What would happen if there was a downturn in macro data?

MAPFRE Economics, MAPFRE’s research arm, always calculates two scenarios when drafting its “2024 Economic and Industry Outlook” report, which makes even more sense at present when there are more and more exogenous factors that can influence economic performance. Weakening macroeconomic data is something that both scenarios specifically include, with the more stressed scenario indicating a more severe downturn.

In the more stressed, albeit least likely scenario, MAPFRE Economics foresees an erosion in purchasing power, which would weaken the capacity to consume while also damaging sources of consumer confidence, thus resulting in a slump that would last until 2025. As such, the dichotomy between economic activity and prices reappears, with a significantly off-balanced binomial ending up on the central banks’ road map.

In any case, a recession isn't in the cards even in the most stressed scenario. MAPFRE Economics forecasts that the global GDP will grow 1.4% this year, compared to the 2.3% figure in the base scenario, while inflation will stand at 4.8% by the end of the year, four decimal points higher.

That extra inflation would be due to a prolonged supply shock caused by growing geopolitical risks. Energy has become the leading factor (due to the escalation in the war between Israel and Hamas and conflicts in the Red Sea), reaching its maximum peak at above 120 dollars per barrel and staying in a tense spot throughout the first quarter of 2024. It’s expected to return to higher equilibrium prices in the medium term, somewhere between 90 to 95 dollars per barrel.

While this alternative risk model may not include additional interest rate hikes, it doesn’t foresee cuts at any point in 2024 either. However, 2025 does seem to clear the way for moderate easing and positive real interest rates for most countries, both in developed and emerging economies.

The impact on government bond yields indicates a significant tightening across the yield curve, surpassing 150 basis points. This is attributed to the perceived extension of a restrictive monetary policy duration, coupled with heightened uncertainty surrounding inflation. Additionally, the levels of bond issuance are influenced by increased uncertainty regarding fiscal responses and sustainability plans. This is all felt by the financial markets, affecting credit spreads and equity in equal measure and causing sources of confidence to break down even further.

There’s less of an impact on the housing market than in prior editions of the Outlook report, with less than a 10% shock overall, but that impact will be broader. While in the foreign exchange market, the dollar is once again getting stronger, reaching 1.05 euros, but it's expected to return to its normal course by the end of 2024 in the central scenario.

The baseline scenario’s optimistic take on geopolitics

The baseline scenario in this report, the most important one for MAPFRE Economic Research, presents widespread decline in global growth, reaching levels lower than the potential for 2024, and a gradual recovery in 2025, indicating a soft landing. Among the reasons for this projection, important factors include the obstacles presented by an even tighter monetary policy, less consumer power, as well as the combination of prolonged weakness in the manufacturing sector and less expansion in the service industry, which has left its cyclical highs behind.

Regarding inflation, this outlook anticipates a slowdown, driven by decreased pressure in the services sector. The contribution from goods is expected to remain subpar, while prices for energy and food are projected to stabilize. Thus, the global inflation forecast is 4.4%.

Looking at this more closely, the forecast for oil prices has gone down (75 dollars per barrel versus 80 dollars per barrel in the previous report), due to increased production in the United States, the plans of OPEC+ to extend voluntary output cuts until the end of the first quarter of 2024, and the commodity markets’ subdued response to the geopolitical conflicts.

Thus, these factors help lead inflation back to its long-term averages, as well as helping central banks to achieve their objectives. But the averages remain slightly above those of 2024, so this chapter of the inflationary story won’t come to an end until 2025.

Moving onto monetary policy, the improvement in inflation could make it more likely that the US Federal Reserve (the Fed), as well as other central banks of developed economies, will start to ease their monetary policies towards more favorable conditions, while emerging countries are strengthened to continue the stage already underway.

Namely, the Fed isn't expected to take a sharp turn in its monetary stance, but instead a moderation in the second half of the year. Thus, the first cut would now be expected to take place in June, easing up 150 basis points until the end of the year. Even with this revision, our perspective informed by the baseline scenario is still somewhat less aggressive than the prevailing outlook among the markets. The pace of adjustment is expected to remain gradual in 2025, and compatible with a neutral rate that can be adjusted to inflation within the target ranges.

In the European Central Bank (ECB)’s case, the same scenario of downturns is being considered, but they remain slightly behind the Federal Reserve, as they're awaiting confirmation of the evolution of tensions in maritime transport and the energy markets. The baseline scenario therefore forecasts somewhat of a decline in economic growth in 2024, followed by a moderate recovery in 2025, with positive global economic activity (2.3% and 2.6% in 2024 and 2025), while, in terms of prices, it predicts an average inflation of 4.4% and 3.3% for these years, respectively.