December 2023

Atradius Economic Outlook

Tightening
weighing inContents
Contents

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Executive summary

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Global Outlook

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1.1 More resilience, for now
1.2 Slow, the best we can get
1.3 The slow growth assumptions
1.4 Creeping trade growth
1.5 Fossil fuel prices slide part two
1.6 Further easing commodity prices
1.7 Disinflation continues
1.8 Mild easing
1.9 A new reality for governments
1.10 An alternative scenario: higher for longer

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Advanced economies grappling with tight conditions

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2.1 Eurozone: sluggish growth
2.2 US economic resilience won’t last
2.3 UK growth to remain sluggish
2.4 Advanced Asia outlook remains muted

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Emerging market economies’ outlooks diverge

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3.1 Emerging Asia to shift to lower gear
3.2 Latin America is facing the lowest regional growth prospects in 2024
3.3 Eastern Europe outlook is bleak
3.4 Weak external backdrop increases domestic challenges in Africa

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Appendix: Macro economic forecasts – major markets

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Atradius Economic Research

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Executive summary
The global economy has proven more resilient than was
expected six months ago, but past monetary tightening isweighing on the outlook. Global growth in 2023 was revised
upwards mainly due to strong US consumer spending and therecovery of services after the pandemic. While inflation andmonetary policy rates have mostly peaked, the brunt of the
impact on consumer and business demand will be felt in 2024.
We think that GDP growth will weaken in 2024 as the impactof these factors wanes and monetary tightening weighs in.
Mild monetary easing will help support tepid growth in 2025.
Key points� The 2023 GDP forecast is better than was expected six months ago. Global GDP
growth is estimated to be 2.6% in 2023, an upward revision of 0.4% comparedto the July Economic Outlook. Growth is likely to dip to 2.1% in 2024. The
resilience of spending by the US consumer has reached its limits and the postpandemic recovery of services, especially of tourism and international travel, isalmost complete. Moreover, the full impact of monetary policy tightening is yet
to be felt. For 2025, we foresee growth to recover to 2.6%, as monetary policy
starts to ease and inflation has further declined. Growth, will however, remain
weak by historical standards.
� Inflation has clearly moved past its peak, with all major inflation components
in decline. The energy component has contributed negatively to headline
inflation in the US and eurozone in recent months. Moreover, the other inflation
components - food, services and goods – are also clearly losing momentum.
But core inflation, which excludes energy and food, is persistent, especiallyin the US. Still, as monetary tightening weighs on demand, headline and core
inflation are expected to come down. With the lower persistence of inflation,
the eurozone will be ahead with monetary easing.
� We forecast global trade growth to slow to 0.8% in 2023, from 3.0% in 2022.
Trade growth in 2023 is lower than previously expected as the ending of thezero Covid-19 policy in China did not generate the hoped-for boost to exports,
and the manufacturing sector is in recession, especially in Europe. For 2024 we
predict a recovery of trade growth to 2.5% as these factors wane. Our forecast
is in line with the observation that the relationship between trade growthand GDP growth has settled down to 1:1. Trade growth is constrained by risingprotectionism and geopolitical uncertainty.
� We estimate GDP growth across advanced markets to be 1.6% in 2023. The
impact of past monetary policy rate hikes is increasingly taking its toll, with
consumer and business senti ment low and a slowdown in demand expected.
Growth in 2024 is forecast to remain very restrained at 0.9%. For 2025, thegrowth picture looks slightly better. Falling inflation will improve consumerpurchasing power. Mild monetary easing will support growth as well.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

3� GDP growth in emerging market economies (EMEs) is expected to stay in alower gear at 4.2% in 2023 and 3.6% in 2024. This is due to weak external
demand and tightening global financing conditions. Beneath the headline
figures lies substantial heterogeneity. Emerging Asia is set to lead other regions
again, with India and China being the growth motors. Latin America, struggling
with structural weaknesses and political uncertainty, will lag other regions. The
growth outlook for 2025 is only slightly better across EMEs (3.9%).
� In our baseline scenario, inflation is expected to come down as monetary
tightening is able to remove the persistence in core inflation and there is no
new energy price shock. In our alternative scenario, things turn out worse.
Inflation is more persistent than expected, for example because consumers
continue spending or there is a new energy price rise. This will trigger further
tightening (instead of mild easing) by central banks. That will lead to a fall indemand from firms and households across both advanced markets and EMEs,
with significant negative effects on global growth.

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

GlobalOutlook

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

1.1 More resilience, for now
Weak resilience. Moving away from recession. That was
the picture of the global economy we depicted in our
July Economic Outlook. It was shaped by three factors.
First, and most prominently, expectations were related
to the reopening of China after the sudden reversal of thezero tolerance policy early in the year. Second, Europe
had weathered the energy price shock and the impactof sanctions related to the war in Ukraine rather well,
aided by government support. Firms proved flexible inadjusting production processes, dampening the impact of
the energy price rise. A mild winter helped as well. Third,
monetary policy tightening in the US did not bite as hardas feared. With unemployment staying at a record low, theUS consumer continued to spend from higher wages andaccumulated pandemic savings. This was despite inflationlevels not seen for decades.
But recessionary forces lingered. In response to the
inflation shock, monetary tightening had been very
aggressive and rapid, especially in the US. It was considered
unlikely that the full impact had been felt. This feeling wasunderscored by the default of Silicon Valley Bank in March.
The shockwave through the financial system could only becontained by massive intervention by the Fed and the US
government. Moreover, as inflation proved stickier thaninitially envisaged, the question was when the series of rate
hikes would peak. These effects reverberated in borrowing
costs for firms and households, which continued to rise.
Now, as we approach the end of 2023 and take stock of the
global economy again, we can report more resilience. Twoelements stand out. First and foremost economic activity
in the US held up better than expected. Again. In Q3 ofthis year the economy grew by no less than 5.2 q-o-q. It
appeared monetary tightening has not really started to bite.
Demand has held up. Consumers continued to spend, as
pandemic savings were not almost exhausted, as previously
thought. Many firms had issued long term debt whenrates were low, providing protection against the (much)higher current interest rates. Second, in 2023 the recoveryof services across the globe, so badly affected during the
pandemic as a result of lockdowns and infection fears,
further gained force. This process is now almost complete.
Tourism especially in Southern European countries, as well
as France and Mexico, has recovered to pre-pandemic levels,
or even above. International travel, particularly related
to tourism, is buoyant, with airlines reporting strong
performance during 2023.

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The US consumer and the services recovery have dominateda global economy, which has otherwise performed moreor less as we expected. China’s growth, after a strong
reopening start, slowed as weakness in the real estate
sector mounted, with homes not completed and investment
remaining low as confidence continued to decline. This,as well as elevated labour market uncertainty, with youth
unemployment reaching more than 20% this autumn, held
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

back strong consumption growth. Europe’s growth was
positively affected by the continued revival of tourism flows.
But its manufacturing sector, especially in Germany, soured.
Still grappling with higher energy costs, it increasingly
faces the impact of higher borrowing costs and tighter
credit conditions that come with monetary tightening by
the ECB.
The upshot is that the global economy is in now insomewhat better shape compared to July. Will this betterthan-expected scenario last? We think not. And we havegood reason to believe so. First and foremost, the resilienceof the spending by the US consumer has its limits. The
bottom of the deep pockets with accumulated savings fromthe pandemic stimulus by the US government is coming
into sight. Moreover, and even more importantly, the lagged
impact of monetary tightening is expected to kick in. That
weighs on the housing sector, putting a brake on prices,
creating negative wealth effects and constraining consumer
spending. Tightening hits firms as well, especially those
who have not locked in long term funding, thus facing
higher borrowing costs. That has an effect on investment
and will also lead to more bankruptcies, which is alreadyvisible now. As a result, the tight US labour market will
inevitably ease, as will income growth for workers. These
will then be even less inclined to go on a spending spree.
Second, as mentioned, the post pandemic recovery ofservices, especially of tourism and international travel, isalmost complete. Services will return to a more normal
growth path; its boost to GDP is running out. Meanwhile
manufacturing is not able to take over the growth baton
yet. With borrowing costs that have run up as a result oftightening, and demand from consumers weaker, firms
are hesitant to pace up production, let alone invest in new
production capacity.
Third, whereas households and firms are not likely to leadin pushing up growth, significant policy easing cannot be

Figure 1.1: Another spike in geopolitical risk

Source: Economic Policy Uncetainty, Macrobond

expected either. After a period of high inflation and core
inflation showing persistence, major central banks such as
the Fed and ECB are not in the mood to change track.
As some easing can be expected, the overall picture will be‘higher interest rates for longer’. Precisely this is anotherfactor that will restrain governments from stepping in. In
any case, fiscal consolidation is required after the pandemic
and the subsequent cost-of-living support programmes.
Indeed, public finances have weakened to levels where
even without significantly higher interest costs, spending
restraint would be needed.
Fourth, geopolitical concerns are mounting (figure 1.1). The
souring of the China - US relationship under the Trumpadministration was only a start. After that Russia started its
war in Ukraine. China showed its military muscle to Taiwan
to emphasise that the island should not get used to the ideaof independence. Most recently, the long lasting IsraeliPalestinian conflict saw another eruption with the potential
for proliferation, at least regionally. These conflicts add touncertainty in the global economy. Geopolitics have quickly
become a matter of concern for the global economy. In short,
we could be surprised on the upside again by GDP growth,
but for now we do not see where that would come from.

The positive trend in consumer confidence that we observedin July is reversing, or at least has peaked. In the US, theeurozone and China, we see no longer improvements in theindex (figure 1.2). Moreover, the indices are all moving below
100, the level that indicates spending restraints over the
next 12 months. For both the US and eurozone the ‘higher for
longer of interest rates’ are weighing in. That feeds back into
consumer sentiment, directly via interest costs for borrowers
such as those buying a house, and indirectly via wealtheffects for homeowners as well as asset portfolio holders.
This is insufficiently compensated by the lower level ofinflation, now that nominal income growth is diminishing
and accumulated pandemic savings are running out. For the
eurozone the persistently higher than pre-pandemic energy
cost, especially for gas, is another force at play. In China,
interest rates are still low, as is inflation, but the crisis in
the real estate sector has stamped its mark on confidence.
Homes paid for by future owners are not completed, as
property developers such as Country Garden are in financial
difficulties. Moreover, the labour market, especially its
younger segment, faces high unemployment figures anduncertainty about future job and income prospects. No
wonder the indicator for China, which plunged after a strong
recovery following the reopening, is so low now.

1.2 Slow, the best we can get
This picture of a US consumer who is running out of
firepower, a post-pandemic services recovery almost
ended, manufacturing firms unable to boost growth in
the face of high borrowing costs and governments pushed
back to get their house in order does not bode well for
GDP growth. Tightening is weighing in. Slow growth is thebest that we can get. That is indeed what we expect overthe forecast horizon. More precisely, whilst in 2023 global
growth has shown some persistence, it will slow in 2024.
In 2025 a mild acceleration can be expected, on the back ofsome monetary policy easing and the impact of previous
tightening waning. Sentiment indicators offer support forthis subdued view.

