Market outlook
Update: 7 November 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 (as recently evidenced by Storm Boris in Central Europe). 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
US growth in the third quarter amounted to 0.7%, the same as in the second quarter, driven primarily by private consumption. Growth is expected to moderate again to about 0.3% in the fourth quarter of 2024, when the labour market tightness is expected to ease further.
Euro area growth in the third quarter amounted to 0.4%, after 0.2% in the second quarter. The manufacturing sector continues to exhibit a persistent weakness, while the expected service sector recovery has not (yet) materialised. Growth is expected to continue at about its current pace, picking up in the second half of 2025 on the back of recovering domestic consumption.
Quarter-on-quarter growth in Belgium amounted to 0.2% in the third quarter, after 0.3% in the second quarter. Relatively strong domestic demand continued to outweigh 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.
The Czech economy grew by 0.3% in the third quarter, after 0.4% in the second quarter. This was supported by private consumption, against the background of a weak and delayed industrial recovery and the adverse economic impact of the flooding there. Weak growth of the industrial sector also weighed heavily on third-quarter growth in Hungary (-0.7%). Based on our latest estimates, third-quarter growth in Bulgaria and Slovakia was relatively strong, amounting to 0.6% and 0.8%, respectively.
The main risk to our short-term outlook for European growth is the possible repercussion of the US elections in November. Moreover, the conflict in the Middle East poses the risk of higher energy and commodity prices. Other risks include the persistence of the current weakness of the global manufacturing sector. Specific European risk factors include the government budget discussions in the EU for 2025, which may generate increased uncertainty and hence adversely affect economic growth and temporarily raise risk premiums for vulnerable euro area member states.
Our view on interest rates and foreign exchange rates
Disinflation in the euro area and the US was broadly on track in the third quarter. In the euro area, inflation fell more than expected in September to 1.7%, driven mainly by lower energy prices. However, inflation is expected to increase again in the period ahead. After January 2025, inflation is expected to resume its downward trajectory towards the ECB’s 2% target rate.
The ECB continued its easing cycle and cut its deposit rate in September and October by 25 basis points each time. It is expected to cut this rate by another 25 basis points in December 2024. Further rate cuts are expected in 2025.
In September, the Fed also started its easing cycle by cutting its policy rate by 50 basis points. The size of this rate cut was motivated by the weakness of labour market data at the time, which triggered a feeling of pessimism and fears of a recession. These disappeared when labour market data proved to be more resilient than feared. The Fed is expected to reduce its policy rate by 25 basis points two more times in 2024. Further rate cuts are expected in 2025.
Ten-year bond yields in the US and Germany gradually moved lower, before bottoming out in mid-September. The main drivers were growth concerns relating mainly to the US labour market. When these concerns eased, bond yields rebounded markedly to their current level of about 4.20% and 2.30% in the US and Germany, respectively. This caused the US-German yield spread to sharply widen again. This yield spread was also the main driver of the US dollar-euro exchange rate. The dollar gradually depreciated as the US-German yield spread narrowed. With the US-German spread widening again from the second half of October, the US dollar started to regain ground.
The Czech National Bank reduced its policy rate in two steps of 25 basis points each in the third quarter. Two more 25-basis-point rate cuts are expected by the end of 2024 and probably one more in the first quarter of 2025. Since the beginning of the third quarter, the Czech koruna has been relatively stable, underpinned primarily by global risk sentiment, interest rate differentials with the major central banks and the exchange rate with the US dollar. The koruna is expected to appreciate moderately in the coming quarters.
In the third quarter of 2024, the National Bank of Hungary cut its policy rate twice by 25 basis points each time. Additional gradual cuts are expected by the end of 2024 and in 2025. On balance, the Hungarian forint has depreciated against the euro and – driven by the structural positive inflation differential with the euro area – is expected to depreciate further in 2025.
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.