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Deutsche Bank revises eurozone GDP outlook for the year

Arial view of the city center of German federal state Bavaria capital Munich, Germany, Saturday, Nov. 12, 2022. (AP Photo/Markus Schreiber)
Arial view of the city center of German federal state Bavaria capital Munich, Germany, Saturday, Nov. 12, 2022. (AP Photo/Markus Schreiber) Copyright Markus Schreiber/Copyright 2022 The AP. All rights reserved
Copyright Markus Schreiber/Copyright 2022 The AP. All rights reserved
By Indrabati Lahiri
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The German economy is doing better than expected, while the UK economy is also going through a cyclical recovery.

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Deutsche Bank has increased the eurozone gross domestic product (GDP) outlook for this year from 0.4% to 0.9%, according to the latest Deutsche Bank World Outlook.

However, the report suggests, this is likely to be due more to cyclical than structural reasons, with the bank's 2025 forecasts for the eurozone remaining the same at 1.5%. 

Regarding the eurozone, the 20 EU member states using the euro as currency, the report says: "Our inflation outlook is broadly unchanged - sticky and with upside risks in 2024, converging to target in 2025 but the composition is a little less ECB friendly, with higher services and lower core goods inflation. 

The risk is two ECB interest rate cuts, not the hoped-for three

"We have made some slight hawkish tweaks to our European Central Bank (ECB) call. Our baseline is 3 quarter point rate cuts by the ECB in 2024. The risk is 2 cuts. Previously, we had an ECB terminal rate of 2% in Q1 2026. 

"We now describe the landing zone as 2% to 2.5%. Either way, we see market pricing in 2025 as too hawkish. Declining inflation, fiscal tightening, and trade and geopolitical uncertainty all lean towards a larger easing of monetary policy."

For the US, the bank expects growth to be about 2.4% this year, which would be on the upper end of the consensus, as well as 2.2% next year. However, the forthcoming US elections could continue to pose volatility risks to the market. 

Growth in China predicted to slow

Looking at China, the bank in April lifted the country's growth forecasts to 5.2%, driven mainly by more government spending and exports looking up. However, for the next year, Chinese growth is expected to drop to 4.5%, as the housing market bows down to supply shooting up. 

As for Japan, Deutsche Bank believes the Bank of Japan may potentially increase interest rates to 1% by the first quarter of 2026. 

India is also expected to see continued growth, with nominal GDP touching 10% to 11% for the next several years, and real GDP coming up to at least 6% to 6.5%. 

Germany still resilient, UK economy seeing cyclical recovery

The German economy did well at the start of this year, boosted by private household consumption and foreign trade. The trend is expected to continue in the second quarter of the year.

However, declining investment and the lingering effects of the pandemic continue to weigh on consumer and business sentiment. The country's housing sector is still under pressure, with several projects having been cancelled or put on hold during the pandemic, which have not yet been resumed. New orders have also been lagging. 

The country's energy sector is also falling behind, due to a slow renewable energy transition, too much dependence on Russian oil and gas and excessive bureaucracy. Furthermore, Germany also continues to face resistance for nuclear energy, leaving it to ramp up other green energy sources quickly. 

The UK is currently seeing a cyclical recovery, with more disposable income boosting household spending. Deutsche Bank forecasts that UK GDP is likely to inch up 0.8% in 2024 and 1.5% in both 2025 and 2026. 

The UK elections being scheduled earlier than expected could help stabilise markets in the short and medium term by reducing the months of volatility and uncertainty previously anticipated. 

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