GLOBAL ECONOMY & OUTLOOK ECONOMIC OVERVIEW OUTLOOK Looking back at 2023, the global economy encountered numerous challenges that significantly impacted the banking sector. These included a slowdown in global GDP growth, particularly in China and Eurozone, and an inflation spike driven by geopolitical strife and supply chain complications, which led major central banks to hike interest rates aggressively. The banking sector also grappled with heightened borrowing costs and cautious investment sentiment due to increased market volatility and economic uncertainty, fuelled further by geopolitical conflicts such as the Russia-Ukraine war and Israel-Hamas. In response, the banking market saw varied effects: increased interest rates initially improved banks’ net interest margins, but the economic slowdown later pressured profitability through rising loan defaults and declining loan demands. The quality of credit suffered, with a potential prolonged slowdown prompting banks to increase loan provisions and tighten lending standards. Investment banking activities, especially in areas like IPOs and mergers, were dampened by the volatile markets. The banking industry faced a challenging year, necessitating adaptability and strategic risk management to maintain long-term resilience amidst these turbulent times. In 2024, the global economic landscape is expected to witness a slight dip in growth, with the International Monetary Fund (IMF) forecasting a growth of 2.9%, compared to 3.0% in 2023. This dip is largely attributed to modest growth in advanced economies like the US and Europe, primarily due to challenges such as constrained lending, a slowdown in manufacturing, and vulnerability to geopolitical tensions. A potential soft landing is on the horizon in 2024, with expectations that major global central banks will commence rate cuts starting from the second quarter. This strategic adjustment could provide a much-needed impetus to the economy. In the UK, economic forecasts suggest that headline inflation will align closer to the Bank of England’s 2% target by 2024, buoyed by a decline in global energy prices. This adjustment is anticipated to ease inflationary pressures, contributing to a more stable economic environment. Overall, the year 2024 is poised to present a mixed economic scenario, with emerging markets expected to be the primary drivers of growth. In contrast, advanced economies will likely face ongoing challenges. This diverse global economic landscape underscores the importance of strategic planning and adaptability in navigating future uncertainties. Link to Risks: CR MR LR OR RCR 43 1 2 3 4 5 6 7 8 9 www.bankislam.com MANAGEMENT DISCUSSION AND ANALYSIS – STRATEGIC REVIEW Operating Environment
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