Figure 1.2: Wobbly consumer confidence

Figure 1.3: Waning services confidence

Source: OECD, Macrobond

Source: S&P Global, Macrobond

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Figure 1.4: Slump in manufacturingconfidence continues

Figure 1.5: Upward forecast
adjustments

Source: S&P Global, Macrobond

Source: Oxford Economics, AtradiusBusiness sentiment indicators are slightly more positive,
but are sliding as well. Services PMIs have declined for all
regions since the summer, and for the eurozone are evenbelow the level of 50 that signals growth (figure 1.3). The
slide partly reflects the return to normal after the pandemic
recovery. The consumer’s appetite for services after the
pandemic, particularly for tourism and travel is waning. That
weak demand drags down demand for services, reducing theservices PMI in that region, much more markedly than in the
US and China. Moreover, demand in the manufacturing sector
remains weak, especially in the eurozone. US manufacturing
PMI has fluctuated around the 50 level since the beginning of
the year, without clear direction. The Chinese manufacturing
PMI has gone up since the summer and has now reached aneutral level (figure 1.4).

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2.6% for 2023 and 2.1% for 2024 underscore that. Eurozone
growth, in particular, remains very weak at around 0.6%.
Weakness also holds for the US, especially in 2024 as the full
impact of tightening is felt and fiscal consolidation kicks in.
Meanwhile, the cart horse of the global economy of the past
decade, Emerging Asia, is showing some weakening now that
China’s growth is under pressure. A growth figure of 4.5% forboth 2023 and 2024 is relatively weak, considering that the
2010-2019 average amounted to 7.2%. Some support for the
global economy comes from Eastern Europe, where growthis expected to be at around 2.2%. For 2025 the picture issomewhat better, especially for the eurozone when the impact
of monetary tightening will have worked its way through theeconomy and some easing starts to benefit activity.

Figure 1.5 reflects the forecast revisions for 2023 and 2024
since the July Outlook. For 2023 the stronger resilience isreflected in an overall upward revision of 0.4 percentage
points (ppt). The far stronger US economy shows up in the 1.1
ppt upward revision. The other upward revision is for Eastern
Europe (1.3 ppt), where the Russian and Turkish economies
perform better than previously expected. Latin America also
performs better (0.7 ppt), with Mexico benefitting from thestronger US economy. The eurozone figure is more or lessin line with our expectations in July (-0.1 ppt). These figures
are not expected to hold up for 2024, and the global economy
is forecast to grow 0.1 ppt less than forecast in July. The US
economy is now expected to grow 0.8 ppt faster. The eurozone
faces a significant downward forecast adjustment, by 0.6
ppt. Emerging Asia is reduced downward as well, by 0.3 ppt,
largely reflecting the impact of lower growth in China (0.3ppt). All the same, over the two year revision period, theseadjustments imply an overall improvement for the global
economy, and the US in particular.

Table 1.1: Slow growth in numbers

Whereas the revisions are slightly upward, they are
insufficient to be jubilant about the growth numbers. The
picture of sluggishness persists. Overall GDP growth ofSource: Oxford Economics, Atradius

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

1.3 The slow growth assumptions
Our slow growth forecast hinges on a number of assumptions.
These are changing only gradually, implying the attentive
reader may recognise quite a few of them from the July
Economic Outlook.
First, the pandemic is history. It was formally declared
over earlier in the year by the World Health Organisation(WHO). China’s ‘zero Covid tolerance’ policy is long gone.
Supply chain tensions have abated, as have price pressure
on transport and related highs in goods prices. They will not
return. A resurgence of the virus, or any other, will not lead to
lockdowns or a repeat of the impact on society.
Second, restrictions on spending on services during the
pandemic, combined with government support, especially in
the US, have led to excess savings. These were in the rangeof 5.1% to 9.2% of GDP for the advanced economies by the endof 20221. For the US, 4% of GDP of USD 1 trillion, is still left2.
For the eurozone a similar amount is available3. We assume
that there is only very mild remaining spending from theseexcess savings. This is because the bulk of the savings arein the higher income groups, saving is currently being
stimulated by higher interest rates, and uncertainty triggers
precautionary buffers.
Third, pandemic support programmes by governments
will have all ended by the end of this year. As some support
programmes to alleviate the cost-of-living crisis were put inplace, fiscal consolidation was slowed. But given the pressure
on public finances, including government debt ratios thatthe pandemic support generated, fiscal consolidation isinevitable. Remaining support programmes will be scaled
back as energy prices have come down. The higher interest
rates provide an additional stimulus for that. Nevertheless,as compared to the previous decade, we expect governments
to play a more active role in supporting the economy. Moreparticularly, governments are expected to be pro-active inthe energy transition, as exemplified by large initiatives suchas the Inflation Reduction Act in the US and the Green deal in
the EU.
Fourth, as the sources of inflation, such as supply chain
tensions, rising energy and food prices and excess demand
as a result of government support programmes during
the pandemic have evaporated, inflation will inevitably
come down. This is reinforced by the rigorous tighteningof monetary policy by the Fed, the ECB and other central
banks to bring back inflation to the 2% target. We also see
no vicious wage price spiral developing now that wage rises
are contained, helped by the inflation expectations thathave remained around the central bank target. Reaching the
inflation target is expected well into 2024 or perhaps laterand varies per country.
Fifth, central banks have shown a strong commitment
towards bringing inflation back to target and are expected tocontinue to do so. Given that inflation has peaked amid thecurrent relatively high level of interest rates, there will bevery limited rate hikes in store. The question is when easingof monetary policy can be expected. We think that will beover the course of 2024, when the impact of past tightening
is really felt and, especially the US and eurozone economies,
slow significantly. Meanwhile, the gradual reduction of thebalance sheets of central banks, through redemption ofbonds purchased during the crisis, will continue.
Sixth, we assume geopolitical tensions remain contained, but
the negative impact will largely persist. China is expected tooccasionally bark but not bite Taiwan, in the sense that it will
not invade the island. An invasion would further complicate
the relationship with the US, in particular in trade. The
Israeli-Palestinian conflict is thought unlikely to spread intoa regional conflict, or even worse. The economic damage
will therefore be largely for the parties involved, withlimited global economic implications4. The military conflictin Ukraine seems to be turning into a stalemate on thebattlefield. But a ceasefire, let alone a peace deal seems far
off. Similarly, a reduction of the tensions between the US, UK
and EU and Russia is not on the cards. Sanctions will remainin place, even well beyond any conclusion of the conflict.
Therefore upward pressure on energy and food prices is
expected to last. But not to the extent that prices spike. Gas
rationing in Europe is off the cards as the tanks are wellfilled and there is sufficient LNG capacity.
Seventh, with the geopolitical tensions, the risk of
deglobalisation has gone up. US-China tensions have noteased, and the EU has also shown a more realistic approach
towards China. The Russian war has effectively cut off Russia
from normal relationships with the advanced economies.
Apart from that de facto piece of deglobalisation we don’t
envisage a break-down, rather a slowing or stabilisation ofthat process. The Trump-administration era trade tariffs
between China and the US are still in place, but no additions
have been made and we do not expect that to happen
over the forecast period. Still, the US has become far morereluctant, as has the EU, to share technological expertise with
China, especially when it relates to security. This erosionof globalisation is expected to last, amounting to a picture
where trade is continuing, albeit with impediments, anddecoupling in technology sharing.

1 See Oxford Economics. Excess savings can still deliver an upside surprise, May 10 2023.
2 See The Economist. Interest rates and the world economy, November 4th-10th 2023.
3 See Oxford Economics. Eurozone: Why excess savings are unlikely to fund a spending spree, May 3 2023.

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4 Such as a significant decline in the number of flights to and from the Middle East.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

1.4 Creeping trade growth
In our previous Outlook we argued that global trade growthfor 2023 warranted an upward revision, citing the economic
environment that proved less weak than expected5. Indeed,
we upgraded the forecast slightly from 1.5% to 1.9% for2023 and kept it at 2.5% for 2024. This was not only in linewith other forecasts, such as that of the WTO, but was also
corroborated by the new export order momentum index. The
latter had edged up markedly. Trade momentum itself was
also improving. The forecast was also brought in line withwhat we believe to be the relationship between GDP growth
and trade, 1:1. In brief, slightly better GDP growth was to bereflected in slightly better trade growth.
About six months on, it appears we cannot maintain thisforecast. With trade growth coming in y-o-y at -1.7% in
September 2023 and a momentum that became negative
again after a short revival during the summer, achieving 1.9%
growth is not realistic. More likely we end up at 0.8%, which
is our forecast for 2023. This implies a marked slowdown
compared to 2022 (3.0%). We take into account that thesecond half of 2022, which is the basis for calculating thesecond half of 2023, was very weak. This implies we canrely on the second half of 2023 being relatively strong. An
upward turn in trade momentum in Q3 as well as a recovery
into positive territory for new export orders corroborates thisview (see figure 1.6).
For 2023 the revision is downward; we keep the trade
growth figure for 2024 at the same level as in the July
Outlook6, 2.5%. This downward revision for 2023 seems
relatively mild. But it is more pronounced if one takes into
account that we have upgraded the 2023 GDP forecast by 0.4
ppt to 2.6%. The result is that the 1:1 relationship between

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GDP growth and trade growth breaks down in 2023. That is
temporary: we expect it to recover in 2024 and onwards.
Why is global trade so weak at the moment? Several
factors are at play. Firstly, the situation in China, as alreadydescribed above. The expectation, or perhaps hope, wasthat the end of the zero tolerance versus Covid-19 would
provide a boost to exports, and also imports. That is notexactly what we are seeing. Chinese confidence indicators
are lacklustre; especially consumer confidence is very low
compared to the US and the eurozone. Given the uncertainty
in the real estate market and the high unemployment rate,
especially for youth, Chinese consumers have remained
very reluctant to accelerate spending. Due to weak external
demand, export growth is also limited. Secondly, and thisrelates to the relatively low export demand from China,
manufacturing is in recession, especially in Europe. Thisis, as we have already mentioned, hitting German exports
in particular. Global GDP growth is led by services growth.
Services are far less trade intensive, and by nature notincluded in goods trade figures anyway. In other words,
if we want to stick to the context of the 1:1 relationshipbetween trade growth and GDP growth, GDP growth isperhaps inflated. Thirdly, monetary tightening plays
a role, and arguably has a larger impact than initially
expected. It impacts trade via several channels. The firstis via investments and related international capital goods
trade. Financing has quickly become more expensive
and more difficult to obtain, cutting off investments thatwere previously profitable. That affects trade negatively.
Not only financing of investments, but also trade finance(credit, insurance, guarantees) has become more expensive.
Moreover, its availability, on which 80% to 90% of global
trade relies, is on a downward trend, dropping at an

Figure 1.6: Trade momentum
improving modestly

Figure 1.7: Trade growth reverts
to GDP growth

Source: CPB, IHS Markit, Atradius

Source: CPB, Oxford Economics, Atradius, Macrobond

5 We discuss global merchandise trade, unless otherwise indicated.
6 Of course, this implies a lower level of trade in 2024 as well, due to the current lower growth (and thus lower trade level) in 2023.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

annual pace of 4%. That is starting to weigh in now that theavailability of finance in general is tightening. The otherimpact of tightening runs via the US dollar, which is used
as an invoice currency in the majority of trade transactions.
Because of the high interest on the US dollar, the currency
has appreciated. That makes it more expensive in local
currency terms, putting a brake on demand.
These factors, plus the China slowdown, the recession in
manufacturing and monetary tightening weigh heavily on
current trade. This is the case even more than envisaged in
the last part of 2022 and in 2023 so far. But these factors
will fade, albeit gradually. Chinese consumer demand will
improve; manufacturing will recover; and monetary policy
will be eased over the forecast horizon, though only mildly.
Then other, more positive, underlying developments inglobal trade can manifest themselves, justifying the morepositive outlook for 2024 and onwards.

