Market outlook
Update: 8 August 2024
Risk statement
As we are mainly active in banking, insurance and asset management, we are exposed to a number of typical risks for these financial sectors such as – but not limited to – credit default risk, counterparty credit risk, concentration risk, movements in interest rates, currency risk, market risk, liquidity and funding risk, insurance underwriting risk, changes in regulations, operational risk, customer litigation, competition from other and new players, as well as the economy in general. KBC closely monitors and manages each of these risks within a strict risk framework, but they may all have a negative impact on asset values or could generate additional charges beyond anticipated levels.
At present, a number of factors are considered to constitute the main challenges for the financial sector. These stem primarily from the mostly indirect, but lingering, impact of the war in Ukraine, including the delayed effects of the increase in energy and commodity prices and the supply-side shortages it triggered. This led to a surge in inflation, resulting in upward pressure on interest rates, lower growth prospects (or even fears of a recession) and some concerns about the creditworthiness of counterparties in the economic sectors most exposed. Geopolitical risks remain elevated, as evidenced by the escalating conflict in Gaza/Israel and the Middle East. A significant number of elections in 2024 across the world, including in the US, are adding to the geopolitical uncertainty. All these risks affect global, but especially, European economies, including KBC’s home markets. Regulatory and compliance risks (including in relation to capital requirements, anti-money laundering regulations, GDPR and ESG/sustainability) also remain a dominant theme for the sector, as does enhanced consumer protection. Digitalisation (with technology, including AI, as a catalyst) presents both opportunities and threats to the business model of traditional financial institutions, while climate and environmental-related risks are becoming increasingly prevalent. Cyber risk has become one of the main threats during the past few years, not just for the financial sector, but for the economy as a whole. The war in Ukraine has triggered an increase in attacks worldwide. Finally, we have seen governments across Europe taking additional measures to support their budgets (via increased tax contributions from the financial sector) and their citizens and corporate sector (by, for instance, implementing interest rate caps on loans or by pushing for higher rates on savings accounts).
We provide risk management data in our annual reports, quarterly reports and dedicated risk reports, all of which are available at www.kbc.com.
Our view on economic growth
After posting 0.4% in the first quarter of 2024 (non-annualised), US growth accelerated in the second quarter to 0.7%, driven primarily by inventory build-up and private consumption. Quarter-on-quarter growth is expected to moderate again to about 0.3% in the third quarter of 2024, since the strong inventory build-up of the second quarter is unlikely to be repeated.
Euro-area growth in the second quarter was in line with the first quarter (0.3%). The manufacturing sector exhibited persistent weakness, while the service sector displayed signs of recovery, which likely supported second-quarter growth. From the second half of 2024 onwards, growth is expected to continue around the current growth rate, driven mainly by domestic consumption that will benefit from a recovery in real wages.
Quarter-on-quarter growth in the second quarter in Belgium amounted to 0.2%, slightly lower than in the first quarter. Relatively strong domestic demand probably still outweighed the negative contribution to growth of net exports. For the remainder of 2024, we expect growth to remain broadly in line with that of the euro area.
Meanwhile, the Czech economy accelerated its recovery in the second quarter of 2024 to 0.3%, despite weak foreign demand, compared to 0.2% in the first quarter. Second-quarter growth was supported mainly by private consumption due to real wage growth. Weak external demand weighed much more on second quarter growth in Hungary, which surprised strongly to the downside (-0.2%). Based on our latest estimates, second quarter growth in our other Central European home markets points to an ongoing recovery (Bulgaria and Slovakia both 0.7%).
The main risks to our short-term outlook for European growth include the global weakness of the manufacturing sector and adverse spillovers to Europe from a potentially weaker-than-expected US labour market. Moreover, current geopolitical tensions pose risks in the form of escalating protectionism, supply chain disruptions and higher energy and commodity prices. In addition, the global economic implications of the outcome of the US presidential election in November 2024, as well as the government budget discussions in the EU for 2025 against the background of the re-activated rules of the EU Stability and Growth Pact, might impact growth and the short-term country risk premiums of European economies.
Our view on interest rates and foreign exchange rates
Disinflation in the euro area paused in the second quarter, but is most likely still on track. Meanwhile, the latest US inflation data pointed to a resumption of the disinflation process after a number of earlier inflation upticks. Consequently, the ECB started its rate-cutting cycle in June 2024 by lowering its deposit rate by 25 basis points and is expected to cut it by another 25 basis points in September. The Fed is also expected to start its rate-cutting cycle in September. In the background, the run-down of the Fed’s and ECB’s balance sheet (Quantitative Tightening) continues. Moreover, the ECB will end reinvesting maturing assets in its PEPP portfolio from 2025 on, after a transition period in the second half of 2024.
Benchmark US and German bond yields in the second quarter have been fluctuating. This volatility was caused by evolving market expectations of Fed and ECB rate policies and changing risk sentiment towards global and specific European (political) risk factors. In early August, market fears about US growth in particular caused US and, to a lesser extent, German yields to fall markedly.
The US dollar was volatile during the second quarter. The two main driving forces were market expectations for the monetary policy pursued by the Fed and the ECB, as well as risk sentiment prompting a flight to safe (USD) assets that led to a stronger dollar at the time of the European and subsequent French parliamentary elections. When it became clear that the extreme risk scenarios in both elections had been avoided, risk sentiment normalised again somewhat, resulting in a weaker US dollar. We expect the US dollar to appreciate mainly as a result of deteriorating risk sentiment in the run-up to the US elections in November. However, based on long-term fundamentals, the US dollar is likely to gradually weaken again from the fourth quarter of 2024 on.
In early May, the Czech National Bank (CNB) continued its rate-cutting cycle by a further 50 basis points, followed by another 50-basis-point cut at the end of June and a smaller cut by 25 basis points in early August. More rate cuts are expected. Since the beginning of the second quarter, the Czech koruna has basically remained broadly stable. However, there were two distinct periods. Until mid-June, the koruna appreciated markedly, mainly on the back of the more cautious easing approach of the CNB and the weakness of the US dollar at that time. From mid-June on, when risk sentiment deteriorated suddenly and the US dollar appreciated, the koruna started depreciating again. However, against the background of still substantial interest rate differentials, and as part of a more structural convergence process for the Czech economy, the koruna is expected to appreciate moderately again in the coming quarters.
In the second quarter of 2024, the National Bank of Hungary (NBH) cut its policy rate three more times, twice by 50 basis points and once by 25 basis points. In July, another cut of 25 basis points was effected. More gradual rate cuts are expected. The exchange rate of the Hungarian forint against the euro has been volatile since the start of the second quarter. Major driving factors have been (global) risk sentiment and the pace of rate cuts by the NBH. Driven by the structural inflation differential with the euro area, the forint is expected to depreciate in the course of 2024 and beyond.
For more detailed analyses and data, please refer to KBC Economics
Disclaimer: the expectations, forecasts and statements regarding future are based on assumptions and assessments made when drawing up this text. By their nature, forward-looking statements involve uncertainty. Various factors could cause actual results and developments to differ from the initial statements. Moreover, KBC does not undertake any obligation to update the text in line with new developments.