Challenges and opportunities in a global context

SECO is forecasting modest growth in Swiss GDP of 1.10% for 2024, which is slightly below the predicted rate of 1.20%. The economy grew moderately in the third quarter of 2023, driven in particular by the services sector. Global differences characterize the economy. While the US is experiencing strong growth, the eurozone, especially Germany, remains weak. This will affect the local export industry. Below-average growth is expected for Switzerland over the next two years. This is mainly due to the weak momentum in the eurozone. Investments could be weak due to falling capacity utilization and higher financing costs. Private consumption will have a supportive effect, although the unemployment rate will rise slightly to 2.30% this year compared to 2.00% in 2023.

Inflation fell surprisingly sharply from 3.40% in February 2023 to 1.40% in November 2023. In response, the Swiss National Bank (SNB) left the key interest rate at 1.75% and adjusted its inflation forecast downwards. The SNB expects an inflation rate of 1.90% for 2024 and 1.60% for the following year. Inflation thus remains within the SNB's target of between 0.00% and 2.00%.

SECO economic forecast

GDP 2024:                         1.10%
Inflation 2024:                  1.90%(E)
SNB key interest rate:     1.75%

Our conclusion:

Switzerland's political stability and neutrality contribute to its economic strength. In 2024, important topics could include digitalization, EU relations, global tax regulations and environmental protection. At company level, the Swiss franc is no longer expected to weigh as heavily on profits as it did last year. The successful implementation of artificial intelligence will make innovative companies even more productive. The Swiss equity market is attractively valued.

Dino Marcesini, Partner

_{Sources: SECO, ZKB, IMF
As at: 15.01.2024}

Slight brightening of the economic outlook

Growth of 1.40% is forecast for 2024 in the European Union (EU), while a decline of around 0.50% is expected in Germany, influenced by political uncertainties. Specific interest rate forecasts for the first quarter of 2024 are unclear, but interest rates could remain stable until the middle of the year and fall towards the end of 2024. The unemployment rate in the EU is estimated at 6.40% for 2024, with an increase expected in Germany due to economic contraction. The Purchasing Managers Index (PMI) remains an important indicator, with a value above 50 signaling a positive economic situation. Profit and sales expectations of European companies depend on economic development, with possible dampening effects in the event of a weak recovery or stagnation. The Purchasing Managers' Index rose slightly to 44.4 points in December 2023. Political decisions, especially in energy policy and financial support measures, are having a significant impact on the European economy, particularly through the rise in energy prices and the resulting economic burdens.

Inflation in Europe is slightly rising on the rise again. In December, consumer prices rose by 2.90% compared to the previous month. In November, inflation was 2.40%. This is the first time that inflation has increased again after seven months of declines. However, core inflation, which excludes the volatile energy and food prices as well as alcohol and tobacco, fell to 3.40% in December after 3.60% in November. The European Central Bank's (ECB) medium-term target of a general inflation rate of 2.00% is receding somewhat into the distance again with the new data.

In December, the final seasonally adjusted HCOB Composite PMI was below the growth threshold of 50 points for the 7th month in a row and, at an unchanged 47.6 points, signaled that eurozone economic output had contracted moderately once again. In the third and fourth quarters of 2023, the index remained consistently below the 50-point mark.  Business activity, incoming orders and employment continued to decline, but the outlook is brightening. The business outlook within a year continued to recover from its recent September low and climbed to a 7-month high.

GDP growth 2024             +1.40% (E)
EU inflation 2024              +2.90% (E)
Current 3-month Euribor +3.93%

Our conclusion:

Leading indicators point to continued weak economic momentum in the eurozone in the first quarter of 2024, although industrial sentiment has remained stable. The economy is expected to stagnate in the first half of the year, followed by a recovery. Industry and private consumption are expected to provide slight growth impetus, supported by expected real wage growth and a robust labour market. The European Central Bank (ECB) has kept interest rates stable for the time being, but is probably planning interest rate cuts due to lower inflation and a weak economy. These could begin in June and September, followed by more in 2024. Despite the challenges, a positive trend on the European equity market is expected in Q2 due to an improved economic outlook and below-average valuations.

