Macroeconomic and industry-specific conditions

Global economy 2024: Numerous challenges and prevailing uncertainties

The diverse external risks will pose major challenges for policymakers, society and the global economy in 2024. There are no signs of a lasting easing of tensions in either the conflict in Ukraine or in Gaza. The possibility of these conflicts spreading to other countries and the emergence of new crises cannot be ruled out either. In addition, the consequences of climate change increasingly pose a risk to geopolitical stability and the economy. Furthermore, the ongoing fragmentation of value creation worldwide could lead to new disruptions in supply chains, trade sanctions and technology embargoes. In this environment, the global economy is expected to continue its weak growth in 2024. The development of interest rates is likely to be a decisive factor for the course and momentum of the economy. Should the leading central banks initiate the first easing measures in 2024, this would stimulate private consumption, but above all investment activity and therefore boost industrial production. Fiscal policy, on the other hand, is unlikely to provide much impetus. It has been very expansive in recent years to alleviate the impact of the pandemic and to cushion the rise in energy costs. These effects are currently falling by the wayside. In its January 2024 update, the International Monetary Fund (IMF) expected the global economy to grow by 3.1% overall in 2024 - as in 2023. Compared to the previous forecast from fall 2023 (2024: +2.9%), this is a somewhat more confident outlook. The industrialized countries are expected to grow by just 1.5%, while the forecast for developing and emerging countries is 4.1%.

China's economic development is to remain subdued in 2024 with a growth target of 4.6%, as the weakness of the real estate and construction industries is having a negative impact on private incomes and subsequently on consumer demand. In addition, the employment situation is tense and debt levels have risen. In contrast, China's exports could benefit from a gradual economic recovery in industrialized countries. After reciprocal technology and raw materials embargoes were recently established, new trade policy frictions between the economic blocs cannot be ruled out. The IMF expects China's pace of expansion to lose further momentum in 2024. For Southeast Asia (ASEAN-5), which is closely linked to China's value creation and whose exports are also heavily dependent on demand from industrialized countries, the IMF is forecasting brisk growth of 4.7%. According to the IMF, India is also growing at an almost unchanged high rate (+6.5%). The forecast for Brazil predicts very low growth of just 1.7%.

In the USA, economic momentum is likely to slow down again in 2024 compared to the strong growth in 2023. Although the measures adopted as part of the US Inflation Reduction Act are supporting the economy, no new fiscal policy impetus can be expected in the 2024 election year due to the tight budget situation and the political balance of power. Furthermore, the still high interest rates are having an increasing impact on the corporate sector. In addition, private consumer demand is unlikely to grow as strongly as before, as tax stimuli will expire, the savings accumulated during the pandemic will be used up and the previously strong momentum on the labor market will slow down. The IMF expects growth of 2.1% for 2024. The US Federal Reserve has announced its first interest rate cuts if inflation continues to fall. This could stimulate corporate investment over the course of the year.

The economic weakness in the eurozone should be gradually overcome in 2024. The higher purchasing power has a positive effect. Following recent strong wage increases, real wages are rising as inflationary pressure eases. In addition, financing conditions would improve if monetary policy is eased. For example, the IMF expects the ECB to cut interest rates in the second half of 2024. The Ifo Institute, on the other hand, expects interest rates to already

fall as early as summer. Nevertheless, economic momentum remains low, as there are no signs of a recovery in fixed asset investments until 2025. The growth forecasts for the eurozone for 2024 are therefore very cautious. The IMF is forecasting growth of just 0.9%. This is 30 basis points lower than in the fall 2023 estimate. In view of a more restrictive fiscal policy in the UK, the economy there is unlikely to expand. By contrast, the Swiss economy should be somewhat stronger than the eurozone. Stagnation is expected to continue in Germany. The construction industry in particular remains under pressure. The industrial sector is also lacking impetus from the global economy. Following the Federal Constitutional Court's ruling on the debt cap, the government has to realign its fiscal policy. An analysis by the German Economic Institute (IW) based on four scenarios shows that the savings will lead to growth losses of 20 to 100 basis points.

This macroeconomic outlook forms the basis of NORMA Group’s forecast and outlook for 2024.

