26 March 2024

markets outlook
Allianz Research
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Economic

End of Q1 2024 updated economic and capital

Outlook 2024-25:
Soft landing: It’s a

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Global Macro
2024-2025

© Allianz 2024
2
GLOBAL OUTLOOK

Our Storyboard
1 Special effects for growth? US growth momentum has been strong but is headed for a managed slowdown. After stagnating, the Eurozone may recover
slightly on the back of positive real income effects though uncertainty and downside risks remain and may limit the investment cycle (wait-and-see mode).
2 Inflation is acting up. Inflation should get closer to target by summer 2024, thanks to continuing loosening of labor markets and weakening domestic
demand. Services inflation remains sticky.
3 Central banks’ summer twist. The ECB will be compelled to cut rates just before the Fed in July, with the BoE following suit in August. Almost all major
emerging markets will also start a cautious easing cycle.
4 Beware of the curtain call for fiscal policy. Fiscal consolidation in Europe will be scrutinized, with potentially strong pressure on GDP growth. In the US,
November elections will determine the course for all public policies.
5 Global trade is no feel-good movie. As trade exits recession, the recovery will be limited by the inventory glut. Disruptions in global shipping and
protectionism mean that the pace of recovery is capped, and global trade growth will remain below its long-term average.
6 China’s policy support: the sequel. Downside pressures abound and the challenge for policymakers is to reestablish confidence and support new growth
drivers in order to establish a sustainable – though slowing – economic model.
7 Emerging markets: the cast is much stronger. Many will experience a moderate recovery, thanks to domestic consumer spending and investment
activity. Exports will be a growth driver only for Southeast Asia and a few other nations. Resilience is still impressive as policy constraints abound.
8 Markets may need subtitles: the economic soft landing narrative contrasts with geopolitical hard landing risks. Long-term interest rates are poised for
a modest decline in 2024, while the bull market in equities could continue. Geopolitics, rising defense spending, reshoring, the AI frenzy and the green
transition will continue to shape market sentiment. Concentration in geographies, sectors and companies make market dynamics vulnerable.
9 The plot is hard to follow for corporates. Corporate profitability will be further tested and capex is slowing down. Lower interest rates ahead mean
the corporate debt-repayment wall should be manageable, but highly leveraged sectors could be increasingly distressed.
10 Political risks: an original movie or a remake? Recent elections have confirmed rising polarization risks. The US, India, Mexico, the EU, South Africa and
the UK elections all matter in today’s uncertain world.
GLOBAL OUTLOOK

Soft landing confirmed

Global real GDP growth (%) Sequential growth to accelerate in the Eurozone in
2024, while it slows in the US
Quarterly real growth rates (q/q %)

© Allianz 2024
Sources: LSEG Datastream, Allianz Research
4
GLOBAL OUTLOOK

American grasshoppers and European ants to test

resilience
Key determinants of consumer spending beyond Real wage growth to stay above historic average
labor income despite deceleration
change between Q4 2022 and Q3/Q4 2023 Real wage growth y/y in %

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research 5
Notes: DPI = Disposable personal income
GLOBAL OUTLOOK

Corporate investment to slow down: Elections wait-

and-see mode?
Limited scope for further rise in fixed investment Capacity utilization rates still below pre-pandemic
Gross fixed capital formation, volume, Q4 2019 = 100 in %

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research 6
GLOBAL OUTLOOK

Indeed, pivotal elections ahead for Europe, the UK

and the US
Populist parties set to gain in European Parliament High uncertainty on US trade policy in case of
elections a Donald Trump victory

Sources: Ipsos Group (March 19, 2024), Allianz Research Source: Allianz Research
7
GLOBAL OUTLOOK

US: Trump II unpacked

GDP and inflation impact, 2025 (%) Policy rates impact (%)

4 Baseline - US policy continuity

Trump - contained trade war
Trump - full fledged trade war 3.1
3 2.7
2.5 2.5
2.1
1.9
2 1.7
1.2
1
0.3
0
US GDP growth World GDP growth US inflation

Source: Allianz Research Sources: LSEG Datastream, Allianz Research

8
GLOBAL OUTLOOK

UK: Is ending the recession enough?