Looking longer term, there are clear limitations for trade
growth. Firstly, geopolitical, developments such as theRussian war in Ukraine and the US-China tensions have led
to a drive to more regional trade relationships. This comeson top of the impact of the pandemic which has triggered
awareness at firms that clustering of the supply chain isvaluable in view of security of delivery. That reduces trade,and takes away the benefit of producing in a country thatis economically most attractive. Second, protectionism isclearly back. As the IMF reports in its Economic Outlook, in
2022 countries added almost 3,000 new trade restrictions,up from 1,000 in 2019. This is done by way of tariffs, suchas those still in place between the US and China. Moreover,following the US with the Inflation Reduction Act of USD 1
trillion, the EU and others have drafted extensive subsidies
programmes, especially to induce chip makers to produce
at home and drive the energy transition. These factors willclearly limit the potential of global trade.

The most obvious drop is the decline in trade costs (figure
1.8). Supply-chain stress that dominated the pandemic
has almost faded, with the supply chain pressure index
having reverted to normal levels. This index consists of
two elements: the delivery time for a good and the cost oftransport. Both have come down dramatically. The Harper
shipping cost index is almost at its 2019 level after a peakthat was 12 times higher. The other positive development
is the recovery in the semi-conductor and auto industries.
The sharp downturn in the semi-conductor industry, a key
factor in Asian trade weakness, seems to have bottomed
out. Auto exports have finally regained their pre-pandemic
levels now that shortages of components have eased. Even
aerospace exports have started to recover, although they
are still 10% below 2019 levels.

Figure 1.8: Supply chain pressuresback to normal

Source: Macrobond, Atradius

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

1.5 Fossil fuel prices slide part two
In our July Outlook we wrote that the slide in fossil fuelprices was about to halt. Fossil fuel prices had declined after
peaking following the Russian invasion in Ukraine in 2022
and then declined fairly rapidly. Subsequently some stability
was indeed observed. We now forecast that will be short lived
and the price decline will resume and continue in 2024 and2025, be it more gradually. Part two of the (gradual) slide ofoil, natural gas and coal prices will then start. Despite that,prices will remain relatively high over the forecast horizon.
This puts a brake on the contribution of energy prices to thedisinflation process (see below).
After the oil price peaked at USD 130 per barrel Brent in 2022
it moved towards the low end of the USD 70 to USD 90 range
in the early summer of 2023. Russian oil kept flowing to themarkets despite sanctions. Prices were predominantly driven
by expectations about economic growth. Then there was an
unexpected announcement by OPEC+ of a production cut
in June, after which prices started to rise again7. That is notexpected to last. Higher production, within and outside OPEC+,
and ongoing weak demand as the global economy weakens
will lead to resumption of the weakening of the price.
As to natural gas prices, the most prominent development
was in the European variant, which plunged in 2023 after theAugust 2022 peak of USD 70 per million btu, to below USD
10 in the early summer of this year. That reflected market
rebalancing after the termination of the delivery of Russian
gas to Europe. This autumn, the price edged up again after the
shutdown of a gas field off the Israeli coast, an explosion of aninterconnector in the Baltic Sea and concerns about escalationof the Israeli-Palestinian conflict. As the European gas tanks
are 90% filled and assuming a relatively mild winter as well
as no supply disruptions, prices are expected to resume theirdownward trend. For the Asian benchmark, which tracks

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the European price with less volatility, a similar picture isenvisaged. The US Henry Hub, in 2023 rather volatile, will
increase as export demand rises. Coal prices are expected to
decline. Demand is expected to weaken as coal continues tobe replaced in power generation and industrialisation, also
because alternative sources such as natural gas are cheaper.
Let us now look at these developments in more detail8.
Oil
In June, OPEC+ announced that voluntary production cuts,
initially due to expire by year end, would be extended
until December 2024. This was reconfirmed in November.
Moreover, a number of OPEC+ countries, including Saudi
Arabia and Russia, volunteered an additional cut of 2.2
million barrels per day in July. The implication is that OPEC+
now holds spare capacity of more than 5% of global demand.
Oil demand increased by 2.3 million barrels per day in Q1-Q3
of 2023, predominantly driven by China. Demand from thatcountry rose by 12% y-o-y despite the real estate constraints.
Chinese demand is driven by transportation activity, which
has continued to recover after the reopening. Oil consumption
in India also rose - by 4% - while demand in the advanced
economies was flat. Declines in Europe originated in the
weak manufacturing sector in particular. Demand fromthe US, where economic activity, especially transport, wasstrong, remained resilient. As to supply, Iran increased its
production to 3 million barrels per day, its highest level since
early 2019. Production and exports from Russia have been
relatively stable. But exports have shifted. Between 2021
and 2023 they increased by 40% to China, India and Turkey,
partially offsetting the 53% decrease to the EU, US, UK andadvanced Asian countries. The price cap of USD 60 per barrel
introduced in late 2022 to limit Russian war funding capacity
has not created significant disruptions. Russia is able to tradeoutside the cap by using a ‘shadow fleet’ of tankers.

Figure 1.9: Oil price slides

Figure 1.10: Natural gas prices on a plateau

Source: Macrobond

Source: IMF, Macrobond

7 OPEC+ contains the original OPEC countries plus Russia.
8 This part and the next lean on World Bank (2023) Commodity Markets Outlook: Under the Shadow of Geopolitical Risks.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Indeed, the Ural benchmark for Russian oil has been trading
at around USD 80 per barrel recently. The US, the world
largest producer, increased supply by 1.4 million barrels
per day until Q3 2023 y-o-y. About half of the increase went
to Europe and China. This occurred despite a decline in
the rig count. Ramping up production further quickly willmeet with supply constraints, such as cost rises. Meanwhile
oil inventories, while they decreased late in the summer,
remained adequate. In particular, commercial inventories
surged in early autumn. Governments’ stockpiles have yet
to be replenished after the sales in reaction to the price rises
following the Russian invasion. At the current price levels,
this is a slow process.
Our outlook of slowly sliding prices assumes a demandof about 102 million barrels per day for 2023 and a very
mild growth afterwards, by about 0.9 mb/d. This growth isexpected to come from Asia excluding China. Demand fromthe latter is expected to moderate as the economy slows andmoves towards consumption-led growth. In the advanced
economies, demand will slide somewhat in 2024 and ease
upwards as the economy gathers pace in 2025. The outlook
for production assumes no escalation of the conflict in the
Middle East. Production growth to meet higher demandis likely to come from non OPEC+ predominantly: the US
as well as, to a lesser extent, Brazil, Canada and Guyana.
OPEC+ production is expected to grow mildly, as we assume
Saudi Arabia will not extend its voluntary production cut
beyond year end 2023, while Russian production as well as
production from other OPEC+ members is expected to remain
stable. The consequence is that the oil market will come intoa surplus situation somewhere in 2024, leading to a rise in(commercial) inventories.
Natural gas
Lower natural gas prices led to some bounce-back inindustrial gas consumption in the first months of 2023 inEurope. Nevertheless, it was 9% y-o-y lower due to lower
consumption in the power sector, fuel switching, efficiency
gains and production cut-backs in the industrial sector. The
EU Gas Demand Reduction Plan provided support as well9.
In Asia- Pacific demand went up as China’s industrial andpower sectors increased demand; in India consumption was
higher, helped by lower gas prices. The power sector in the
US drove the mild increase in North America consumption.
On the supply side, Russia’s lower production and deliveries
were offset by increases in most other regions, notably the
US where production rose by 5% y-o-y. Russian production
is estimated to shrink by 8% in 2023, after a 12% decline in
2022. The pipeline exports drop to Europe was insufficiently
compensated by higher exports to China and Central
Asia. China increased production as part of the strategy toincrease energy security. The Middle East followed suit aspart of a strategy to gain market share in LNG.

Meanwhile, trade patterns have fundamentally changed
since the Russian invasion. There is more reliance on LNG
and also more price volatility. Japan imported a lot less (-13%in H1 2023), China a similar figure more (in the first ninemonths), and Europe 2.7% more. Exports from the US rose by
8%. With lower prices and plenty of supply, stocks are high.
In Europe 90% of the tanks were already filled in August; inthe US, levels were 5% higher than on average in September
and in Japan and Korea even 30% higher. Floating storage,
in vessels around the globe, is increasingly used.
The forecast assumes that demand for natural gas will
increase only mildly in 2024 and 2025, meaning below 2%.
In North America demand will decline by about 1%, whereas
in Europe it is expected to remain stable at 2023 levels. With
lower prices, industrial sector demand is expected to recover,just like residential demand, which will offset lower demand
from the power sector as renewable employment goes on.
Demand growth comes from China as well as the Middle
East and Africa. Production increases are foreseen in Russia
and the Middle East, while the US will continue expanding.
LNG trade is set grow further, helped by new US export
capacity coming on stream. East Asia and China will absorb
much of the increase. China’s imports are expected to double
until 2026 (versus 2022).
Coal
Coal demand and consumption growth are decelerating
quickly after a record 2022, and to very mild levels (1.5% in
H1 2023). Coal is substituted by gas in power generation andstorage levels are high. Consumption is still rising in China
and India, but falling in the US and EU. Production increasedin China and India, as well as in Indonesia. This picture is
expected to continue over the forecast horizon. As a result,global consumption will plateau during that period. India,
China and Indonesia are expected to extend their position as
global production leaders.
1.6 Further easing commodity prices
The underlying downward pressure on commodity prices
we reported in the July Outlook, largely normalisation
following the shock of the Russian invasion, has not further
imposed itself since. Prices of base metals, such as copperand iron ore, have broadly moved sidewards as the economy
turned out more resilient and ample supply was available.
As we have seen in this Outlook, economic resilience is notexpected to last. It implies that prices are forecast to weakenover the forecast horizon, despite the additional demand
coming from the energy transition for some metals, suchas copper. For food prices there is an underlying downward
trend as well, based on rapidly growing crop yields andincreased trading of production. Barring new shocks, thiswill become manifest in 2024 and 2025.