Daniel Beck, Member of the Executive Board

_{Sources: European Commission, Statista, HCOB, S&P Global
As at: 15.01.2024}

Dead cat rebound?

The GDPNow model of the Federal Reserve Bank of Atlanta forecasts growth in the US economy in Q4 2023 at 2.20% (in Q3 it was still at 4.90%). According to the last FOMC meeting on December 13, GDP growth is expected to flatten further to 1.40% in 2024.  

The US Composite PMI in December improved slightly by 0.20% to 50.9 points compared to the previous month, indicating a continued expansion of the US economy in 6 months. The service sector was responsible for the increase with 51.40 points (November 50.8), while the manufacturing sector weakened with 47.9 (November 49.4).  

Inflation rose by 0.30% to 3.40% in December compared to the previous month (3.20% was expected). Encouragingly, however, the Fed's much-watched core inflation rate (excluding energy and food) fell by 0.10% on the previous month to a 2.5-year low of 3.90% (3.80% was expected).

The Fed left the Fed Fund Rate unchanged at 5.25 - 5.50% at its December meeting. What was new, however, was the statement by its chairman Jerome Powell that the interest rate level does not need to be raised further due to the successes in the fight against inflation.

Despite the rebound in the inflation rate in December, the market now assumes an 80.00% probability that the Fed will cut interest rates by 0.25% for the first time as early as March (the Fed in July 2024). Even the rather strong labor market report in December with 216,000 new non-farm jobs created and the still low unemployment rate of 3.70% (unchanged from the previous month) did nothing to change this.

The companies represented in the S&P 500 Index are expected to report earnings growth of 1.60% in the fourth quarter of 2023. Once again, the actual earnings figures are expected to be higher due to the downward revision of earnings estimates in advance. Based on the earnings estimates for the next 12 months, the S&P 500 Index has a price/earnings ratio of 19.5. The 5-year average is 18.9 and the 10-year average is 17.6

GDP2024 (IMF):               +1.48% (E)
Inflation 2024 (IMF):        +2.76% (E)
Fed Fund Rate:                 +5.50%

Our conclusion: 

The US economy will cool down in 2024, but will remain on course for growth. Inflation will continue to weaken towards the Fed's target. The resulting interest rate cuts will have a positive impact on corporate earnings and provide a tailwind for equities.

Dr. Patrick Huser, CEO

_{Sources: Trading Economics, US Bureau of Labor Statistics, Statista, FuW, IMF World Economic Outlook October2023, FactSet, FMOC
As at: 15.01.2024}

Class not mass

China faces another challenging year as the real estate market continues to look bleak despite a more than two-year slowdown. While the government has taken measures to support real estate developers and boost demand, potential buyers remain hesitant for fear that the apartments they have already paid for will not be completed. This is leading to a continued decline in property sales and putting pressure on developers. A quick solution to this dilemma is not in sight. Consumer sentiment currently gives little cause for euphoria and growth is mainly being driven by fiscal stimuli in the form of infrastructure investment. At the same time, the central bank is ensuring sufficient liquidity. In order to counteract the slowdown in growth, a further reduction in key interest rates will probably be necessary in the second half of the year. Growth of only 5.00% is therefore expected for the coming year, which is the lowest figure since official measurements began, apart from the pandemic years.

In view of the weak economic momentum, price pressure will also be low in 2024. However, fears of deflation are exaggerated. According to the IMF, inflation will therefore only average 0.70%.

IMF Economic Forecast

GDP 2024:               5.00%
Inflation 2024:        1.70%
3 months Shibor:   2.53%

Our conclusion:

The government's top priority is to build a modern industrial system with scientific and technological innovation and increase domestic demand. The high-tech industry is to be expanded and old growth pillars such as speculative house building are to be replaced. The expansion of government spending is taking place very cautiously. Due to the major political risks and the anaemic economic momentum, equity investments in China are not recommended.