Activity tracker, Z-scores Housing is about to bottom out as interest rates
have peaked

February 2024

© Allianz 2024
Sources: LSEG Datastream, S&P Markit, Allianz Research Sources: LSEG Datastream, BIS, Allianz Research
9
GLOBAL OUTLOOK

Fiscal central: Consolidation, slippage risks

and the transatlantic gulf
...while fiscal policy adjustments kick-off and will
Debt trajectories take different course while
shave -1pp from European GDP growth in 2024-25
sustainability measures worsen
Government debt to GDP in % and real interest rate – growth potential cumulatively
Primary balance % of GDP

© Allianz 2024
Sources: LSEG Datastream, Allianz Research
Note: r-g is calculated as the difference between the real interest rate from inflation-linked
bonds and the potential growth rate. In the Eurozone debt weighted averages from Germany, 10
Italy and France were taken. Pre-2014 nominal yields minus inflation were taken as a proxy in Sources: LSEG Datastream, IMF, EC AMECO, Allianz Research
the Eurozone. Debt/GDP forecasts are from IMF.
GLOBAL OUTLOOK

Germany: Hard(er) times ahead?

Ifo business survey Germany is pursuing a deficit reduction
Index Federal budget , in EUR bn

© Allianz 2024
Sources: LSEG Datastream, Allianz Research Sources: Bundesministerium der Finanzen, Allianz Research 11
GLOBAL OUTLOOK

France: Cyclical rebound in H2 but fiscal clouds

remain
Consumer confidence is picking up, pointing to Spending cuts in 2025, but deficit to come out above
accelerating consumer spending government’s target

© Allianz 2024
Sources: Refinitiv Datastream, Allianz Research
Note: we assume for 2024 EUR16bn of savings from the phasing out of cost-of-living crisis
Sources: Refinitiv Datastream, Allianz Research 12
measures and EUR15bn of cuts in budgets. For 2025, assume EUR15bn of spending cuts.
GLOBAL OUTLOOK

Italy: Fiscal woes remain while growth eases

Superbonus tax credit clearly inflated the ...while having disastrous impact on public finances –
construction sector (and economic activity)... on top of prolonged support measures and higher
GFGC – dwellings (2019=100) financing cost (government balance, % of GDP)

© Allianz 2024
Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research 13
GLOBAL OUTLOOK

Trade rebound jeopardized by supply-chain

disruptions (Red Sea, protectionism, decoupling)
Global trade growth should remain below average The Asia-Pacific region leads efforts in trade-
(in volume terms, +3.0% in 2024 and +3.1% in 2025) liberalization, contrary to Europe and North America

Sources: LSEG Refinitiv, Allianz Research Sources: Global Trade Alert , Allianz Research
14
GLOBAL OUTLOOK

China: Policy support to cushion the slowdown

Confidence remains low and the labor market has Policy mix is easing (especially on the fiscal side),
not normalized yet with more to come to make up for lower efficiency

© Allianz 2024
Sources: national sources, Allianz Research Sources: national sources, Allianz Research 15
GLOBAL OUTLOOK

Disinflation: Difficult last mile

Inflation forecasts, % Approaching central bank targets end of 2024
Quarterly inflation rates, y/y%

© Allianz 2024
Sources: LSEG Datastream, Allianz Research
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GLOBAL OUTLOOK

Stable oil prices and decelerating input prices

Oil prices to remain expensive despite lower demand US corporates' input prices easing anew, suggesting
CPI inflation will dip

12 88
US CPI %y/y
78
US composite PMI input prices
7
(adv. 6 months) - rhs 68

58
2
48

-3 38

© Allianz 2024
2009 2011 2013 2015 2017 2019 2021 2023

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research
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GLOBAL OUTLOOK