9 The plan for best practices and guidance by the EU is set to reduce gas consumption by 15% from August 2022 to March 2024.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

13

Figure 1.11: Easing basic metal prices

Figure 1.12: Some relief for food prices

Source: Macrobond

Source: Macrobond

MetalsWeak demand for metals and steel predominantly
originated in China, which consumes about 60% of the
global supply. Chinese growth sputtered over the summer
with the property and construction sectors in particularremaining weak. Measures by the authorities such as
easing monetary policy and less stringent home purchasing
restrictions should provide support in the remainder ofthe year and onwards. But demand in the country willremain subdued. High borrowing costs as a result ofmonetary tightening as well as ongoing weakness in the
manufacturing sector will do the same for demand in therest of the world. Moreover, supply of metals is increasing.
As steel demand in China rose after the summer, so did
demand for its major input, iron ore. Iron prices rose in
Q3 2023, be it mildly. This impetus will fade in Q4 as steel
demand will face a seasonal fall, reinforced by government
measures to improve air quality. The weak property andconstruction sectors play a prominent role. Meanwhile
ore exports from Australia, Brazil and India and China arerising, partly substituting Chinese production. The risingcost of steel scrap comes into play here as well, creating
additional demand for iron ore and thus providing someprice support. This does not fundamentally change thepicture of weak demand. China will continue to steer awayfrom construction and property sector led growth. Add
supply expansion, as new mines in Africa, Australia andBrazil come in operation and the expected picture of falling
prices in 2024 and 2025 is clear.

14

The copper price is partly driven by the same factors as
those for steel and iron ore. The weakness in the Chinese
property and real estate sectors plays an important role.
This is similar to the manufacturing slump in the rest of
the world. But in contrast to other metals, copper is a major
beneficiary from the rising demand for clean technologies,
including the development of charging capacity for electricvehicles. This reins in the price decline. In 2023 so far there
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

was additional support from outages in Chile, China andIndonesia as well. It resulted in prices that broadly moved
sidewards. That will not last, as the outages are temporary
and new capacity is to come on stream, later in 2023 and in
2024, in Chile, the Democratic Republic of Congo, Indonesia,
Peru, Russia and Uzbekistan. Prices are therefore set tofall in 2024. As the energy transition gathers pace andeconomic weakness fades, in 2025, prices are expected torecover.
Food
The Grains Index significantly eased over the summer,
although it remains 20% higher than the 2015-2019 average.
Russia’s withdrawal from the Black Sea Grain Initiative did
not prevent an impact of improved supply. Ukraine had agood harvest this year. Shipments via the Danube River
continued to flow, despite Russian attacks. The Oils andMeals index slid as well, driven by higher-than-expected
production in Russia and Ukraine and low demand from thelivestock sector. The Other Food Price Index, which includes
sugar, meat and fruits was volatile at the pre-summer level.
Several factors played a role, including lower chicken andbeef prices due to falling grain and transport costs. Overthe forecast horizon, all food indices are expected to fall,though only mildly, especially for the Other Foods Index.
This is predicated on good harvest conditions, such as inArgentina, Brazil and the US for grains outweighing theimpact of El Nino and India’s export restrictions on sugar.
That dependency highlights the level of uncertainty of foodprice forecasting.

1.7 Disinflation continues
The weak growth picture, high financing costs and the
downward trend in prices of energy, commodities andfood, suggest downward pressure on inflation. That isindeed what we are seeing and will continue to see in theremainder of the year and beyond. It is a worldwide trend,
but the speed of the process differs per economy. That
divergence hinges not so much on the drivers of inflation,
which are broadly similar, but rather on the impact ofthese drivers. These differ. We will elaborate on that point
below, after taking stock of the developments since ourJuly Outlook. In the latter context, we see the following
picture. We focus on the US and the eurozone; the emerging
economies will be discussed in Chapter 2.

Figure 1.14: Eurozone energy inflation negative

Source: Macrobond

Inflation in the US peaked in June 2022 at 9.1%. Since thenit embarked on a downward trajectory, reaching a low
of 3% in June this year. After that it started to rise mildly
and then moved downwards again, to 3.1% in November.
Core inflation, which strips out energy and food from theheadline, peaked in September 2023 at 6.6% and moved
on a downward trend as well, to 4% in November. Core
inflation is therefore higher than headline inflation. Thisis because energy prices have been declining since March
this year, now even reaching energy deflation (price declineof 5.4% in November) which disinflates the headline figure.
Food inflation declined as well but remained positive,
falling from 10.6% in November 2022 to 2.9% now.
For the eurozone the picture is somewhat different.
Inflation peaked higher, at 10.6% in October 2022 but alsocame down more quickly than in the US. In November 2023,
the figure stood at 2.4%, below the US. Core inflation has
climbed more slowly than in the US, reaching a lower peakat 5.7% in 2023 as well. Declining energy inflation plays
a prominent role in this difference between headline andcore inflation, and even far more markedly than in the US.
Both energy and food inflation have declined rapidly in the
eurozone since the start of the year.

In brief, headline inflation rose later in the eurozone, peaked
higher and is coming down more quickly. Core inflation in
the eurozone even rose a lot later, peaked markedly lower
and is now already coming down as well. What is this?
To understand this situation better, we first identify four
factors that have driven inflation generally over the past
2021-2023 period. Firstly, there were lockdowns andshutdowns of production facilities during the pandemic
amid strong consumer demand for goods. This was due
to services, such as travel and hospitality, not being
available during the lockdowns. This global supplydemand imbalance caused supply-chain strains, reflectedin stretched delivery times and mounting transport costs
for durable goods such as cars and electronics. That in turnpushed up goods inflation.
Secondly, the Russian invasion of Ukraine triggered energy,
commodity and food price spikes, generating another push
to inflation. The effect was direct, simply because energy
and food prices are components of headline inflation.

Figure 1.13: Persistent core inflation in the US

Figure 1.15: Wage growth contained

Source: US BLS, Atradius, Macrobond

Source: Federal Reserve, ECB

15
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Moreover, a spillover effect occurred to core inflation.
This effect runs via increased input costs for sectors thatare sensitive to energy prices, such as travel and hospitality(e.g. hotels and restaurants). These, supported by strong
demand after the pandemic, have passed on higher input
costs to consumers. That pushes up core inflation10. Thirdly,
and this is perhaps a less well known factor, local supplydemand imbalances were given an additional boost bygovernment support during the pandemic. This createdexcess savings that were gradually being unwound after
the pandemic. This additional demand met constrained
supply, also because in countries such as the US, labour
market participation had declined. The resulting tightlabour market pushed up wages as firms struggled to findstaff, reflected in a vacancy rate (vacancies as percentageof employment) far above average. Higher wages were also
passed on to clients - a variant of inflation called wage
inflation. This factor played a predominant role in the
US (figure 1.15). Fourthly, whereas inflation expectations
remained well anchored to the 2% central bank targets, they
did edge up somewhat, especially in the short run. This has
most likely driven up inflation as well, although perhaps
only mildly (figures 1.16 and 1.17).
Now, with this in mind we can take the next step. What does
this analysis tell us about the disinflation process over theforecast period? The global supply-demand imbalance is
no longer playing a significant role and can be disregarded.
This does not hold for the stronger local supply demand
imbalance in the US. That is more persistent than in the
eurozone. This means it will take more time (and effort
by the Fed) for inflation, especially core inflation, to comedown. In the eurozone, inflation is coming down because
energy and commodity price are declining, or are at least
stable. The impact is soon felt directly on inflation and witha certain lag indirectly via core inflation. In short, inflation
can be expected to come down, towards the mandate levels
of 2%. But it will take more time and effect in the US. We are
not there yet (figure 1.18).

Figure 1.16: Inflation expectationsin the US edged up

Source: Federal Reserve Bank of Cleveland, Macrobond

Figure 1.17: Inflation expectationsin the eurozone contained

Source: ECB, Macrobond

Figure 1.18: Disinflation ends in 2024

Source: Oxford Economics, Macrobond

16

10 Oxford Economics estimates that this direct effect has added 1ppt to core inflation in the eurozone in the first part of 2023, with persistencein the remainder of the year. See Oxford Economics, Lower inflation will allow rates to fall faster in EA than US/UK, November 14 2023.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

1.8 Mild easing
The picture sketched in this Outlook so far is one of a
weak global economy, where disinflation is ongoing withsome persistency in core inflation, especially in the US. It
raises the question how we view the current - and future- monetary policy stance. Is current monetary tightening
accurate? Or should we expect more tightening? When
does easing come into play? Answers to these question are
invariably economy-specific. We focus on the US and the
eurozone. Details on the emerging economies policy areprovided in chapter 3.
Let us first take stock of the developments since the July
Outlook. It is clear that aggressive monetary tightening, inthe form of accelerated rate hikes, has stopped. The Fed
had raised its policy rate from 0.25% in March 2022 to 5.5%
in August 2023. That is 5.25 ppt in period of just under ayear and a half. No further hikes, and also no clear forward
guidance of the financial market as to a next one. Unless
one considers the message that every option is open. Any
further step depends on incoming data regarding variables
such as inflation, core inflation and the labour market. The
ECB started hiking later, in July 2022. Its approach was
also aggressive, though slightly less so compared to theFed. The official rate went up from 0 to 4.0% a year later.
After that, two other steps followed, to 4.5%, with the latest
taken in September. In October, the ECB kept its policy
rates unchanged. As to any further steps, like the Fed, the
ECB has also indicated that this is data dependent, and has
given no forward guidance either.
The other leg of tightening, reduction of the balance sheet
inflated during the pandemic, i.e. quantitative tightening(QT), is continuing. The Fed is taking a passive stance here,
by not reinvesting any portion of maturing assets. This is to
avoid liquidity issues in a system that has been awash withliquidity for more than a decade. The balance sheet has
shrunk from a peak of USD 8.95 trillion in late spring 2022
to USD 8.14 trillion in October this year. The ECB is acting
more quickly here, as it has fewer concerns about liquidity
in the system. It has brought back the balance sheet fromEUR 8.6 trillion to EUR 7.2 trillion since the summer of2022. Banks paid back amounts under the long term
financing operations (LTROs), and reinvestment under the
Asset Purchase Program was ended. Flexibility is being
maintained though, by partially reinvesting under the
Pandemic Emergency Purchase Program until the end of2024 as well as staying with the Transmission Protection
Programme11.