Gradual improvements expected in a persistently challenging environment in NORMA Group's key customer industries

Assuming that there is no further escalation of the wars in Ukraine and the Middle East or an outbreak of further geopolitical conflicts, that supply chains are not disrupted again and that inflation and energy costs continue to ease, it can be assumed that the prospects for NORMA Group's key customer industries will gradually improve over the course of 2024. However, the environment remains very challenging, particularly in the construction industry.

Mechanical engineering

In view of the weak economic signals for 2024, the impetus for mechanical engineering is likely to remain low. Muted industrial production and reduced capacity utilization suggest a cyclically low willingness to invest, especially as financing costs are only likely to improve later in the year. In contrast, the focus is increasingly shifting to investment decisions that are independent of the cycle. The establishment of regional value chains to minimize bottleneck risks and increase supply security is playing a more important role. Many industrialized countries are trying to reduce their dependence on China. In addition, the restructuring of the energy industry and the decarbonization of industrial production processes require high strategic investments that are simultaneously driven by digitalization. Industrial production and entire value chains will become even more interconnected in the future thanks to the growing possibilities offered by artificial intelligence (AI). These long-term drivers are increasingly boosting strategic investments and fundamentally supporting the mechanical engineering sector, regardless of the short-term economic situation.

Despite these structurally good prospects, the short-term outlook for the mechanical engineering sector for 2024 is gloomy. The unstable global economy under pressure from geopolitical risks and high energy and interest costs are limiting demand for capital goods. If central banks start to cut their interest rates later in the year, the picture should brighten, especially with a view to 2025. In terms of real machine sales, the VDMA (German Engineering Federation) expects the global market to continue to stagnate in 2024. The recent double-digit expansion in India (+5%) and Turkey (+4%) has leveled off, while Brazil remains at zero growth. After last year's losses, mechanical engineering in South Korea (+1%) and Taiwan (+0%) is expected to stabilize. A sector downturn is expected for the USA (-2%) and Canada (-4%) in 2024. In Switzerland (-1%) and the UK (+0%), mechanical engineering is treading water. For the EU and the eurozone, the VDMA is forecasting negative growth rates of 2%. While Spain stagnated, machine sales shrank in real terms in Italy (-2%), France (-3%) and the Netherlands (-4%). The VDMA also expects losses in the German mechanical engineering sector. According to this, machine sales are expected to fall by a further 2% in real terms in 2024 (nominal: -1%). Production is even forecast to fall by 4% in real terms.

Automotive industry

Following the strong performance of the automotive industry in 2023, which was characterized by catch-up effects and the normalization of production processes, the further recovery in commercial vehicles (CV) and light vehicles (LV, up to 6 t) should now be more moderate. Industry experts at Global Data (GD, formerly LMC Automotive) expect global commercial vehicle sales to increase by just 1.0%. Commercial vehicle manufacturers in North America (-16.7%) and Europe (-5.2%) are likely to reduce their production, while growth is expected in China (+13.3%). The commercial vehicle figures for North America and Europe are heavily influenced by the legal deadlines for emissions standards. GD is forecasting global sales growth of 3.3% for the LV market in 2024. The specialists at S&G Global Mobility, on the other hand, expect growth of only 1% to 3%. The German industry association VDA is forecasting an increase of 2.4% for the more narrowly defined global passenger car market. Momentum remains weak everywhere. GD expects global automotive production to virtually stagnate in 2024 (+0.9% to 91.4 million LV). Although slight growth is expected in China (+1.0%) and India (+2.1%), Japan (-5.9%) and South Korea (-5.4%) are likely to see a noticeable setback. GD's production forecast for the USA is optimistic at +7.8%. In contrast, Europe is only to grow moderately overall (+1.2%). Opposing trends are overlapping here: Anticipated declines in the UK (-6.9%) and Italy (-5.3%) are offset by noticeable growth in France (+4.2%) and Spain (+4.1%). According to GD, production in Germany is set to increase by 5.6%. Contrary to this, the VDA forecasts that passenger car production in Germany will stagnate.