Sticky (but manageable) services inflation

Services output prices easing in both the US and the Services inflation will moderate but will remain a
Eurozone major contributor to headline inflation

Sources: LSEG Datastream, Allianz Research Sources: Indeed, Allianz Research

18
GLOBAL OUTLOOK

Sticky costs could squeeze margins further

Corporate profits have the capacity to absorb Impact of higher interest rates on corporate margins
actual cost pressures from renewal of debt redemptions should interest rates
index 2018=100 remain at current levels
pp of gross operating surplus

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Oxford Economics, Allianz Research
19
GLOBAL OUTLOOK

Labor markets: The great relaxation?

Nominal wage growth expected to normalize by The job-worker gap (% labor force) is narrowing,
2025 except in the UK and Italy
z-score
quarterly y/y in %

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research Note: Job worker gap defined as number of people employed plus vacancies 20
minus labor force as a share of total labor force
GLOBAL OUTLOOK

Central banks’ summer pivots: Fear of going first

and terminal rates on the radar
Central banks to cut rates in summer 2024 amid Quantitative tightening will continue on auto-pilot
disinflation; ECB to cut first but intermittently bn USD, EUR
%

© Allianz 2024
Sources: LSEG Datastream, Bloomberg, Allianz Research Sources: LSEG Datastream, Allianz Research
21
GLOBAL OUTLOOK

Tail tightening: pushing up consumer loan

delinquencies in the US
Consumer loan delinquencies up Sharp increase in interest rates on consumer loans
in % in %

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research 22
For corporates, the debt-redemption wall should
GLOBAL OUTLOOK

be manageable if central banks don’t

procrastinate
40% (50%) of US (EZ) corporate debt due by 2026 Sharp decline in average maturities because of less
Debt repayments for IG, HY, SME & MidCaps in % of total
and shorter-date issuances
Average debt maturity in years

Sources: LSEG Datastream, Allianz Research Sources: BofA, LSEG Datastream, Allianz Research.
23
GLOBAL OUTLOOK

Corporates’ financing constraints remain

elevated
Working capital requirements by global sectors, Q4 2023 Total credit to non-financial corporates,
level (y-axis) and y/y change (x-axis), in number of days of turnover y/y in %

Sources: LSEG Datastream, Allianz Research

Sources: IMF, Allianz Research 24
GLOBAL OUTLOOK

Insolvencies to rise by 9% in 2024 before stabilizing at

high levels in 2025
Global and regional insolvency indices 2024 expectations, level and trend
index (100 = 2019)

Sources: National sources, Allianz Research 25

Sources: National sources, Allianz Research
Sector radar: Winners & losers from transition(s)
Demographics & Geopolitics &
Climate change Race to raw Energy AI, automation &
Overall Outlook aging global value
& green policies materials transition robotics
Population chain shifts
Automotive ► ● ●●● ●● ●●● ●● ●●
Construction ► ●● ●/● ● ●/● ●
Transportation ▼ ● ●● ●●● ●● ●●● ●
Chemicals ▼ ● ● ● ●●
Pharmaceuticals ▲ ●●● ● ●
Agrifood ► ●● ●● ●● ●●
Textiles ► ● ●● ●● ●
Paper ▼ ● ●●●
Electronics ► ● ●●● ● ●● ● ●●
Metals ▲ ● ●/● ● ●/●
Retail ► ●● ●● ● ●
Machinery & Equipment ► ●● ●/● ●● ●● ●
Transport equipment ► ● ●●● ●● ●●● ●●
Software & IT Services ▲ ● ● ● ● ● ●●●
Household equipment ► ●● ●● ● ● ●
Computers & Telecom ▲ ●●● ● ●●● ● ●●●
Oil & Gas ▼ ● ●●● ●●●
Power ▲ ● ● ●●● ●●● ●●●
Financial services ► ●● ● ●●
Hospitality ► ● ●● ●● ●
26
Source: Allianz Research; NB: when blank = negligible impact
GLOBAL OUTLOOK