Figure 1.19: What steep hiking looks like

Source: Macrobond

Figure 1.20: Quantitative tightening pushed on

Source: Macrobond

In brief, both the Fed and ECB have tightened their policy,
the Fed arguably slightly more aggressively and ending up
at a higher level of interest rates. This means both central
banks are now in a contractionary policy stance. Both the
Fed and the ECB are currently restricting demand andtherefore economic growth - the ECB even more so12. Thisis taking place against the background of higher growthin the US, and inflation, particularly core inflation, that ismore persistent. That suggests that, looking at the forecasthorizon, further steps in tightening are more likely in
the US than in the eurozone. The flipside of this is thateasing of monetary policy is likely to happen earlier inthe eurozone. Eurozone growth is much slower and thedevelopment of inflation as well as core inflation seem tobe on track to allow it.

11 The latter programme can be used in the case of what is considered (by the ECB) to be unjustified market fragmentation, such asa sudden rise in the yields of Italian government bonds, for example.
12 One comes to this view by calculating the real interest rate, which is the actual policy rate minus (one year) inflation expectation andcomparing this to the so-called natural rate of interest. The latter was discussed in Box 1 of the July Outlook. We calculate the US realinterest rate 2.7% against a natural rate on interest of 1%, suggesting a restrictive monetary policy stance. For the eurozone this figure is
2.5% against 0% natural rate (an estimate based on Germany and France), thus even more restrictive.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

17

While this conclusion seems to provide a clear view onpolicy, this is not the case. There are several reasons forthis. First, there is a high level of uncertainty surrounding
the disinflation process as such. For example, it is uncertain
when and to what extent the indirect effects of lower energy
and commodity prices will manifest themselves in lower
core inflation in the eurozone. Second, lagged effects ofpast tightening may not have worked their way throughthe economy. Moreover, the impact may be different for the
US and eurozone. If the impact is greater in the US, it may
offset or even outweigh the seemingly more easy stanceof the Fed13. Third, and very importantly, central banks’credibility is at stake. When inflation rose, they arguably
acted rather late with their hikes and QT. With this highlevel of uncertainty, they now want to avoid erring again.
Or at least to be seen to err. The policy seems to be to holdoff with further action until the data provide more certainty
as to what course to take. The implication of this is that we
can expect interest rates to remain elevated, and that thesteps towards easing, in the case of the US, potentially after
another hike, will be small.
1.9 A new reality for governments
The picture sketched so far is one of low growth, declining
inflation and interest rates that remain higher for longer. This
raises the question whether governments can use fiscal policy,
to help support the slow economy. The overall picture that weelaborate on below is that it can be done and is being done. But
the days of big spending are over. Governments are facing a
new reality.
Let us start with the advanced economies. The significant
support packages in reaction to the pandemic, especially in theUS, helped push up inflation as we have seen. The energy andcommodity price rises provided further impetus, triggering
the second round of government support, especially in the
eurozone and the UK. This support pales compared to thatprovided during the pandemic. But it is sizeable nevertheless,costing an estimated 0.8% of GDP in the median OECDeconomy and 2% of GDP in several European countries, suchas Poland and Germany14. This support, started in 2022, will
be largely phased out during this year and 2024 as energy
and commodity, especially food, prices come down. After that,government support packages will therefore no longer push
up inflation, or constrain the disinflation process

Figure 1.21: Government stimulus still there

Source: Oxford Economics, Macrobond

This does not mean governments will stop supporting the
economy. To evaluate this, we consider the government
structural balance as a percentage of potential GDP15 16.
With the exception of Germany that economic variable wasnegative before the pandemic and the Russian war shock17.
This means the economy was already being stimulated by thegovernment’s fiscal policy. Particularly in the US, the level ofstimulus was high with a structural deficit of above 5%. The
two shocks brought the impetus to another level, roughly
doubling it in the US and France, and even higher in countries
such as Italy, Spain and the UK.
Now, with the support packages related to the shocks
expiring, the stimulus will be reduced as well over theforecast period. But to what level? That is very relevant
because GDP growth is rather weak. Then, what we forecast
here is not a return to the normality of the years before
the pandemic, but a rather somewhat more expansionary
government structural balance. This holds for Italy, theUK and, to a lesser extent, for the US. The latter country
will indeed return from an extremely expansionary, to an
expansionary fiscal policy. Even Germany will reverse its
contractionary policy and move, albeit very carefully (andthus at a very low level), to an expansionary stance. France
and Spain will return to what is more or less normal for thesecountries. The necessary support for the economies, therefore,
will continue over the forecast horizon (figure 1.21).

13 Reasons to believe that this impact in the US is greater are not spurious. We refer in this context to the argument made in the July Outlook that the banking turmoil
in the US of March this year and the restrictive stance in lending of US banks may indeed have had such an effect.
14 See ‘Fiscal support needs to be refocused’ OECD Economic Outlook, June 2023.
15 This effectively means that the government balance as well as GDP are adjusted for the business cycle and temporary revenues or expenditures.
For example, in 2013 Greece reported a 3.5% surplus of the adjusted government balance as a share of potential GDP (i.e. GDP at full capacity), meaning thatthe country’s fiscal stance was restrictive. See https://www.oecd-ilibrary.org/docserver/gov_glance-2015-9-en.pdf?expires=1701183355&id=id&accname=guest&checksum=A60A7E2A07CE0D9243AF057BF0CD7471
16 Note the difference with the reported government balance as a percentage of GDP. For the example of Greece in the previous note we see that the deficit was 12.3%
as a share of GDP. That is due to one-off factors related to the Greek bail-out in 2013 and the significant economic recession. In other words, due to temporary factors,

18

the government balance was much more negative, and GDP much lower than the respective structural balance and potential GDP.
17 Germany had structural surpluses of around 1% before the pandemic.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Figure 1.22: No ultralow interest rates anymore

Figure 1.23: Government debt remains highSource: Macrobond

Source: Oxford Economics, Macrobond

This support will be a balancing act because, as is thecase for households and firms, the resources available to
the government are not infinite. There are several factors
underpinning this new government reality. First andforemost, as we argue above, the era of ultralow interest
rates, debt for free, is over, at least for the foreseeable
future. Whereas during the pandemic governments wereable to write cheques for free or even at a positive yield,
since then, yields have sprung up (figure 1.22). Gradually,
this is going to weigh on government spending, as
refinancing of existing loans and bonds rise.
Secondly, as it is declining, inflation is no longer coming
to the rescue of governments. It did so in several ways.
Government debt exploded during the pandemic, but waseroded afterwards as inflation pushed up nominal GDP
and thus lowered the debt-to-GDP ratio18. The government
deficit in turn was positively affected because tax revenuesrose with nominal GDP and expenditure was largely fixed.
But now that inflation is fading, so are these positiveeffects for government finances. Worse, expenditure, suchas public sector wages, is on the rise in reaction to past
inflation.
Thirdly, and closely related to the first two points,
government debt-to-GDP ratios, though lower than theirpeak, are generally higher than prior to the pandemic.
And they remain high and will even move up mildly inmajor economies over the forecast horizon (figure 1.23).
For advanced economies, 90% is considered a benchmark.
Above that level, debt sustainability issues may kick in,especially if interest rates remain high. These reasons,higher for longer interest rates, the fading of inflation
benefits and the debt-to-GDP level, press home the message
of a new, harsher, reality for governments.

19

18 Debt remained constant so that the debt to GDP ratio declined.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

1.10 An alternative scenario: higher for longer
In the baseline scenario that we have described above, we
see inflation coming down towards the mandate values of
the central banks over the course of the forecast horizon.
Energy prices drop, or remain around current levels,
preventing an impetus to inflation revival. Underlying sucha world is that monetary tightening is able to remove thesupply-demand tensions especially in the US that keep core
inflation at a high level. Moreover, the conflict in the Middle
East is assumed not to escalate, meaning that energy
prices will continue to slide, or at least remain volatilearound current levels. In that scenario, central banks willbe allowed to provide support to the economy, albeit very
mild. As a result, borrowing costs will not rise further,
the number of non-performing loans at banks remains
contained and equity prices will recover further. Growth
will get some stimulus from monetary policy, especially in
2025 in our view.
Such a scenario is, of course based on assumptions - towhich we accord the highest probability. What if inflation
remains more persistent, fed by even more persistentcore inflation, in the US predominantly? That situation
could arise if the impact of the current high interest rate isoverestimated. Consumers continue spending, from theirincome or from the remaining excess savings accumulated
during the pandemic. Or energy prices may rise again as
result of renewed or potential escalation of the IsraeliPalestinian conflict, in which case inflation will be directly
and indirectly (via higher core inflation) pushed upwards.
This will fundamentally affect our scenario in the sensethat tightening is expected to weigh in even more heavily
and over a longer period. This is because central banks
will be obliged to raise interest rates further to fight the
new inflation rise. It is not too difficult to envisage what
will happen in that situation. Borrowing costs will notcome down over the forecast period. Banks will comeunder renewed pressure, with non-performing loans

Figure 1.24: Hit to growth in Higher
for Longer scenario

20

Source: Oxford Economics, Atradius

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

in sectors such as (residential) property rising quickly.
Their reluctance to finance firms and households will be
reinforced, credit conditions will tighten further. Equity
markets will fall, causing financing costs for firms to risehigher and households to face negative wealth effects fromtheir investments.
The ultimate result is a fall in demand from firms andhouseholds. Sentiment, especially that of households,
worsens and saving instead of spending occurs.
Governments will be constrained in their attempts tostimulate the economy. They will be even more constrained
as GDP is lower, as are tax revenues, as social spending
rises and the debt to GDP ratio is worse than expected. The
result is a protracted period of sub-par growth, with global
GDP only accruing at a pace of 1.5% in both 2024 and 2025.
By the end of that latter year, the world will be 2 ppt worse
off (figure 1.24).

Advanced economies grapplingwith tight conditions

21
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Activity across advanced economies is expected to slow
significantly from 2.6% in 2022, to 1.6% in 2023 and to 0.9%
in 2024 as the impact of past interest rate increases takes its
toll. Consumer resilience has brought 2023 estimated growth
0.6 percentage points higher than expected in July, led by
the upward revision for the US where we no longer expect
to see a recession. Consumer and business sentiment acrossadvanced economies is low and we anticipate the slowdown
in consumption in demand in 2024 to sufficiently bring down
inflation in the second half of the year. This should allow for
central banks to commence mild easing and support growthprospects for 2025 to a meagre 1.7%.
2.1 Eurozone: sluggish growth
The outlook for the eurozone economy continues to be
weak. The manufacturing sector struggles with subdued
foreign demand and tighter financial conditions that are
increasingly weighing on investment and consumer spending.
The services sector is also weakening further. This is mainly
because weaker industrial activity is spilling over to othersectors, the growth boost from the reopening after the
pandemic is fading and the impact of higher interest rates
is broadening. Our latest forecast is for GDP to expand by
0.5% in 2023, 0.1 percentage points lower than six months
ago. The eurozone growth forecast for 2024 was also revised
downwards, with GDP growth expected to come in at 0.6%,
0.6 percentage points below our expectation six months ago.
Growth was revised down for all the major economies in 2024
(figure 2.1), most notably in Germany.