Climate change and its consequences are also incontrovertible economic factors. Most countries have set themselves clear decarbonization targets, in some cases with fixed deadlines for banning conventional combustion engines. The capacities for the production of battery cells and electric vehicles are being expanded with high investments. This continues to drive technological change. The main bottleneck factors are the slow

expansion of the charging infrastructure and the upgrading of the electricity grids. Nevertheless, global production of purely battery-powered vehicles (BEV) and plug-in hybrids (PHEV) is expected to increase by a combined 29.7% to 18.8 million units in 2024, according to GD's forecast. From a global perspective, a strong increase of 33.0% is anticipated, particularly for BEVs, while PHEV production is expected to increase by 20.5%. Other alternative drive systems, such as hydrogen and fuel cell technology, are currently insignificant in the volume market.

Construction industry

In Asia, rapid population growth, urbanization and generally high government investment in infrastructure are the structural drivers of the construction industry. Indonesia is building a completely new capital (Nusantara). In the Philippines, Malaysia and India, the upturn in residential construction and infrastructure is set to continue in 2024. In China, however, the crisis in the sector is seen to be continuing, especially as large construction companies continue to face financial problems. Early indicators signal another difficult year for building construction in 2024. China's new construction starts in terms of floor space fell by a further 20% at the turn of 2023/2024. The decline was almost equally pronounced in residential construction and office buildings. Irrespective of this, investment in infrastructure is increasing, including in the water supply. Projects to combat climate-related damage, such as rising sea levels, are also playing an increasingly important role in Asia.

The Euroconstruct industry network (including the ifo Institute) also believes that the European construction industry remains under pressure. Both new residential construction and the renovation of existing buildings are likely to shrink significantly in 2024. However, other new building construction remains stable and civil engineering continues to grow. Overall, construction output will therefore fall by 2.1% in real terms in 2024 (Western Europe: -2.3%; Eastern Europe: +1.0%). A decline of 2.2% in real terms is expected for Germany. This scenario is also supported by a significant decline in residential building permits (eleven months 2023: -25.9%), which signals a continuation of the downturn for 2024. In this respect, the ifo Institute expects real construction investment to fall by 1.8%, and by as much as 3.7% in residential construction. The DIW (German Institute for Economic Research) also expects the construction volume to fall by 1.5% in real terms. Residential construction, including measures on existing buildings, is expected to decline at an accelerated rate of -3.4% and more sharply than the other construction segments. If, on the other hand, only new residential construction is considered, the construction volume is even expected to slump by 6.5% in real terms. The outlook for 2024 is better for commercial construction with an estimated increase of 0.3% in real terms and public construction with a forecast of +2.5% in real terms.

The outlook for the US construction industry paints a mixed picture. The main negative factor is the still high interest rates, which are increasingly weighing on a large part of the construction sector. The key figures for private residential construction indicate a decline in construction activity: The number of building permits in the residential sector fell by 11.7% year-on-year as at the end of 2023, while new construction starts fell by 9.0%. The industry experts for the North American construction sector at FMI assume that residential construction in the USA will be in a broad-based downturn in 2024 (single-family house -5%, multi-family -15%). In addition, investments in office construction are expected to fall by 2% in nominal terms and by as much as 4% for commercial buildings. On the other hand, industry experts from the research company Zonda estimate that construction starts for single-family homes will increase by 12% in 2024. The latter is supported by the annualized building permit data for the month of December 2023, based on data from the National Association of Home Builders (NAHB). These showed a 2% increase in annual approvals in 2023 compared to 2022.

The forecasts for fiscal year 2024 also show a mixed picture for expenditure on renovations and repairs, which are a key driver of the NDS business. Among other things, the Harvard JCHS Lira Index anticipates a 6.5% decline in spending on repairs and conversions in 2024. This forecast is mainly due to economic weakness in the homeowner segment and the persistently high interest rates. In addition, companies in the renovation and maintenance sector started 2024 with a significantly lower order backlog. This is likely to have a dampening effect on the forecast growth in the US construction industry, particularly in the first six months of 2024. The experts at John Burns Real Estate Consulting (JBREC), on the other hand, are more optimistic and expect the market for renovations and conversions in Central America to grow by 3% in 2024 (West America: +10%, East America: +4%) compared to the previous year.

Further growth in 2024 is expected primarily in the construction of industrial buildings (+18%) and infrastructure investments. FMI is forecasting a nominal increase of 8% for investments in US water supply.