Scenario Eco - Slowcession taking root

Video editorial - Slowcession taking root
Michala Marcussen - Group Chief Economist

Is the temporary bright spot over?
The temporary bright spot for global economy observed in much of 2024 is now fading, and while further rate cuts from central banks on both sides of the Atlantic will help ease the risk of a full blown recession, hopes for a so-called soft landing are likely to be disappointed due to several headwinds that are set to keep the global economy in a prolonged period of lacklustre growth with little room for policy error.
The first of these headwinds is political and geopolitical uncertainty. This is weighing on both business and consumer sentiment, causing delays to investment and spending decisions. Uncertainty is also weighing on some financial market risk premia. Just zooming in on France, we have seen the long bond yield spread over Germany widen by about 20 basis points since the election. We estimate that if this becomes permanent, it will all else being equal take 0.05 percentage points off GDP growth in France each year. This may sound moderate but add on other transmission channels of uncertainty and the numbers can quickly add up.
Capacity of households to spend is also an issue in several economies, and not least the US. The unusual buffers created by the pandemic have now been either spent or inflated away and real wage levels have yet to catch up with past inflation. Reduced fiscal room as governments seek to rebuild buffers to be able to address eventual future crisis this means that fiscal policy in many instances is becoming a headwind or at least is less supportive.
Turning finally to China, the ongoing process of reducing reliance on the real estate sector as a driver of growth brings further challenges as evidenced by the latest batch of disappointing economic data leaving the official 5% target increasingly out of reach.
Is climate change also part of these headwinds?
The predicted increased frequency of extreme weather events has become ever more visible, with both a high human and high economic cost. The subsequent need to repair the damages of extreme weather and make adaptations hereto in the form, for example, of flood protect risks taking away financial resources from the urgently needed climate transition. We furthermore observe that climatic factors are increasingly weighing on housing, be it in relation to upgrading homes to become more energy efficient or to become more resilient to climate change itself.
How much of a lift can we expect for rate cuts?
Easier monetary conditions on both sides of the Atlantic should certainly bring some relief including to housing markets but it's worth recalling that brining monetary policy from the current tight stance back to neutral will take a sharper pace of rate cuts than presently discounted by financial markets over the coming quarters. It is moreover worth recalling that not all central banks are in easing mode with notably the Bank of Japan signalling further tightening.
The real upside potential for the global economy at this juncture will come from creating opportunity for greater investment and innovation. Here support from other policy areas is required and, in this respect, the new report on the future of European competitiveness led by Mario Draghi sets out a path to unlock the opportunities and shows where the upside could come from if political agreement can be reached.