The German economy is performing better than expected and the UK economy is experiencing a cyclical recovery.
advertisementIn its latest World Economic Outlook, Deutsche Bank raised its forecast for euro zone gross domestic product (GDP) growth this year to 0.9% from 0.4%.
However, the report suggests this is more likely to be due to cyclical than structural reasons, leaving the bank's 2025 forecast for the euro area unchanged at 1.5%.
Regarding the euro area (the 20 EU member states that use the euro as their currency), the report said: “The inflation outlook remains broadly unchanged: firm with upside risks in 2024, and converging to the target in 2025, although the composition is somewhat less favourable for the ECB due to higher services inflation and lower core goods inflation.”
The risk is that the ECB will cut rates two times, rather than the three expected.
“We have revised our European Central Bank (ECB) outlook slightly more hawkish. Our baseline is for the ECB to deliver three quarter-point rate cuts in 2024. The risk is two cuts. We had previously forecast a 2% final ECB rate in Q1-2026.
“We are currently looking at a landing point of 2% to 2.5%. In any event, we see market pricing in 2025 as too hawkish. Lower inflation, fiscal tightening, trade and geopolitical uncertainty would all lead to a significant easing of monetary policy.”
For the U.S., the bank expects growth to be around 2.4% this year, at the high end of the consensus, and 2.2% next year, but the upcoming U.S. elections could still pose volatility risks to markets.
China's growth predicted to slow
For China, the bank raised its growth forecast for the country to 5.2% in April, mainly due to higher government spending and rising exports. But China's growth is now expected to slow to 4.5% next year as the housing market succumbs to a supply surge.
As for Japan, Deutsche Bank believes the Bank of Japan could raise interest rates to 1% by the first quarter of 2026.
India too is expected to see continued growth over the next few years, with nominal GDP rising to 10-11% and real GDP rising to at least 6-6.5%.
Germany remains strong, UK economy on cyclical recovery track
The German economy began the year on a strong footing, buoyed by strong private household consumption and foreign trade, and this trend is expected to continue in the second quarter of the year.
However, declining investment and the lingering effects of the pandemic continue to weigh on consumer and business sentiment. The country's housing sector remains under pressure, with several projects canceled or put on hold during the pandemic and yet to resume. New orders have also struggled to pick up.
Germany's energy sector is also lagging behind due to a slow transition to renewable energy, an over-reliance on Russian oil and gas, and excessive bureaucracy. Additionally, Germany continues to face resistance to nuclear energy and urgently needs to ramp up other green energy sources.
The UK is currently in the midst of a cyclical recovery, with rising disposable income encouraging household spending. Deutsche Bank predicts that UK GDP is likely to rise by 0.8% in 2024 and 1.5% in 2025 and 2026.
The UK election being scheduled earlier than expected could reduce the previously expected months of volatility and uncertainty and lead to market stability in the short to medium term.
