SEB Banka Economists Anticipate Interest Rate Reductions in 2024: Impact on Global and Baltic Economies

Entrepreneurs and citizens still live in anticipation of a reduction in interest rates, economists “SEB banka” state in the review “Nordic Outlook” of the world and Baltic economies.

Economic growth prospects continue to improve, although the global economy is still recovering from the covid pandemic, as well as energy prices and inflationary shocks, the review says.

Inflation continues to decrease, however, this trend is not sustainable, so the rate reduction is slower than previously expected, the review explains. It is expected that the European Central Bank (ECB) could make an appropriate decision in June, and the US Federal Reserve System – in September.

Lower inflation and interest rates, as well as higher earnings create conditions for growth in consumption and investment. On the other hand, the deterioration of the geopolitical situation with new risks of military, political and economic conflict, maintains an environment of high uncertainty.

However, the stability of the economy has improved recently, according to “SEB banka” economists. Global uncertainty will continue with moderate real and financial impact unless energy prices are significantly affected. Despite the surprisingly strong growth shown in the US (at the same time maintaining high inflation), “SEB banka” expects moderate global growth – a little more than 3% annually from 2022 to 2025.

The review explains that, from a historical perspective, such an increase is appropriate, taking into account the events of recent years – the pandemic, as well as the climate and energy crises and wars in Europe and in the Middle East. Commodity levels have fallen in recent weeks, and sentiment among manufacturers has improved. Although risk appetite has moderated, global asset prices have shown unexpectedly good resilience. After the first quarter of the year, trends in the equity markets reversed in April due to reduced risk appetite. It should be noted that geopolitical risks rarely have a negative long-term impact on stock markets.

The US economy continues to grow despite high interest rates and inflation. “SEB banka” predicts that growth will be slower in 2025, because the labor market will “cool down” at the end of this fall. The US presidential election is not considered a decisive factor for economic development. It is true that if Donald Trump wins, “SEB Bank” expects slightly lower gross domestic product (GDP) growth, a stronger US dollar, more geopolitical uncertainty and trade wars.

The strength of the US economy and the labor market, as well as continued inflation, are forcing SEB bank economists to change their forecast for the number of rate cuts this year. In general, US economic growth means higher and real interest rates, as well as a stronger US dollar. This will affect growth and monetary policy in both Europe and Asia, creating some tension between the US and the rest of the world.

Eurozone growth will slow in the first half of 2024, mainly due to weak economic growth in Germany, according to the review. Supported by fiscal stimulus, China will reach its 5% growth target this year. India’s GDP will grow by 6.5%. If this trend continues, India could soon become the third largest economy in the world.

The review states that Denmark can enjoy economic growth thanks to the pharmaceutical sector, while Norway can enjoy the growth thanks to the oil sector. Economic growth in Sweden will remain slow – the main reasons are weak consumption and significantly reduced activity in house building. Growth prospects will improve next year both in Sweden and in other economies sensitive to interest rate fluctuations.

Assessing changes in consumer confidence, there is an improvement, although overall it is still at a low level, explains the “Nordic Outlook” review. Global business activity indicators have risen to a neutral level. Lower inflation, wage growth, as well as a high level of employment will pave the way for more active private consumption. Lower interest rates will help ease the pressure on housing finance and support housing investment.

According to SEB Bank economists, the emergency policy should now be replaced by policies and decisions that encourage investments in the defense and security sectors, as well as in energy and the implementation of the green movement. Many countries need to mobilize private capital through various forms of incentives, such as environmental taxes or public-private partnership opportunities. One of the risks of fiscal policy is that the US, EU and China could end up competing for state aid and subsidies.

The world has successfully managed to suppress inflation. According to industry surveys and business sentiment indicators, price pressures have eased. Producer price indices also indicate lower prices of consumer goods. There has been a significant reduction in raw material prices (compared to the peak in 2022), although in some cases they are still significantly higher than before the pandemic. Wage growth is fueling inflation in the services sector, where demand has been strong. However, wage growth has slowed in the US, with similar signs seen in Europe.

The review says that at the beginning of 2024, the market expected a total of six rate cuts by the US Federal Reserve for this year. Currently, the market is skeptical that the Federal Reserve can implement more than one reduction before the end of the year. As for the ECB, “SEB banka” economists expect four rate cuts this year and four more in 2025. The Federal Reserve will delay the first rate cut until September and continue to work slower – two rate cuts are expected this year and four in 2025.

Oil prices have risen to $90 per barrel (Brent) this year. The market is focused on concerns about the escalation of hostilities in the Middle East. “SEB Bank” economists believe that oil prices will be largely determined by economic activity, inflation and the actions of central banks, as well as “OPEC +” production plans. New sanctions on Iran in May and renewed US sanctions on Venezuela will reduce the amount of oil on the market, but other countries such as Saudi Arabia have extra capacity to make up for the shortage. “SEB Bank” economists believe that the price of oil will average 85-90 dollars per barrel in 2024 and 2025.

Although energy prices are still higher than they were before the pandemic, they have been decreasing since the beginning of 2023. However, domestic energy prices are still high from a historical perspective, even if oil and gas prices have stabilized . One explanation for this situation is that, as taxes related to energy consumption have increased significantly, energy prices also affect other costs. This applies to everything from emissions pricing, energy transfer fees and taxes. In Europe, they are often higher than in the US, affecting competitiveness.

Economic prospects in Latvia are improving, so GDP growth will accelerate, despite prolonged uncertainty. The recovery will be driven by housing consumption and public investment. This year, “SEB banka” expects GDP growth of 1.9%. The “pull” will further strengthen the improvement in household consumption, which will continue to be driven by the recovery of purchasing power. There are also signs of gradual stabilization in exports.

Economic growth could strengthen in the second half of this year, expecting the “Nordic Outlook” review. However, this recovery will proceed at a moderate pace – due to geopolitical risks and events, as well as delays in interest rate cuts. Private investors will remain cautious, so public investment will have a significant impact on economic activity.

As for the rest of the Baltic States, – in Lithuania, public investments will partially compensate for the decline in construction activity. House prices have stabilized and household spending is gradually recovering. It is expected that, together with the increase in defense costs, the budget deficit will increase this year. This year, we expect GDP growth of 1.5%.

On the other hand, in Estonia, after two years of GDP reduction, signs of stability have appeared, including better indicators in the retail and business sectors. GDP is expected to fall 0.5% this year. The recovery in 2025 will be driven by an increase in exports and domestic consumption.

It was already reported that SEB lowered Latvia’s GDP growth forecast for this year from 2% to 1.9%, while the GDP growth forecast for next year was kept at 2.7%, according to the next -the bank’s latest economic survey “Nordic Outlook”.

Therefore, SEB analysts still expect the fastest growth among the Baltic countries in Latvia this year, while the slowest growth among the Baltic countries is expected in Latvia next year, slightly behind Lithuania.

At the same time, SEB has increased the average annual inflation forecast in Latvia for this year from 1.4% to 1.5% predicted in January, while the inflation forecast annual average for next year kept at 2.4%.

In the Lithuanian economy, SEB still predicts an increase of 1.5% this year, and 2.8% in 2025.

At the same time, Lithuania’s average annual inflation forecast for this year was reduced from 2% to 1%, and the forecast for next year was kept at 2.7%.

On the other hand, in the Estonian economy, SEB analysts still predict a fall of 0.5% this year, but in 2025, Estonian GDP growth is still estimated at 3.5%.

At the same time, the forecast of the average annual inflation in Estonia for this year was reduced from 3.8% to 3.5%, but in 2025, the average annual inflation in Estonia is still predicted at 2.5%.