Table 2.1: Real GDP growth (%)– advanced economies

Source: Oxford Economics, Atradius

Table 2.2: Real GDP growth (%) – eurozone

Figure 2.1: Negative growth revisions for 2024
Source: Oxford Economics, Atradius(-0.2%) and Austria (-0.6%). In Italy, there was a stagnation of
economic activity in Q3.

Source: Oxford Economics, Atradius

22

Recent data confirm that the eurozone economy has
stagnated since Q4 of 2022. Eurozone GDP decreased by 0.1%
in Q3 of 2023 according to the flash estimate. This followed
on a 0.2% quarter-on-quarter growth in Q2 and stagnationin Q1. In Q3 2023 there was growth in, for example, Belgium(0.5%), Spain (0.3%) and France (0.1%). However, in several
other eurozone economies there was a decline of economic
activity in Q3, such as Germany (-0.1%), the Netherlands
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Sentiment indicators draw a picture of continued economic
weakness in the near term. The European Sentiment
Indicator (ESI) improved slightly to 93.8 in November,from 93.5 in October. The ESI has been below the neutrallevel of 100 for 1.5 years now. The purchasing managers
index (PMI) improved slightly in November to 47.6, but
remains below the neutral level of 50. There remains a clear
distinction in the level of PMI between the services sector(48.7) and manufacturing (44.2). The manufacturing PMI isin clear recessionary territory, with new orders falling at anaccelerated pace and an ongoing depletion of order backlogs.
Weak manufacturing in the eurozone can be expected tolast well into 2024. Eurozone manufacturers, in particularGermany, are facing high borrowing costs and low external
demand (including from China). Moreover, they are also still
grappling with higher energy costs.

The services PMI performed well in the earlier months of2023, but went into reverse after that. In part, this reflects acooling of the spending on travel and recreation.
Net trade and investment contribute little to growth
Exports declined in 2023 and the outlook for 2024 is thatexport growth will remain low. The contribution of net
trade to GDP growth is expected to be very limited. Global
GDP growth slowed in the course of 2023, as the excess
savings accumulated during the pandemic began to
decline, the initial growth stimulus from the reopening of
the services sector diminished, and a sustained slowdown
in manufacturing occurred. Business investment growth
remains low due to monetary tightening, but it still
continues to increase. Strong corporate balance sheets
are helping businesses to make the transformation in thecontext of energy-saving and lower emission production.
Easing supply chain bottlenecks are also foreseen to support
investment. Infrastructure investment has also benefited
from public spending and not least by EU funding packages
such as REPowerEU. Housing investment is doing less well
as monetary tightening and high input costs are weighing on
this sector. Housing is expected to remain a drag on overall
investment growth, but this will gradually abate. This is apattern that is visible in all the major eurozone economies.
Consumption picks up again
We expect private consumption growth to pick up again
in 2024 and 2025, after meagre growth in 2023. Private
consumption remained stagnant in Q2 of 2023, after a small
increase in Q1. Unlike during the post-pandemic reopening,
consumption has not been a solid growth driver in 2023.
We expect a 0.5% consumption growth in the full year 2023.
Much of the consumption outlook hinges on the resilience ofthe labour market. Even though the employment indicatorof ESI declined through 2023, it remains in positive territory.
Nevertheless, consumption is set to remain the key growth
driver. Higher wages, continuing employment growth andfurther slowing of inflation are expected to result in positive
real gross disposable income growth in 2024 and 2025.
Therefore, we expect a more favourable consumption growth
figure in 2024 (0.9%) and 2025 (2.1%) compared to 2023.
The labour market remains tight, despite some recent
cooling. The latest unemployment figure (6.5% in October)is still very low. Labour market slack, which comprises all
people who have an unmet need for employment was ata new low of 13.2% of the extended labour force in Q2 of2023. The latest information from surveys points to somecooling of the labour market. In November, the Employment
Expectations Indicator declined compared to October, but
remained above its long-term average. Wage growth picked
up in 2023 as employees were trying to make up for lostpurchasing power. Negotiated wage growth increased
through 2023 to 4.7% in Q3, which is considerably higher
compared to Q4 2022 (3.1%). Wage growth is still negative
when adjusted for inflation (-0.2% in Q3 of 2023), much lessso than at the start of the year. Real wage growth may very
well turn positive in Q4 2023. We expect wage demands
to moderate in 2024 and 2025 as domestic demand andinflation are easing.
Inflation continues to drop
Inflation in the eurozone continued to decline through 2023,
primarily due to falling energy inflation and falling foodinflation. Inflation eased to 2.4% year-on-year in November,a 0.5 percentage point decline compared to previous month.
Core inflation went down by 0.6 percentage points to 3.6%.
The energy and food components of inflation are declining
rapidly thanks to favourable base effects, as the large priceincreases from last year are starting to drop out of annual
inflation numbers. But the components of core inflation –non-energy industrial goods and services – likewise started
to decline in recent months. Total (CPI) inflation is projected
to continue trending down. The average inflation rate in
2023 is projected to be 5.4%, followed by 1.8% in 2024.

Figure 2.2: Eurozone labour market
slack at new low

Figure 2.3: Ongoing disinflation
across inflation components

Source: Macrobond

Source: Macrobond

23
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Whether victory over inflation can be declared remains
to be seen. As one ECB board member recently remarked,
initial rapid declines of headline inflation after a periodof high inflation, often leads to “premature celebrations”19.
IMF research20 has shown that in about 90% of unresolved
inflation episodes, inflation declined materially within
the first three years after the initial shock, but theneither plateaued at an elevated level or accelerated
again. One reason is that base effects often turn frombeing a source of disinflation to becoming a renewed
headwind, as they operate in both directions. Anotherreason is that underlying price pressures can prove much
stickier than the more volatile components of inflation.
Monetary tightening is paused
The ECB governing council expects that interest rates
have reached levels that, if maintained long enough,will return inflation to target. Following a 25 bps policy
interest hike in September, the ECB kept its policy rates
unchanged in October. Since July 2022, it had increased
its key policy rates by 450 bps. The main refinancing
rate currently stands at 4.5%. This means the terminal
rate has been reached and that rates will remain stable
at the ECB’s upcoming meetings. October’s inflation
figure seems to confirm the ECB’s view that a pause ininterest rate increases is justified. Furthermore, thesize of the ECB balance sheet has continued to shrink.
Recent data show monetary tightening is having an effecton credit availability. The ECB’s Q4 bank lending survey
again pointed to a tightening of credit standards on
business loans (with the net percentage of banks reportinga tightening standing at 12%). Banks also reported a further
tightening of their credit standards for consumer credit andmortgage lending (net percentages of banks at 16% and 11%
respectively). Banks’ heightened risk perceptions and lower
risk tolerance continued to have the largest tightening
impact. Bank lending data are also weak, with bank lending
growth slowing to -0.3% for non-financial corporations and0.6% for households in October 2023.
Fiscal policy remains expansive
Fiscal policy expansionary, though budget deficits are
forecast to decline in 2024 and 2025. Adjusted for thebusiness cycle, the government deficit declined from 4.1%
in 2022 to 3.9% in 2023. This was underpinned by thephasing out of pandemic-related fiscal measures. On theother hand, there were still costs related to fiscal measures
to mitigate the energy crisis and the humanitarian crisis
following Russia’s invasion of Ukraine. The structural
deficit is projected to decline further to 2.2% in 2024 and2.0% in 2025.

24

The eurozone debt-to-GDP ratio declined slightly to 90%
in 2023 and is forecast to remain roughly at this level in
2024 and 2025. At the same time, there are several member
states with significantly higher debt, such as Italy (148%),
France (123%) and Greece (207%). Germany is the exception,with a 60% debt-to-GDP ratio. Although short-term debt
sustainability risks are limited, several member stateswith high government debt cannot afford to do nothing
about their budgetary policies in the long term. The 10 year
yields on government bonds have increased by some 3
percentage points in the major eurozone economies since
July 2021. This is going to lead to higher interest paymentsin the medium term. Inflation expectations do not explain
the jump in nominal yields. This could mean that either
equilibrium real interest rates have risen or financial
markets are counting on monetary policy to remain tight.

Figure 2.4: Credit standards are tightening

Source: ECB, Macrobond

Figure 2.5: Eurozone deficit
and debt remain highSource: Oxford Economics, Atradius

19 Keynote speech by Isabel Schnabel, Member of the Executive Board of the ECB, at the annual Homer Jones Memorial Lecture, St. Louis, 2 November 2023.
20 Ari, A. et al. (2023), “One Hundred Inflation Shocks: Seven Stylized Facts”, IMF Working Papers, No 2023/190, IMF, 15 September.

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

2.2 US economic resilience won’t last
The pace of economic growth in the US this year isunsustainable but a recession is no longer on the cards.
We expect the US economy to have grown 2.4% this year,
1.1 percentage points higher than forecast in July due toongoing consumer resilience. But the fates are turning: pastmonetary policy tightening and a cooling labour market arecatching up with an increasingly cash-strapped consumer
while the government’s fiscal stance turns restrictive. We
now expect GDP growth to slow sharply to 1.0% in 2024 andremain weak with 1.3% growth in 2025.

Figure 2.6: Explosive Q3 growth
unsustainable

The US economy far exceeded expectations in 2023, driven
by continued consumer resilience. In July, we expected thebusiness cycle to turn downwards in H2 2023, but growth
has proven resilient – even in the face of lingering inflationand lower consumer sentiment. With firm job creationand the unemployment rate now 3.7%, consumer spendingrose by 3.6% in Q3 compared to Q3 2022. This resilience isattributable to the tight labour market, residual pandemicera support and the USD 2.1 trillion of excess savings
accumulated during the pandemic.

higher prices. But overall, demand for most other forms ofcredit have also slowed which may further strain consumer
finances in 2024.

Historical data revisions released end-September fromthe US Bureau of Economic Analysis (BEA) show thatthe stock of excess savings has been drawn down more
gradually than previously estimated21. At the same time, US
households have been spending more of their disposable
income than previously thought. Consumers have also been
taking on more debt than ever before, with household debt
reaching an all-time high of USD 17.1 trillion in Q2 2023 –over USD 1 trillion of which is in credit card debt.

Healthy household balance sheets should ensure a softlanding though. Total household debt, while standing at alltime highs in nominal terms, is steady around 75% of GDP
as of Q2, compared to over 100% on the eve of the financial
crisis in 2008. The share of delinquent household debt
across nearly all categories remains relatively low. That is
especially the case for mortgages, home equity and student
loans. While delinquencies are beginning to tick up, it isfrom historically low levels.

Fixed investment on the other hand rose 1.3%, a sharp
downward shift from previous quarters. This is a signthat the economy is beginning to feel the impact of tightermonetary policy. Government spending is also boosting
economic growth with its contribution expanding in Q3
especially due to increases in defence spending. Inventories
also provided a surprise positive contribution to growth inQ3 but we expect this to be revised down.

