Executive summary
This week, we analyzed three important issues:
- First, OPEC+’s faltering grip on oil prices. While the global economy feared oil prices at USD100 per barrel (bbl) a few months ago, they stand close to USD80/bbl today, in line with our forecasts. Indeed, the disappointing data releases from China and Europe have increased concerns about demand. In this context, we expect OPEC+ to extend existing cuts. Yet, we kept our previous forecasts as tighter-for-longer supply should yield to USD85/bbl on average in 2024, before edging down to USD83/bbl on average in 2025. Last, as refining capacities remain stretched, the decrease in retail prices should be delayed for at least a few months.
- Second, Germany’s budget freeze: when the music stops. The Federal Constitutional Court’s ruling has stripped the German government of the financing for climate and industrial policy projects: at least EUR60bn (costing -0.7pp of GDP) and a further EUR200bn set aside to aid the economic recovery from the economic stabilization fund (so called WSF; -1.9pp loss for GDP in total). In the short-term, the coalition should act fast as the situation creates immense uncertainty for companies, households and investments, besides cutting competitiveness in an already unstable economic environment. In the long term, to avoid jeopardizing the green transition, the debt brake needs a solid reform.
- Third, emerging market monetary policy pivots: cutting the line. EMs have remained remarkably resilient despite the uncertain economic environment. Most are currently recording moderate current account deficits, or even surpluses, with Emerging Asia enjoying the best external positions: Thailand reversed last year’s deficit into a surplus and India’s external shortfall has narrowed markedly. Improving current account balances alongside better inflation outlooks and stabilizing currencies have prompted several countries in Latin America (Brazil, Chile and Peru) and Eastern Europe (Poland and Hungary) to kick off interest rate cuts. So far, markets are reacting positively, but we expect a EM fixed income rally to pause until the first cuts in advanced economies, followed by a contained decrease in local yields (going from 6.5% to 6% by end-2024 and 5.5% by end-2025). The asynchronized monetary easing could pressure EM currencies, and affect the economic recovery in an election-packed year