufacturing cycle also impacts Japan, whose economy is also oriented towards the same sector, creating a similar situation of technical recession. However, analysts believe the late wage adjustment should provide some support to local consumption. Like the United Kingdom, Japan also had disappointing figures for the last quarter of the year: GDP declined 0.1% quarterly (-0.4% quarterly annual), following a 0.8% decline in the previous quarter, and private consumption declined 0.2% and investment declined 0.1%.

“Japan unexpectedly entered a technical recession as the preliminary estimate for GDP growth for the fourth quarter of 2023 was -0.4% quarter-on-quarter, after a 3.3% decline in the previous quarter. The main source of weakness in printing was domestic demand, as private consumption declined 0.9% quarter-on-quarter, marking the third consecutive quarter of decline. Additionally, capital investment was weaker than expected, falling 0.3% quarter-on-quarter, following a 2.4% decline in the third quarter. On the positive side, foreign demand contributed positively to the fourth quarter figure, as export growth accelerated to 11.0% quarter-on-quarter, mainly as a result of domestic consumption,” he explains. Bigsur Partners In its latest report.

As the firm’s document warns, these data should not lead us to draw hasty conclusions about Japan. “Despite the weak quarterly data, Japan’s average annual GDP growth for the full year 2023 was strong at +1.9%/+5.7% in both real and nominal terms. “In addition, a range of more advanced indicators of Japanese activity, such as the Economy Observer Survey, consumer confidence and new job creations, show signs of bottoming out,” they argue, inviting optimism.

Like the rest of the economy, what the Bank of Japan (BOJ) does will be decisive, especially when it decides to end the negative interest rate policy (NIRP), a decision that markets anticipate will be made in the spring. ,We believe that now there is less possibility of interest rates increasing rapidly and there will be no restrictive measures., NIRP release is likely to be delayed till April. We are very interested in how this release may impact the BOJ’s policy normalization prospects, given that the BOJ is signaling an end to its yield curve control measures at some point in 2024. Is. Global interest rates, given that Japan is the only developed economy that maintains artificially low interest rates,” explains BigSure Partners.

Challenges of China and America

Of the world’s major economies, China and the United States are most likely to avoid recession. in the matter of ChinaAnalysts say the country is facing “growth problems” while still dealing with the effects of its housing crisis. From Amundi, the country sees some risks of deflation. “A fiscal bazooka seems unlikely as the government attempts to reduce debt. But given the fundamental problems of the real estate sector and the pressure on consumption, partial efforts to boost morale will not have a lasting impact,” Mortier and Germano said.

And they clarify: “We do not advocate total deflation in China, but we have lowered our inflation forecasts for 2024 and 2025 to 0.2% and 0.4%, respectively. Consumption in China is under stress. Households will be affected by wage pressures and the low wealth effect as a larger proportion of their wealth is held in real estate (against the backdrop of low asset prices). Besides, We are seeing China’s rapid transition towards lower but more sustainable growth in the long term, However, if Beijing presents a larger stimulus package (not our base case) in the form of spending on social protection or transfers and infrastructure, it could impact our weak growth outlook.

At the moment, in a bid to support the economy, the Bank of China has cut the preferential interest rate for 5-year loans by 25 basis points. “The cuts, which attempt to boost the battered real estate sector (5-year prime mortgages are the reference), have been insufficient to satisfy markets, which are facing losses after earlier moving upward,” analysts say. I have returned.” banking march,

At the end, usa Looks like it’s making a soft landing. The economy’s resilience during 2023 was largely due to the low unemployment rate and excess savings accumulated during the pandemic. as he admits Shannon Saccoccia, Co-Chief Investment Officer, Neuberger Berman Private EquityThe forecast was that as these savings were depleted, growth would be slowed by weakness in consumption in a context of persistent inflation and high interest rates, which has not happened at the moment. Saccoccia says, “Now, a large number of economists believe the savings glut could last through 2024. Consumer confidence surveys and US retail reports have been very positive, and US GDP growth is well ahead of consensus estimates. Much more than that.”

Now, he warns that the publication of higher-than-expected inflation data last week, with its impact on interest rates, could subject this flexibility to its first litmus test. He concluded, “It is worth asking whether consumption in the US will weaken if prices continue to rise above target and rates remain at high levels for a long time.”