In addition, the labour market is showing signs of softening
but from very tight conditions. The unemployment rate
is ticking up but remains near all-time lows. The pace ofjob creation has disappointed, in part due to major strikedisruptions, but it continues at historically robust rates.
Average hourly earnings rose 4.1% in October, down fromalmost 6% in early 2022 but remained above inflation. Whilethese indicators are moving in a challenging direction, theyremain far from recessionary territory. Combined withstronger household finances, this should all ensure theAmerican consumer on aggregate can withstand tighter
economic conditions more sustainably than in the past.

The tide will turn for the US consumer in 2024
US consumers have spent more than anticipated time andtime again in part thanks to substantial excess savings
accumulated during the pandemic. The BEA estimates that
the USD 430 billion of excess savings still in the economy
will be depleted in the first half of 2024. This means thebuffers that households have had to withstand higher
interest rates are dwindling. On top of this, the Covid-19
grace period for student loans just ended which means
households may need to cut back on spending to resume
those payments. Credit card debt has expanded rapidly, up
17% y-o-y in H1 2023, showing consumers are increasingly
dependent on credit to keep up spending in the face ofSource: Macrobond

The consumer outlook for the economy is still turning
gloomier amid higher prices. Despite the stronger
position of US households, consumer sentiment is turning
downward. Worsening consumer confidence mirrors an
uptick in consumer inflation expectations. Expectations
for one-year ahead increased from 3.4% over the summer
to 4% most recently. This comes despite the fact that overall
inflation declined to 3.2% in October, from its 9% peak inJune 2022. While prices may no longer be rising as much,

25

21 Data Revisions and Pandemic-Era Excess Savings | San Francisco Fed (frbsf.org)

ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

consumers are clearly concerned with the fact that average
consumer prices are 20% higher than they were at end-2019.
We expect the Federal Reserve to continue to look beyond
this sort of ‘noise’ and keep rates on hold. The Fed kept its
target policy rate unchanged between 5.25% and 5.5% in its
November meeting to give more time for the cumulative
525 basis point increase in interest rates to feed throughto the economy. There are signs that restrictive policy
is starting to be felt by the economy: credit quality forhouseholds is deteriorating, investment and hiring plans
are softening and bank lending standards continue totighten. These effects should increase through 2024 ashouseholds and corporates need to re-set fixed-rate debts.
Bond yields have begun decreasing as markets begin
to anticipate rate cuts, but the Fed is clear that it will
not consider cutting rates before the slowdown is more
entrenched. Thus we expect the Fed to maintain a hawkish
tone in the coming months to prevent undesired financial
easing and not make the first cut until Q3 2024.
Fiscal tightening is a major factor behind slowing economic
momentumFederal spending will remain elevated as some newinvestment programmes in infrastructure, climate change
mitigation and semiconductor manufacturing come into
effect. This can be seen in the still-elevated structural deficitof the US in figure 1.21 but overall the fiscal stance willtighten in 2024. This is partially due to the fading or reversalof several one-off spending boosts from the last fiscal years
related to the pandemic recovery. It’s also a result of spending
cuts agreed in the appropriations bill for fiscal-year 2024.
While this tightening isn’t so significant to spur a recession,
it’s another lever that will not help economic growth. A
downside risk remains that the Fiscal Responsibility Act
could be triggered at the start of 2024, unleashing automatic
spending cuts of 1% in Q2. With a split House and elections
coming up in November 2024, political gridlock will preventthe capacity to respond to any significant slowdowns.
Wide fiscal deficits, declining debt affordability and ongoing
political uncertainty are also dragging on US creditworthiness.
The United States lost its AAA-credit rating from Fitch inAugust; and Moody’s, the last major rating agency to assign
the US the highest AAA-rating lowered its outlook to negativein October. While the federal government remains capableof meeting its debt obligations, political uncertainty remains
high and the cost of borrowing will increase further in 2024.

26

2.3 UK growth to remain sluggish
The UK’s economic outlook remains weaker than other major
economies given its overreliance on private consumption andthe hit to export competitiveness from Brexit. The economy
has avoided contracting as we had expected six months
ago, but the lagged impact of tighter monetary policy andrestrictive fiscal policy is keeping growth sluggish at only
0.6% in 2023 and 0.4% in 2024.
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Figure 2.7: Rising consumer inflation
expectations despite relief

Source: University of Michigan, Macrobond

Figure 2.8: UK real wage growth finallyback in black

Source: UK ONS, Macrobond

The cost-of-living crisis has taken its toll on the UK economy
Britons have faced exceptional cost-of-living challenges
over the past years. Average weekly pay contracted for 18
consecutive months starting in December 2021. Wage growth
fell at record rates in 2022 as inflation reached an all-timehigh above 11%. As inflation has finally begun its steadydecline downward, there has been some relief for consumersin H2 2023 as real income growth has crossed back into theblack.
Underneath the steady deceleration in price growth though is
sticky core inflation. The drop in energy prices in particular
has helped rein in inflation to 4.6% in October, compared to
11.1% in October 2022. This offers some relief for consumers
and monetary policymakers but the underlying picture
is not sufficient for the Bank of England (BoE) to begin
considering lowering rates from the current 5.25%. The paceof disinflation is slower than in other advanced economies,
as the UK, like the US, has a very tight labour market and,like the eurozone, higher vulnerability to energy prices. Core
inflation, stripping out volatile items like housing and energy,
was still 5.7% in October, compared to 6.5% one year before.

Core services inflation remains especially concerning at
6.6%. Moreover, house prices have fallen year-on-year for
the first time in a decade, while rental costs are rising at arecord pace, which will increasingly weigh on household
confidence and wealth.
Lower demand to rein in inflation further in 2024, allowing
the BoE to keep rates on hold. Evidence is mounting that the
cost-of-living crisis and the gradual pass-through of higher
interest rates is a drag on domestic demand. Household
consumption fell 0.4% q-o-q in Q3 while investment
contracted 2%. The labour market is also showing signs ofcooling with the estimated unemployment rate standing at
4.2%, from 3.7% a year ago. We expect demand to continue
weakening but there are still challenges – namely sticky
core inflation and wage growth – that will prevent the BoEfrom cutting rates before H2 2024.
Fiscal policy to continue as drag on UK growth
Economic activity has also been strained by the end of
pandemic-era and energy-related stimulus packages fromthe past years. Besides these temporary measures, tax
increases and spending restraint have been prioritiesof the Sunak administration. The Office for Budget
Responsibility’s (OBR) updated inflation forecasts havebeen revised substantially up from their last estimatesin March – 7 percentage points higher in Q1 2028 to be
exact – which provides a boost to expected tax revenues.
This has allowed the Chancellor to announce in the Autumn
Statement a fiscal expansion of GBP 14.2 billion (0.5%of GDP) in 2024 to 2025. But with the net impact of past
tightening events and limited scope for policy change aheadof the 2024 elections, fiscal policy is estimated to exert an
overall drag of over 2% of GDP over the forecast period.
2.4 Advanced Asia outlook remains muted
The lacklustre growth experienced by Japan in recent
decades will continue in the coming two years. We expect
1.7% GDP growth in 2023 followed by 0.7% in 2024. This will
be supported by improving private consumption as well as
government policy that supports investment in strategic
industries. Inflation reached its peak in January 2023
(4.4%), before declining to 3.3% in October. Core inflation(excluding energy and fresh foods) remains elevated, butthere are signs it is nearing its peak. Core CPI slowed
slightly to 4.0% in October from its 4.3% peak in August,with non-fresh foods and durable goods prices easing.
With moderating CPI, we expect that real income willkeep recovering gradually. A dip in real incomes should belargely resolved by early 2024. Investment growth remains
constrained by high input costs and a soft recovery inexternal demand. The labour market remains strong, withthe latest unemployment figure at 2.5% (October 2023).
Export growth was lacklustre in 2023, with annual growthestimated to be 2.1%. Goods exports rose by declined by 3.0%
year-on-year in October. Global capital expenditures are

Figure 2.9: Japanese economic outlook
remains lacklustre

Source: Oxford Economics, Macrobond

hampered by high interest rates, and recent gains in auto
shipments are unlikely to last. Despite the government’s
desire to restore fiscal soundness, expansionary policy willremain necessary to supplement private-sector demand.
Defence spending will be stepped up in the coming years.
Public expenditure targeted at the private sector will aim toincentivise businesses to promote digitalisation and to invest
in research and development, particularly in important
industries such as semiconductors and renewable energy.
The government is also increasing social spending to support
childcare and encourage greater wage growth. This is likely
to lead to an elevated fiscal deficit of 5.1% of GDP in 2023,
with prospects of a somewhat lower deficit in 2024 (4.3%).
Economic activity in Australia and New Zealand is also
increasingly facing the impact of past monetary tightening.
Australian inflation stood at 5.4% in Q3, down from a peakof 7.8% last year, but still well above the Reserve Bank
of Australia’s (RBA) target range of 2% to 3%. Consumer
resilience and sticky services inflation prompted the RBA toresume hiking rates by 25 bps to 4.35% in November. It will
likely hike rates once more in the coming months before
ending the tightening cycle. With a very tight labour market,
sticky core inflation and higher-for-longer rates, we expect
GDP growth to slow from 1.9% in 2023 to 1.3% in 2024. Net
exports will also pose a small drag on GDP growth overthe forecast period due to economic challenges in China,
Australia’s largest overseas market.
New Zealand is a bit further than most other advanced
economies in its economic cycle. Its economy toed the lineof recession earlier this year as a result of tight financing
conditions and the impact of Cyclone Gabrielle. Inflation
eased to 5.6% in September 2023, down from a peak of 7.3%
in June 2022, giving the central bank (RBNZ) room to stop
its tightening cycle with the policy rate at a 15-year high of
5.5%. Policy will need to remain tight to keep inflation ona downward trajectory but growth will likely gather pacefrom 1.7% this year to 2.1% in 2024 and 2.8% in 2025.
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

27

Emerging market economies’
outlooks diverge

28
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

The outlook for emerging market economies (EMEs) is on
average stronger than that for advanced economies, but it
remains weak by historical standards. We expect GDP growth
to stay in a lower gear at 4.2% this year and 3.6% in 2024, due
to weak external demand and tightening global financing
conditions.Many EMEs continue to face spending pressures.
Ongoing geopolitical tensions may lead to further increases
in defence spending and fiscal support to address negative
effects from disruptions to international trade. Industrial
policies, including government subsidies, may also emerge
to foster import substitution. As interest rates are rising
globally, governments of EMEs face higher interest payments
which are expected to remain higher in the medium termcompared to pre-pandemic levels. Low-income countries inparticular may face debt sustainability issues.
Under the headline figures lies substantial heterogeneity.
Emerging Asia is set to lead other regions again in terms ofGDP, though growth is subdued in a historical perspective
due to external headwinds. Still, China and India areprojected to contribute jointly about half of world growth in2023 and 2024. Latin America, struggling with structural
weaknesses and political uncertainty, will lag other regions,especially in 2024. Only in MENA and Sub-Saharan Africa
will economic growth accelerate next year.
3.1 Emerging Asia to shift to lower gear
Growth in Emerging Asia is likely to have increased to
5.4% in 2023, before slowing to 4.5% in 2024 and 2025.
The economy in China is expected to expand by 5.2% in
2023 and 4.4% in 2024. GDP growth in China was higher
in 2023 than in 2022, but this was mostly the result of afirst quarter consumption boost following the end of Covid
containment measures. After a strong GDP growth of 2.2%
q-o-q in the first quarter of 2023, GDP growth slowed
significantly to 0.5% in the second, before picking up to
1.3% in the third quarter. Consumer spending proved more
resilient than expected in the third quarter, despite thestill-weak level of consumer confidence. In 2024 we expect
private consumption growth to slow.