Dino Marcesini, Partner

_{Sources: Allianz, ZKB, IMF
As at: 15.01.2024}

Asia's driving force

Japan expects moderate economic growth in 2024 due to the slow recovery after the COVID-19 pandemic and low inflationary pressure. Core inflation was around 3.00% in 2023, and thus only just above the target value of 2.00%. The unemployment rate is low and wage increases could support growth. Interest rates remain unchanged for the time being as the Bank of Japan is sticking to its loose monetary policy. According to SSGA Economists, average inflation in Japan is expected to fall to 2.60% in 2024. This should allow the Bank of Japan to remain relatively cautious compared to other central banks.
Big companies are forecasting growth, supported by corporate reforms, a good capital situation and positive stock market performance. Capital expenditure is expected to rise, as is private consumer spending, while exports are growing and consumption by foreign tourists is recovering moderately. The Japanese government is planning economic measures such as tax cuts and support for households in order to increase consumption. Prime Minister Kishida is calling on companies to consider wage increases over and above price rises.

This economic environment is showing positive signs of recovery and growth, despite some of the challenges Japan is facing. However, these are more likely to be found outside Japan. 

IMF Economic Forecast

GDP 2024:                           1.00%
Inflation 2024:                     2.90%
3 months (JPY Libor):        -0.03%

Our conclusion:

Japanese equities are still trading below book value and remain underweighted in international portfolios. However, the stock market has already caught up in 2023. This raises the question of whether it is the right time to enter the market, despite the positive starting position.

Mimi Haas, Lic. rer.pol. HSG, M.A. in Banking and Finance HSG, Partner

_{Sources: IMF, FT, SSGA Economist and AI
As of: 15.01.2024}

Growth momentum despite interest rate restrictions

Although interest rates are extremely restrictive, growth prospects in the emerging markets have developed surprisingly well in 2023 and have even accelerated again recently. In the third quarter, growth rates were still below potential in many places, but the acceleration was broad-based. Economic activity in emerging economies is expected to gain further momentum in 2024, primarily as a result of monetary easing. The fall in inflation in the first half of the year gives central banks scope to cut interest rates, particularly in Asian economies. In countries that have already cut interest rates, monetary easing is likely to increase, particularly in Latin America and Eastern Europe. The cycle of interest rate cuts will become broader, peaking in the middle of the year and lasting for several quarters due to the high level of interest rates. Although some countries are still struggling with high inflation, a disinflationary trend is expected. This is likely to lead to higher real wages and a revival in consumption. In addition, important elections are imminent in several countries, making fiscal policy stimuli likely in advance and thus supporting the economy. Growth is increasingly shifting to emerging markets outside of China. Favorable demographic trends, supply chain diversification and global economic rebalancing are attracting investment in infrastructure in countries such as India, Vietnam and Indonesia.

Our conclusion:

Supported by monetary policy measures, expected disinflationary trends and upcoming fiscal stimulus, emerging markets are well positioned for continued growth. Equity valuations in Brazil, Mexico and India appear attractive.

Dino Marcesini, Partner

_{Sources: ZKB, IMF
As at: 15.01.2024}

Equilibrium restored?

The WTI oil price has moved in a rather narrow range between USD 70 and USD 80 per barrel in recent weeks. Doubts about continued production cuts by OPEC+ as well as higher US inventories have outweighed fears of a supply shortage due to the ongoing geopolitical tensions in the Middle East.

In the long term, a potential decline in demand for fossil fuels is expected, which could lead to lower oil prices in 10 years' time. However, the IEA is still forecasting an average Brent oil price of $73 per barrel in 2030 (currently at USD 78 per barrel).

‍Our conclusion: We expect WTI oil to move in a range between USD 70 and USD 80 per barrel.

Dr. Patrick Huser, CEO

_{Sources: F&W, MarketMap,International Energy Agency (IEA)
as at: 15.01.2024}