2024 Q4 Global Economics Outlook (II)

Last week, we discussed our forecasts for the US, China, and Japan. This week, we will focus on the EU, UK, and India (EM).

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EU:

The European Central Bank (ECB) has cut 75 bps so far 2024, with more cuts expected even inflation dropped to 1.7% in September 2024, dragging by Germany's weak economic data, including a negative industrial production figure of -2.7% in August, and a shrinking trade balance, are dragging down the broader Eurozone recovery. The ECB is expected to continue with cautious rate cuts through 2025, although more aggressive cuts may be necessary if Germany's struggles persist. Despite weak data, the Euro has shown resilience, and significant EUR/USD depreciation is unlikely in the near term.

UK:

The Bank of England (BoE) started cutting rates with a 25bps reduction in August 2024, as inflation falls, and the economy slows. Forward output and consumer confidence have declined sharply, signaling weaker economic momentum. Payroll reductions indicate softer consumer demand, which could lead to slower growth. We expect the BoE to continue cutting rates, possibly bringing the Bank Rate to 2.75% by late 2025, with downside pressure on the GBP as the U.S. economy remains strong.

India:

India's economic momentum softened in Q3 2024, with weakening consumer demand and a 60% drop in residential housing sales YTD. Goods exports fell 9.3% year-on-year in August, and public sector investment declined by 19%. Despite challenges, India's Nifty 50 index outperformed other Asian emerging markets, rising 110% over the past five years. Strategic resilience, demonstrated during the Russia sanctions, and a young, tech-savvy population support long-term growth. With expanding manufacturing and global competitiveness, India remains a key global investment hub, poised for continued development despite slowing momentum.

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EU

ECB has cut 75bps so far in 2024, amoung all other countries that in the same rates cut cycle, Eurozone reflects weaker economy and rising confidence in disinflationary trends. The Eurozone’s economic data has shown signs of slowdown, with Germany's industrial production still negative at -2.7 in August 2024, a signal that the region’s largest economy is still struggling. Meanwhile, inflation in the Euro area dropped to 1.7% in September 2024, well below its peak of 10.6% in October 2022. However, Germany's challenges have clouded the broader recovery. Germany's trade balance has dropped to 19.1 billion in August 2024, continuing a downward trend from its February peak of 24.6 billion. This decline reflects weakening export performance, a key pillar of Germany's economy, signalling broader economic difficulties. The softening trade surplus further bring the Eurozone’ economic outlook under pressure.

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Looking forward, the ECB is expected to continue its cutting cycle, with the third consecutive 25bps cut and possibly one more in Dec 2024, bringing rates down to approximately 1% in a year. However, if economic conditions worsen, particularly with Germany underperforming, there is a possibility of more aggressive cuts, potentially up to 50bps. An extended scenario includes further cuts in the second half of 2025 if inflation continues to underperform or trade tensions persist.

In our view, the ECB's cautious, step-by-step approach to rate cuts reduces the likelihood of significant EUR/USD depreciation in the near term. Despite weaker economic data, the ECB has not committed to aggressive forward guidance, meaning each rate cut will be data-dependent. This gradual cutting cycle has supported the Euro’s relative resilience, limiting the downside. While there are still risks of a decline, especially if the ECB shifts to a more decisive stance compared to the Fed, we believe that a EUR/USD would mover lower, yet rapid weakening is unlikely in the immediate future.

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UK:

With BoE started the interest rates cut, 25bps in Aug 2024, investor focus has shifted to the extent and duration of the cutting cycle. A key factor influencing future rate cuts is the neutral interest rate, which balances inflation and economic growth without excess stimulus or restriction. Estimates suggest that the UK’s neutral rate has risen slightly from its pre-pandemic levels, likely driven by higher productivity growth, population expansion, and increased public debt. Historical analysis shows that real rates have trended lower over recent decades but have recently seen a moderate increase.

Despite this rise, we see the BoE’s current rate policy remains restrictive, particularly as inflation continues to fall and Monetary Policy Committee (MPC) statements signal a more dovish stance. We forecast that the BoE will lower rates more aggressively than the market currently anticipates, with consecutive 25 bps cuts. Although the country has a better production outlook and improved unemployment data; however, on the payroll side, we see a steady drop which potential lead to a unideal economy due to weaker consumption. Our outlook sees the terminal Bank Rate at 2.75% by November 2025, lower than current market pricing, as inflation stabilizes and economic conditions align with a more accommodative monetary policy.

Furthermore, recent UK economic indicators present a broadly negative outlook for the GBP. The forward output volume in the CBI Industrial Trends Survey fell sharply from 7% in September 2023 to -14% in September 2024, signaling weaker production expectations. The three-month forward minus backward momentum metric also indicates a slowdown in activity. Consumer confidence, as measured by GfK, dropped from -21 to -30 in September 2024, showing a sharp decline in sentiment, while restaurant bookings stagnated in October, further signalling reduced consumer activity. Given these factors, economic momentum in the UK is weakening, which is expected to place downward pressure on the GBP. In contrast, the U.S. economy remains robust, evidenced by higher-than-expected GDP growth of 4.9% in Q3 2024, leading to the expectation that GBP/USD will continue to decline in the near term, with the USD poised to outperform.

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India (EM)

India's economic momentum softened in the September 2024 quarter, with consumer demand showing signs of weakness. New Residential housing sales has drooped around 60% in 2024 YTD. Additionally, goods exports declined by 9.3% year-on-year in August. While industrial activity had some positive movements, such as a 3.4% rise in E-way bill generation, other areas like electricity generation contracted by 3%. As the public sector investment, particularly central government capex, slowed with a 19% year-to-date decline, the country faces challenges to meet its growth targets for FY25, which is forecasted at 6.8%, down from 8.2% in FY24.

Nevertheless, India continues to hold a unique position on the global stage, maintaining strategic flexibility in its economic and political dealings. This was notably demonstrated during the US sanctions on Russia, where India emerged as a key player in the energy market. India bought discounted Russian natural gas and oil, refined it, and resold it to other countries, effectively bypassing sanctions while benefiting its economy. This ability to navigate international sanctions and maintain diverse partnerships highlights India's growing influence and resilience in the global economy, especially during periods of geopolitical instability. Additionally, with its large and youthful population, India is becoming a major player in global manufacturing. Companies are increasingly shifting production to India, recognizing its vast workforce and positioning the country as a critical hub in global supply chains.

Likewise, India stock’s market is the most appealing market among all Asia EM countries. The chart highlights India's Nifty 50 as the strongest performing index among Asian emerging markets, the index jumped 110% over the past 5 years, significantly outpacing the KOSPI 200 (Korea), VN Index (Vietnam), and PSEi Index (Philippines). India's stock market shows the highest growth potential, driven by robust economic expansion, a growing middle class, and increasing foreign investment. We believe this outperformance underscores India’s position as a global investment hub, with its stock market not only reflecting domestic developments but also benefiting from international capital flows and global economic integration.

In current stage, we are optimistic on India's outlook for several key reasons. First, its massive population provides a strong foundation for sustained economic growth, with a young and expanding workforce. Second, India boasts a deep pool of talent, particularly in technology and mathematics, which positions it as a global leader in IT services and innovation. Third, beyond the stock market, India has become the most appealing emerging market, thanks to its rapidly expanding manufacturing sector and increasing global competitiveness. Despite this, the country is still far from reaching developed nation status, offering significant room for further growth and development in the coming years.

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