Emerging markets to cut within the next 12M,

caution warranted to not disturb portfolio flows
Asia ex-China as a key spot of financial flows, China Prepare for “cautious cutting” mode in almost all
made a comeback in February major EMs
Monthly foreign portfolio flows by region, USD bn Dashed lines represent market-implied rates

Sources: Bloomberg, LSEG Datastream, Allianz Research. As of 21/03/2024. Market implied

Sources: IIF, LSEG Datastream, Allianz Research. Latest data point as of end-Feb 24’. rates for 3, 6 and 12 months forward. For China the 7D reverse repo rate has been used instead
of the 1Y Loan prime rate. 27
GLOBAL OUTLOOK

Currency devaluation across EMs: is a political peg

materializing?
Elections are not a synonym of devaluation but Currencies at risk of devaluation vs. 2024 elections
present an opportunity to deliver an economic shock calendar
Exchange rates movements post-elections, selected cases Performance vs. USD

Sources: LSEG Datastream, Allianz Research. For changes of president 0 marks “proclamation” Sources: LSEG Datastream, Allianz Research. For the full analysis used to identify the currencies at
date, for presidents that continue 0 marks the date of the last voting round. All events shown are risk: What to watch: EM Currencies at risk and other stories. LE = Local elections; GE =
national elections. We pretend to illustrate the issue and not talk about a pattern: the sample is General/Presidential elections; PE = Parliamentary/Legislative elections. * Pakistan celebrated
made by selecting some cases in which a devaluation followed elections, and on purpose it omits already general elections in February but still within the 100 days margin; some minor elections still
i) devaluations that didn’t follow elections, ii) elections that were not followed by a devaluation. to be celebrated in the country. ** Senegal held them on 24th March (CFA pegged to EUR not USD).
REGIONAL OUTLOOKS 2024-2025

APAC: shifting growth drivers within the region, in

the context of global supply-chain rewiring
GDP growth forecasts and short-term country risk Real GDP growth %y/y: India and Southeast Asia to
as of Q1 2024 be outperformers in coming years

© Allianz 2024
Sources: Allianz Research Sources: Refinitiv Datastream, Allianz Research 29
REGIONAL OUTLOOKS 2024-2025

EM Europe: Gradual recovery supported by

rebalancing, lower inflation and monetary easing
GDP growth and short-term country risk Rapid unwinding of current account imbalances (% of
as of Q1 2024 GDP, 12-m MA), slower in Romania and Türkiye

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research
REGIONAL OUTLOOKS 2024-2025

Africa & Middle East: Social contract put to the test

due to cost of living or growth ambitions
Food prices still on the way up in Africa due to …while an oil price still below expectations keeps
currency devaluation and trade disruption… some GCC countries into fiscal deficit
(index) (USD/barrel)

© Allianz 2024
Sources LSEG Datastream, Allianz Research Sources: IMF, Allianz Research 31
 REGIONAL OUTLOOKS 2024-2025

Latin America: Growth convergence among major

economies and further normalization ahead
Around 2% growth in LatAm-5 in 2024 Inflation will continue to moderate, but at a slow and
rather uneven pace
CPI, y/y in %

© Allianz 2024
32
Sources: LSEG Datastream, Allianz Research. * LatAm-5: Brazil, Mexico, Colombia, Chile and Peru Sources: Refinitiv Datastream, Allianz Research
Capital Markets
Outlook
2024-2025

