This Week’s Developments in the Global Economy

Taking the Global View: Perspectives from the Road

Having spent some time in the UK this past week, we heard a broad range of perspectives on the rate environment and the underlying strength of major economies both in the UK and on the European continent. Underpinning many if not all of our conversations was the sense that monetary policy seems stuck, even rudderless in some perspectives. Among our discussions, one of the most pertinent questions offered was “how does the outlook for the US compare to the UK and the continent?” From a headline perspective—whether that is GDP, inflation, labor market conditions, etc.—comparisons among peers may seem easy at first but can overstate the nuanced structural components of each economy’s strengths and weaknesses. In our view, the US is not alone in demonstrating resilience (but certainly has seen higher growth than its global peers), and the UK may be on a quicker path to recovery compared to Germany, a peer economy on the continent and key driver of broader economic growth for the Eurozone.

With the Bank of England (BOE) holding rates this week, Governor Bailey signaled that markets are underpricing the pace of easing their committee is contemplating in the face of positively-trending inflation data. With the BOE, ECB, and Fed preparing for their upcoming June meetings, markets are anticipating that both the BOE and ECB may lead the shift in global monetary policy, potentially ahead of the Fed. This expectation is partly due to the current economic trajectories in the UK and the Eurozone, which are moving towards a 2% inflation target amid relative economic weaknesses. Emphasizing this relative economic weakness to global peers, the latest growth projections by the IMF and the OECD place the UK and Germany at the lower end of G7 growth estimates for 2024, while the US tops the list. This week we unpack factors likely influencing the lower relative expectations of the IMF and the OECD and identify the key economic levers for each economy.

Each of these major global economies are likely to experience different trajectories in the near term, and Germany may be bracing for a longer road ahead due to structural demand concerns. In the US, consumer spending and a robust labor market are key drivers of economic stability, although recent labor data showed softer-than-expected results—in our view, it is not a meaningful concern or signal of an impending slowdown. In contrast, the UK's economic growth, while modest, is supported by a tight labor market and strong wage growth. However, signs of cooling in the labor market may impact future trends. The UK's Purchasing Managers’ Index (PMI) for the services sector, crucial given its status as the world’s second-largest service exporter, has been in expansion for six months. Meanwhile, Germany faces more structural challenges; its economy depends heavily on manufacturing, which has been contracting since mid-2022. Exports, a vital component of German economic growth, have suffered from reduced global demand, further straining its economic outlook.

UK Expected to See a Sustained Recovery

The UK finished 2023 in a technical recession after posting two quarters of negative quarter-over-quarter GDP growth—this decline was shallow and short-lived (which we believe will be confirmed with first quarter figures on May 10). Various metrics point to an economic turnaround. Composite PMI, a leading indicator for growth, has been expansionary for the past six months. In addition, sustained increases in real earnings are likely to bolster household consumption and support economic growth.

Despite this positive momentum, the UK saw limited growth last year and lower expectations for growth may continue through 2024 before potentially picking backup in 2025. The IMF and OECD have lowered their 2024 growth forecasts for the region to 0.5% and 0.4%, respectively. Although this marks an improvement from the 0.1% growth experienced in 2023, the outlook remains modest, reflecting the potential for upcoming challenges. In the UK, the labor market, while previously resilient, is showing signs of cooling, with the unemployment rate rising to 4.2% between December 2023 and February 2024, up from 3.8% between October and December 2023. Furthermore, while the market is pricing in a few BOE rate cuts, monetary policy in 2024 will likely remain tight and continue to weigh on economic growth in the UK.

Germany Confronts Structural Challenges Which May Complicate an Economic Recovery

While Germany avoided a technical recession in the latter half of 2023, unlike the UK, its economy still contracted by 0.3% over the full year. However, the start of 2024 brought a more positive turn, with Q1 GDP increasing by 0.2% quarter-over-quarter. This uplift was supported by a surge in industrial production in the first two months, vital for Germany’s industrially driven economy. Similar to the UK, recovering real wages could boost household consumption and thereby foster economic growth. At first glance, the sluggish GDP reading thus may appear temporary in nature, but a deeper analysis reveals structural challenges confronting Europe’s largest economy, potentially influencing the modest 0.2% growth projection for 2024 by both the IMF and OECD.

The German economy has relied heavily on manufacturing, compromising 18% of its GDP—more than twice that of the UK and nearly double the US level. As the third largest exporter of goods globally, exports serve as a significant driver of German growth. However, lower global demand for German-manufactured products combined with higher energy prices has presented growth challenges for the German economy. Moreover, the country is faced with an aging population and a shortage of skilled labor, which is estimated to result in a shortage of as many as 7 million workers by 2035. Combined, these are meaningful structural challenges in our view and are likely to weigh on German growth—and the Eurozone overall—for at least the next few years