Table 3.1: Real GDP growth (%) –emerging market economies

Source: Oxford Economics, Atradius

Rising global food and energy prices are having a modest
impact on inflation due to the domestically administeredpricing mechanism and self-sufficiency in coal and food(staple grains). Inflation moderated from 2.1% in January
to -0.2% in October 2023. We do expect to see an increase in
the coming months as supply-side deflationary pressuresease (i.e. normalising firms’ price-cutting practices) andconsumption demand broadly holds up. As food and fuelprices are expected to increase, the baseline outlook is
for a gradual rise in inflation from 0.4% in 2023 to 1.5% in
2024. Whereas most other central banks hiked policy rates
in response to rising inflation since 2022, the PBOC has
kept its policy rate low – currently at 3.45% - in response todisinflation.
Private investments stayed in contractionary territory,pulled down mainly by real estate investments. External
demand is not particularly strong either, and Chinese
industry is still faced with destocking pressure. There
are some bright spots emerging, however, in the three‘new economy’ sectors of electric vehicles, batteries andrenewables. The outlook for 2024 is that industrial activity
will strengthen moderately, as destocking pressures fadeand the decline in industrial profits bottoms out. The
property sector remains the biggest downside risk in
China, with poor housing activity indicators and a steadystream of negative headlines about distressed property
developers. The Chinese central bank (PBOC) is cautious
with possible easing, reflecting concerns about banking
sector profitability.
In India, growth in 2023 is estimated to pick up slightly
to 7.0% from 6.7% in 2022, supported by household
consumption, investment, and strong services activity.
Consumption growth is weakening and we expect it tocontinue trending down. Rural incomes have been hit
by reduced crop output due to below-average monsoon
rains, while government measures to lower food prices
have depressed farmer earnings. Inflation cooled to 4.9%
in October, with easing price pressures across the board.
However, it does remain above the central bank’s 4%
midpoint target. We expect to see a moderation in inflationfrom 5.8% in 2023 to 4.8% in 2024. Inflation is still above
the central bank’s midpoint target (4%) and we do not
expect a rate cut in India before Q2 of 2024.
High frequency indicators show signs of a loss in private
investment momentum. Industrial production weakened in
September, with growth falling to 5.8% year-on-year, 4.5 ppt
lower than in August. Capital goods imports declined in Q3.
Industry and services credit expanded further in September,
but with financing conditions likely to tighten further as thelagged impact of monetary policy tightening feeds through,this is unlikely to be sustained. There are signs that
economic activity is going to soften in 2024. Consumers are
feeling the strain from weakening labour market conditions
and subdued real income growth.
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

29

Private investment is yet to see the full effects of pastmonetary policy tightening materialise. Meanwhile,
external demand will likely remain soft given the lacklustre
global growth outlook. GDP growth in India is likely to dip
in 2024 (5.7%), before increasing in 2025 (7.0%).
3.2 Latin America is facing the lowest regional growthprospects in 2024
We expect already-weak GDP growth in Latin America toslow from 2.0% in 2023 to 0.8% in 2024. Whereas the region
continues to lag behind other EME regions in terms of GDP
growth, its shock resistance has improved substantially.
This is largely thanks to improvements in policymaking,visible in the region’s proactive approach in monetary
policy. Latin American central banks hiked interest rates
earlier and further than the US Fed to stave off inflationand now the region is leading in the easing cycle.Brazil,
the region’s largest economy, was the first (and so far only)
among the featured markets in this Economic Outlook to
begin cutting its policy rate.
Brazil’s GDP outlook is very weak with only 0.4% growthforecast in 2024, down from 2.9% in 2023. But there isconsiderable upside potential for growth, if the central bankinterest rate cuts have an effect on the economy faster than
expected. Inflation went down from 5.8% in January to 4.8%
in October, and the expectation is that it will decline further.
The current monetary stance is highly contractionary given
where inflation is. Some further monetary easing can be
expected in 2023 and 2024. The economic slowdown that
we expect in 2024 is mostly due to the lagged impact ofrestrictive monetary policy. The magnitude, however, is inpart due to negative base effects from the bumper harvestof H1 2023. After a record grain harvest in Q1, agricultural
output levels are normalising and potentially adverse
weather associated with El Niño is a downside risk. Support
from higher global commodity prices will also fade overthe forecast period. The fiscal deficit is likely to remainhigh (8.7% of GDP in 2023 and 2024), but that is due tohigh interest expenditure (there is a small surplus on
the primary balance). The public debt burden is likely toincrease on account of the high interest rate costs.

30

Mexico is outperforming regional peers but growth isdecelerating. GDP growth is expected to hold up at 3.3% inMexico, driven by US consumer resilience and domestic
fiscal support. We expect growth to slow to 1.9% in 2024
owing to weaker external demand and fading support
from government infrastructure projects. New FDI inflows
slowed in Q3, mostly due to lower FDI in companies thatwere already located in Mexico. While the labour market
is tight, supporting domestic consumption, the retail andtourism sectors are cooling. Mexico’s fiscal position is
likely to worsen somewhat as President Obrador (AMLO)
ramps up spending ahead of the 2024 elections. This is
an upside risk for growth as it could strengthen consumer
resilience but it will also cause a substantial deterioration
ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Figure 3.1: Turkey is shifting
to orthodox monetary policy

Source: National Sources, Macrobond

in public finances. The central bank is holding the policy
rate constant as it remains concerned about tightness in thelabour market and sticky inflation expectations. We expect
some easing of the policy rate in Mexico from Q1 2024
onwards.
3.3 Eastern Europe outlook is bleak
Our growth estimate for Eastern Europe in 2023 was
subject to the largest revision (+1.3 ppt) compared to Julyas Turkey shifted to orthodox policy and Russia skirted
international sanctions. But the outlook for the region in
2024 and 2025 remains very cloudy. In Turkey, tightermonetary policy, high inflation and slower global growthweigh on economic activity. We expect GDP growth todecrease from 4.0% in 2023 to 1.0% in 2024. The longrunning consumer boom is now set to come to an end,
and many companies and households are likely to facedifficulties in 2024. As part of the shift to a more orthodox
footing, the government has started to increase taxes andinterest rates, as well as limiting access to credit, withnegative implications for both consumer spending andgovernment expenditure. Inflationary pressure emerged
again as the central bank allowed the lira to weaken, andhigher government spending and increases in pay andpensions boosted demand. Headline inflation rose from a
yearly low of 38.2% in July to 61.4% in October. The central
bank started a tightening cycle in June, marking the
beginning of a shift towards more orthodox polices (seefigure 3.1). The central bank has hiked the policy several
times since the May elections and the policy rate is now
at 35%. We expect a couple of further rate hikes before thecentral bank will pause.
Higher domestic interest rates are bearing down on
consumer loan growth, underpinning a moderationin consumption. Intensifying demand weakness, bothinternally and among key European trade partners,
is driving the softening in business conditions. The

employment picture is deteriorating, and we expect morecompanies to reduce staffing. The conditions are likely tobe slightly better in 2025, due to lower inflation and higher
growth in Turkey’s trade partners, leading to an expected
1.9% GDP growth.
The war in Ukraine has unleashed deep transformationin Russia’s economy. International sanctions are hurting
the economy, but have not crippled it. Russia’s economy
expanded by 3.0% in 2023, after a 2.1% contraction in
2022. We expect the war to continue to drag on economic
growth, which is likely to be low in the coming years. GDP
growth is still supported by high government spending.
Military spending has increased to 6% of GDP in the 2024
budget, from 3.9% in 2023. Increasing wage growth andlow unemployment support private consumption, althoughhigher interest rates will constrain consumer demand.
Inflation was elevated at 6.7% in October, which is above thecentral bank target (4%). It is likely to remain elevated due
to high import costs, labour market shortages, and supply
chain disruptions. The central bank started to tighten its
monetary policy again since July, by raising the policy ratefrom 7.5% to 15% in October.

elections, scheduled for mid-2024 could dent confidence
but are unlikely to be destabilising. The government’s
main medium-term policy challenge is to boost growth andemployment by implementing the vital structural reforms
needed to tackle serious power shortages and transportbottlenecks. The task will be complicated by domestic
political challenges.

The central bank was responding to inflationary pressure
and a weakening rouble. We expect that monetary policy
remains very tight in the near term and there could be someeasing in Q2 2024 at the earliest.
Oil exports to some key emerging markets, such as China,
India and Turkey, offer some respite on the external trade
front. Urals oil is consistently trading above the EU-G7 pricecap of USD 60 per barrel. The discount of Urals to European
brent has narrowed to around USD 10 per barrel. Therewas some pressure on the rouble in October 2023, but thepartial re-introduction of capital controls has reversed the
downward trend of the rouble.
3.4 Weak external backdrop increases domestic
challenges in Africa
We expect GDP growth in South Africa to moderate to 0.8% in
2023. There is likely to be a very limited recovery to 1.0% in
2024, helped by a mild improvement in domestic conditions,although the global backdrop will remain challenging.
Inflation has been ticking up again in recent months. In
October inflation rose to 5.9% from 5.4% in September,reaching the upper limit of the inflation target range of thecentral bank (3-6%). Food and transport prices are driving
the upturn in inflation. The central bank has raised theinterest rate in total by 475 basis points since November
2021 to 8.25%, the highest level since 2008. Since May 2023
the central bank has kept its monetary policy rate constant.
Increased private sector investment in electricity
generation capacity is supporting the demand side, buthouseholds are experiencing strain due to elevated prices
and high interest rates. The next presidential and legislative

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Appendix: Macro economic headline figures - Major markets

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

Atradius Economic ResearchJohn Lorié
Chief economist
john.lorie@atradius.com+31 (0)20 553 3079
Dana Bodnar
Economist
dana.bodnar@atradius.com+31 (0)20 553 3165
Theo Smid
Senior economist
theo.smid@atradius.com+31 (0)20 553 2169

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ATRADIUS ECONOMIC OUTLOOK - DECEMBER 2023

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