Nordea Chief Economist: Increased chances of a soft landing

The prospects for the global economy are still relatively good despite significant monetary policy tightening. The labour markets have thus proven to be surprisingly strong in most countries, just as inflation has fallen sharply in the wake of the tumble in commodity and energy prices. This has contributed to supporting economic activity. The services sector has especially benefited from consumers’ seemingly insatiable appetite for new experiences after the pandemic. The manufacturing sector has, in turn, been hit hard by falling demand and destocking in both domestic and export markets.   

Global growth looks set to land at around 3% in 2023, and we expect fairly similar growth in both 2024 and 2025. This is compatible with a so-called soft landing where central banks succeed in getting inflation under control without serious consequences for the real economy.   

Seen from a historical perspective, however, it is a very distinct and presumably permanent slowdown. In 2000-19 – that is, before the pandemic and Russia’s war against Ukraine – average global economic growth was at nearly 4%. 

It is also a fact that in the past years, growth has been unevenly distributed across countries and regions. This can partly be explained by the development in the terms of trade between the countries that export and import commodities and energy, respectively. Against this backdrop, some economies have performed surprisingly well through the energy crisis, and others have struggled more. The euro area is thus on the brink of a technical recession, whereas the US economy and a number of emerging market economies are not experiencing a slowdown in the same way. China has had big problems in terms of a confidence crisis among households and a collapse in the construction sector – even though inflation has not spiralled out of control at any time. 

It should be noted, however, that there is still  significant uncertainty. Firstly because the interest rate has reached such a high level that monetary policy will have a dampening effect on spending and investment activity for a long time to come. This holds true even though the first rate cuts from both the Fed and the ECB can be expected as early as in the first half of 2024, unless inflation starts soaring again. 

The higher interest rate level also means that the risk of debt crises in the coming years has gone up. Not least among the less developed and very indebted countries. But also, many of the industrialised countries have seen such a strong surge in debt levels during the years with zero interest rates that it now puts pressure  on their fiscal capacity and limits their growth potential. 

Moreover, geopolitical tensions have not decreased; rather the opposite. The war in Ukraine seems to be at a deadlock, and the war between Israel and Hamas could potentially escalate to a regional conflict. If so, this might impact supply chains and energy prices so severely that the ghost of inflation could quickly rear its head again and trigger major fluctuations in the financial markets. 

International events can affect the economy. 2024 will see the election for the European Parliament in June and the US presidential election in November. Will the US return to the America First policy if Donald Trump wins back the White House? And what will the public opinion be in Europe on major issues such as Ukraine, Gaza, the green transition and the EU budget policy once the composition of the European Parliament is known and a new leadership is in place? 

At the beginning of 2024, five new countries joined the BRICS bloc: Iran, Syria, the United Arab Emirates, Egypt and Ethiopia. This will add yet another dimension to the BRICS countries’ role in the game of the future global world order, including the wish to become less dependent on the USD.

2023 was the hottest year ever on record. And since the effect of the weather phenomenon El Niño will not wear off until May at the earliest, there is a risk that the record will be beaten this year, resulting in more big climate catastrophes. 

It is thus good news that the need to move away from fossil fuels to obtain net-zero emissions by 2050 was acknowledged for the first time at the COP28 summit in Dubai in December 2023. To reach this target, global climate investments will need to rise from around 1% in 2020 to just under 5% of global GDP in 2030. It is obvious that the enormous investment needs will turn the green transition into a decisive growth engine for the global economy for many years to come.    

Also the Nordic countries are feeling the consequences of higher interest rates and lower growth on important export markets. Especially the manufacturing and construction sectors are affected. Denmark and Sweden are already in technical recession. Finland will probably follow suit soon, just as the growth prospects for Norway are weak owing to massive rate hikes and the steep decline in energy prices.

In many ways, 2024 seems likely to become a challenging year.

This editorial originally appeared in the Nordea Economic Outlook: Past the peak, published on 24 January 2024. Read more from the latest Nordea Economic Outlook.