© Allianz 2024
33
CAPITAL MARKETS – FORECAST SUMMARY

Markets to navigate the policy-heavy environment

Capital markets: Eurozone and US Capital markets: UK, emerging markets, FX
year-end figures year-end figures
EMU Last Unit 2022 2023 2024f 2025f UK Last Unit 2022 2023 2024f 2025f
Government Debt Government Debt
ECB deposit rate 4.00 % 2.00 4.00 3.50 2.75 BoE rate 5.25 % 3.50 5.25 4.50 3.50
10y yield (Bunds) 2.40 % 2.56 2.03 2.20 2.10 10y yield sovereign (Gilt) 4.00 % 3.67 3.54 3.60 3.40
10y EUR swap rate 2.69 % 3.14 2.48 2.60 2.50 Corporate Debt
20y EUR swap rate 2.64 % 2.87 2.51 2.70 2.70 Investment grade credit spreads 110 bps 192 134 120 115
Italy 10y sovereign spread 127 bps 213 168 130 120 High-yield credit spreads 427 bps 663 515 440 410
France 10y sovereign spread 44 bps 55 53 40 30 Equity
Spain 10y sovereign spread 80 bps 109 97 80 70 FTSE 100 (total return p.a.) 3 ytd % 5 8 5 5
Corporate Debt
Investment grade credit spreads 112 bps 166 135 120 120 Emerging Markets Last Unit 2022 2023 2024f 2025f
High-yield credit spreads 344 bps 494 395 360 350 Government Debt
Equity Hard currency spread (vs USD) 204 bps 273 215 225 220
Eurostoxx (total return p.a.) 9 ytd % -12 19 7 10 Local currency yield 6.28 % 6.86 6.19 6.00 5.60
Equity
US Last Unit 2022 2023 2024f 2025f MSCI EM (total return p.a. in USD) 3 ytd % -20 10 6 10
Government Debt
Fed Funds rate (high) 5.50 % 4.50 5.50 4.50 3.75 Others 2022 2023 2024f 2025f
10y yield (Treasuries) 4.28 % 3.83 3.87 3.80 3.60 EUR USD 1.09 $ per € 1.07 1.10 1.12 1.13

© Allianz 2024
Corporate Debt
Investment grade credit spreads 91 bps 138 104 100 100
High-yield credit spreads 305 bps 479 334 350 330
Equity
S&P 500 (total return p.a.) 10 ytd % -18 26 11 8
34
Sources: LSEG Datastream, Bloomberg, Allianz Research
CAPITAL MARKETS

Risk assets off to a good start despite yield increases

reaffirming the comeback of the 60-40 portfolio
Returns to be hedged even in downside scenarios with an Stock markets will continue to be driven by underlying
equity – fixed income portfolio trends: AI, defense & reshoring while ESG falls out of favor
Stock indices, rebased

Sources: NY University, LSEG Datastream, Allianz Research. US 10Y used for US bond returns. Sources: LSEG Datastream, Allianz Research
35
CAPITAL MARKETS

Complacency? Economic soft landing fully priced,

geopolitical hard landing very little
Geopolitical risk remains elevated; impact on
Markets are bracing for volatility around US elections
VIX term structure in points markets often short-lived
Risk measures, index

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research
Notes: Gold/Equities ratio uses the gold price and the MSCI world equity index
36
CAPITAL MARKETS

Rising confidence in soft landing and inflation victory

contribute to risk-on mood
Economic surprises turned positive since the Stable inflation expectations signal trust in central
beginning of the year especially in the Eurozone banks but scale of future rate cuts remains uncertain
Citi Economic Surprise Index 5y US nominal and real rate in %

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research
37
FIXED INCOME - RATES

Volatility in bond markets to fade after markets are

clearer on future monetary policy path
Rates market volatility remains elevated as monetary
Uncertainty on monetary policy path remains high
policy uncertainty stays high 1y-ahead CB rate forecast dispersion (high-low) by Bloomberg economists in bps
Index of market volatility expectations (2019 avg = 100)

Sources: Bloomberg, Allianz Research

Notes: Option implied volatility expectations of US stocks (VIX), US treasury bonds (MOVE) and Sources: Bloomberg, Allianz Research
a set of major currency pairs (CVIX) 38
FIXED INCOME - RATES

