The 35th edition of the Ambrosetti Forum, discussing “The Outlook for The Economy and Finance” took place on the shores of Lake Como last week. As usual, this was an occasion for policymakers, market participants, academics, advisors and pundits to discuss the most pressing issues of the global economy, in terms of macroeconomic scenarios as well as technological and geopolitical developments. The key takeaways of this edition of the forum were the following.
First, from a macroeconomic perspective, the global economy is more stable than was feared a year ago, when a recession in a number of key developed markets and emerging economies seemed inevitable. The US managed to achieve the sought-after soft landing; it could even be said that the US economy continues to fly, and so remains in a “no-landing” zone, as we called it in our 2024 Global Outlook. The Eurozone economy meanwhile is very weak, and has experienced a technical recession in some countries, such as Germany, and yet one could characterise the current cyclical phase as stagnation rather than recession. In non-Eurozone Europe, such as in the UK, there was a technical recession at the end of last year, but the much-feared five consecutive quarters of economic contraction that were predicted by the Bank of England to occur in 2023-24 did not materialise.
Among the largest economic areas, China is the one that poses the most cause for concern. In 2023, the economy expanded 5.2%, just a tad higher than the 5% targeted by the government, however its potential growth continues to decline. This is due to the bust in the real estate sector, which represents almost a quarter of the economy and could lead to what Richard Koo calls a “balance sheet recession,” possibly resulting in a decade of stagnation while economic agents repair their balance sheets (similar to what Japan suffered in the 1990s). If the government continues to refuse to provide fiscal stimulus, the economy will likely continue to face the Middle Income Trap, as recently discussed by Nouriel Roubini on his return from China Development Forum.
Second, inflation is falling everywhere, and only a recent increase in oil prices could lead to a rise in headline inflation. As long as central banks consider this to be a truly “temporary” phenomenon, they could look through it and proceed with the beginning of their monetary policy easing cycles. In the US, the recent encouraging data from the labour market (with 303K new jobs added in March alone) suggest that the Fed may need to wait longer before cutting rates. The ECB seems on track to begin its easing cycle in June. The Bank of England is still facing persistent inflation, and therefore the first rate cut is “some way off.”
Third, in spite of this relatively benign macroeconomic backdrop, geopolitical risks continue to abound, and could pose a threat to the durability of such a moderate economic scenario. The two open wars, in Ukraine and Gaza, are nowhere near their end. Russia, which just launched the recruitment of 150,000 additional soldiers, will likely launch a large-scale offensive in Ukraine in the spring/summer. In Israel, the current operation against Hamas will not change tack until PM Netanyahu is ousted, something that seems to be easier said that done. Other risks that participants feared were the re-election of Trump as US president, an intensification of the attacks by the Houthis in the Red Sea, and the re-opening of the skirmishes in the Strait of Taiwan.
In September, the 50thedition of the summer version of the Ambrosetti Forum, discussing the “Intelligence on the World, Europe, and Italy” will take place, and that will be an occasion to re-evaluate these assessments regarding the macroeconomic environment and geopolitical risks.
