The Big Picture: 2024 European Market Outlook

2023 has been a year of uncertainty and instability. While progress was made to bring inflation down in Europe, recession fears loom. What risks and opportunities do you need to consider as you look to 2024? We review six important themes that may impact the outlook for European markets.

Capital Markets: Higher rates, economic uncertainty, and banking trepidation prompt investor caution

Overall, the 2024 capital markets outlook remains patchy, with bankruptcy filings up in Europe, credit growth decelerating sharply in most banking sectors, and central banks maintaining biases toward tightening even as they reach peak cyclical policy rates.

This continued tightening in credit conditions will help bring down inflation in 2024, albeit not as quickly as in 2023. Weaker growth is expected in most major economies, along with additional asset quality deterioration in most regions. Unemployment is expected to edge up next year in advanced economies, while downside risks include inflation persistence, tighter for longer financial conditions, and commercial real estate uncertainty.

Mergers and Acquisitions: Financial sponsors have plenty of cash to do deals

Global private equity dry powder at midyear 2023 stood at a record $2.49 trillion, up more than 11% since the close of 2022. Private equity-backed deal value fell further than deal volume year-over-year through the first eight months of 2023, an indication that fund managers were targeting smaller deals because of the higher cost of leverage.

Yet, there are signs of change, with the European Central Bank indicating that its rate-hiking campaign was approaching a turning point in the fight against inflation. Concerns over a possible global recession have been replaced by an expectation for slow growth, with S&P Global Market Intelligence forecasting mild recessions for many western European countries.

Artificial Intelligence (AI): Governance legislation gains momentum

Even though generative AI has not yet created vast streams of revenue for many of the technology companies promoting it, it has driven new waves of capital investment by these vendors as they prepare for what they expect to be widespread adoption. The rapid drive toward governance legislation worldwide is a further reflection of AI’s impact.

In April 2021, the European Commission proposed the AI Act that outlines various categories of risk, applying stricter regulation and restriction to use cases that fall under higher-risk categories. However, the proposed legislation has raised some concerns. Cédric O, former secretary of state for the Digital Sector of France, is one of several notable politicians in the European Union (EU) to have recently expressed fears that the AI Act will hinder attempts to develop foundation models in Europe. These concerns could delay approval of the Act until 2024.

Sustainability: Water stress is a major concern for Europe’s industry outlook

Future climate scenarios by S&P Global Sustainable1 forecast that water stress and drought frequency will increase in many parts of the world, with a “middle-of-the-road” climate scenario showing that this will be particularly pronounced in Spain and Italy.

More frequent or prolonged periods of drought would adversely impact the functioning of nuclear reactors in countries such as France, as seen in the summer of 2022. While the impact on nuclear reactor security remains low, insufficient water levels would force a reduction in electricity production, the function utilizing most water, as energy companies must comply with regulations to preserve set water levels and temperature at the source to conserve the ecosystem and prevent biodiversity loss.

Critically low water levels affected the Rhine River in Europe in August 2022, significantly disrupting commercial shipping and supply chains. Sectors likely to be most affected by future disruption to Rhine shipping include coal mining, automotive, food, and chemicals.

Supply Chains: Environmental policy will be relevant in Europe

Chip scarcity will continue to be an area of supply chain concern in 2024 ― from the design and manufacture of chips to testing and inserting them into computing devices. It is a highly complex system with key single points of failure. For example, the Dutch company ASML is the world’s only supplier of extreme ultraviolet (EUV) lithography machines capable of making chips on a minute scale.

Environmental policy will also become more relevant to supply chain decision-making in 2024, with three major EU policy initiatives — the Carbon Border Adjustment Mechanism, Emissions Trade Scheme and Deforestation Free Regulation — set to start exerting costs directly to induce policy changes in other countries. Regulation plays a significant role in reshoring decisions for companies looking to build resilience.

Energy Transition: New policies risk making electric vehicles (EVs) more costly

In Europe, North America and Australia, new government policies supporting battery supply chain development have included measures to limit materials from China in favor of near- and friend-shoring. For example, the EU's Critical Raw Materials Act mandates a phased reduction in China-sourced critical minerals. Countries in Africa that have an abundant supply of critical minerals are seeing greater interest, with both the EU and the U.S. seeking more critical mineral deals in Africa for long-term resource security.

These policies and supply chain developments threaten the outlook for EV affordability, potentially slowing uptake. EV policies in a number of key markets are shifting from consumer "carrots" to producer "sticks" with increased fiscal burdens to fund EV subsidies. Germany, France, and Norway reduced consumer EV purchase incentives in 2023, while France is reviewing its EV subsidy regulations to potentially exclude China-made cars, and the EU announced an anti-subsidy investigation into China's EV exports in mid-September.