Long-term yields to decline as policy shifts, but

supply pressures limit fall
Sovereign bond yields to fall slightly on lower policy US bond supply on high fiscal deficit pushing fair
rates and further normalizing inflation expectations value of long-term US rates higher
10y government bond yields in % US 10y fair value in % and contributions to change in bps

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research
39
FIXED INCOME - RATES

Monetary policy normalization and soft landing to

rebalance inverted curves and spreads
Yield curve inversion to cease unevenly, Germany Spread normalization continues anticipating ECB
lags with comparatively high ECB terminal rate pivot, economic rebound and European integration
10y – 2y government bond yields in bps Yield spreads vs. 10y German bund yields in bps

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research
40
FX

Modest depreciation ahead for the USD amid

gradual normalization of global imbalances
Interest rate differential to remain important driver
The USD looks increasingly overvalued
Real effective exchange rate indices (2014=100) for EURUSD going forward
Yield differentials in pp and EURUSD exchange rate

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research
41
CORPORATE CREDIT

Corporate credit spreads will remain compressed

due to strong demand and fundamentals
Corporate credit spreads to trade sideways on the EUR spreads to follow US credit with renewed
back of improved fundamentals and excess demand optimism, low default rates and strong demand

Sources: LSEG Datastream, Allianz Research Sources: LSEG Datastream, Allianz Research
42
EQUITIES

Strong earnings and decent valuations support the

equity rally but little room left for upside surprises
Resilient earnings and strong balance sheets should Market expectations and valuations suggests this
sustain the equity rally but there is little upside left market rally is not reminiscent of the dotcom bubble

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research
TMT: Technology, Telecommunications and Media
43
EQUITIES

US market dominance climbs, diminishing local

investment in Europe
Share of US stocks in MSCI world index European money pours into US EQ as investors
% of total market value partake in the exponentially-shaped technology rally

Sources: LSEG Datastream, Allianz Research

Sources: LSEG Datastream, Allianz Research
Note: US/EZ EQ refer to the relative performance of the S&P500 vs Eurostoxx
44
COMMERCIAL REAL ESTATE

An (isolated) CRE shock could still jeopardize smaller

banks – but does not look systemic
US banks’ profitability will be the first victim – capital German and Dutch banks appear the most
ratios to deteriorate but should suffice1 vulnerable across those in EZ-5
aggregate US banking system

Sources: FDIC, LSEG Datastream, Allianz Research. 1 CRE shocks in this exercise are taken in Sources: EBA, LSEG Datastream, Allianz Research. CRE shocks in this exercise are taken in
isolation (i.e. does not include hit from other parts of the balance sheet or deposits withdrawals). isolation; not that it comes together with additional developments such as deposits
Especially since banks still carry unrealized losses. For the CRE losses in the adverse scenario an withdrawal or defaults in other areas of banks’ loan book. Especially since banks still carry
45
8.8% loan loss rate has been used, consistent with the one found in 2023 Fed Stress Tests. unrealized losses. For the CRE losses in the adverse scenario we have used a loan loss rate of
Operating income refers to the latest annual figure available. 5%; for reference, in the 2023 stress test scenario the EBA found the % of stage3 CRE loans to
increase to 10.3% in an adverse scenario. NOI = Net Operating income (latest available).
 EMERGING MARKETS

Tight EM sovereign spreads also price a soft landing

but yields still at attractive levels
Markets eye the nearing Fed cuts: limited scope for spread Momentum not equally distributed with many countries’
narrowing, local currency yield declines to continue spreads still at distressed levels – and downside risks in
Dots represent latest hard currency spreads of key countries in the index the horizon

Sources: Bloomberg, LSEG Datastream, Allianz Research. MXN = Mexican Peso. . “Imp
Sources: Bloomberg, LSEG Datastream, Allianz Research. HC = Hard Currency. LC = Local
vola”: implied volatility, it refers to the expected volatility in the currency pair (vs. USD)
Currency. Sov = Sovereign.
over one month, taken from financial instruments. 46
© Allianz 2024