The year 2023 is over and 2024 has already started. Unemployment has been low and, crucially, inflation is marking fall in most of the world. And yet, the economic outlook remains deeply uncertain. Higher interest rates are grinding their way through the system, wars are wreaking havoc around the world, and climate disasters are becoming more and more common. The macroeconomic situation in 2024 will remain difficult and uncertain, but there are key themes and questions every business leader should keep an eye on heading into next year.
Inflation has already been tamed. The optimistic case starts with rental prices, which are a major slice of household spending. Rent prices are rising much less quickly, but that takes a long time to show up in inflation statistics as most U.S. renters sign year-long leases. As more leases come up for renewal and their prices stay flat or rise only modestly the CPI could fall even further. By this way of thinking, inflation is nearly where it needs to be, there’s just a lag in the data. The Federal Reserve is ending the year on a fairly optimistic note, by not only holding interest rates steady but also signaling the possibility of multiple rate cuts in 2024.
However, that path is not preordained and things could still go wrong. Absent a significant economic downturn, the final descent to 2% inflation will take longer, and have more zigs, zags and potholes than typically considered. As the saying goes, the longest mile is the last mile home. In Europe, where the war in Ukraine has had a more dramatic impact on energy prices, the European Central Bank and Bank of England remain somewhat more hawkish in their statements.
This is still one of the best times in U.S. history to be looking for a job. The share of people in their prime working years is close to the highest it has ever been, although still below the peak of the late 1990s. The share of people who are working part-time when they would rather be full time is around all-time lows. The labor market is cooling at least slightly. The number of new hires has declined significantly over the last year and the number of job openings per unemployed worker has fallen as well. So far, though, the U.S. unemployment rate is still relatively low. And, as The Economist has argued, the longer term outlook for workers in the U.S. and Europe looks strong.
As such, there is no sudden stop but more of a rolling stop ahead for the economy perhaps a death by thousand cuts. That slowing process will be less immediately disruptive or recognizable but more long-lasting and harder to engineer an escape from given the limited fiscal and monetary space available to policy-makers. Corporate bankruptcies rose sharply in the U.S. this year, but are still well below the highs of the great financial crisis period. Many businesses are exposed to floating-rate debt, and they may be feeling pinched at some point. But the experiences of Australia, Canada, Europe, and the UK other rich economies that have much more short-term borrowing than it may suggests that strong growth can make higher interest costs tolerable. While there is going to be pain ahead for some, the overall economic impact may not be that large.
Themes to keep an eye on in 2024, China is a big wildcard. Many people had expected that the end of “Covid Zero” this year would lead to a surge in consumer spending and a big spike in oil prices, which had been held down by China’s travel restrictions. That is not what happened, in part because of longstanding structural issues and also because the government seems determined to continue squeezing the real-estate sector. Now there seems to be an attempt to pivot to investing in levels of manufacturing capacity that would only make sense if China became an overwhelmingly dominant exporter in categories where it has, until recently, not competed internationally. How that plays out and how that will affect the other major economies will be very important, and has the potential to be extremely disruptive.
Politics will remain a major driver of economic uncertainty in 2024, including via the U.S. presidential election which could have unpredictable consequences for geopolitics, trade, and the wars in Ukraine and the Mideast. China’s inaccurate data masking sputtering growth, the world’s major shipping companies stopping transit in the Red Sea, and the second largest economy in South America at serious risk of default. And that’s just scratching the surface. While the economic outlook in the U.S. is better than it was a year ago, much of the uncertainty that businesses have gotten used to over the past three years is not going away. The risks are real and numerous. Metaphor for the economy in 2024 is a jenga tower.
Some predictions may be consistent for world economy in 2024 i.e., (1) Inflation may moderate further-the sharp initial decline in global consumer price inflation from late 2022 stalled in mid-2023, reflecting a rebound in energy prices and sticky core inflation, particularly for services. Downward trend has resumed and is expected to continue through 2024. (2) Growth in North America and Western Europe may fall short of its potential-this is consistent with the goal of bringing inflation back to target rates. Weaker annual real GDP growth rates are forecast across all the largest regions in 2024 compared with 2023. Global annual real GDP is forecast to grow at a slower pace in 2024 – 2.3% compared with an estimated 2.7% in 2023 although strength in some regions including Asia Pacific will help to avert a global hard landing.
(3) Mainland China’s economy may recover slowly- Mainland China’s economy will be supported by more accommodative policy, a gradual improvement of private-sector confidence, and an expected bottoming out of the housing market downturn. It forecasts annual real GDP growth in mainland China of 4.7% in 2024, down from an expected 5.4% in 2023. (4) Policy rates may be cut in advanced economies from mid-year-With confidence building that consumer price inflation rates will fall back to target monetary policy pivots are predicted by mid-2024. Rate cuts may begin once concerns about underlying price pressures have abated. Quantitative Tightening (QT) by the world’s major central banks will continue.
(5) Emerging markets will get an earlier start on easing cycles-The central banks that are already easing generally tightened their monetary policies relatively early, keeping inflation expectations stable and second-round effects in check. In Latin America, for example, inflation rates have fallen relatively rapidly, while labor market conditions are generally not tight. Easing cycles that are already under way in Chile, Brazil and Peru are forecast to continue in the period ahead, with rate cuts also forecast in Mexico in the first half of 2024. (6) The US dollar will depreciate-The depreciation may be reinforced by a relative slowing of both US real economic growth and inflation as well as the overhang of a current-account deficit which, as a share of US GDP, is unsustainably high. The yen is expected to appreciate against the US dollar more strongly than many of its peers during 2024, in tandem with the forecast divergence of monetary policy.
(7) Financial headwinds to growth may persist- It expects the lagged impact of higher interest rates and the quickly waning effect of COVID-19-related support measures to weigh more heavily on debt servicing capacity in 2024. That is likely to drive NPLs higher in most regions. Banks will likely maintain a more cautious stance to lending as a result, requiring higher collateral, and restricting credit to lower quality borrowers. Credit growth is expected to come in below trend in most countries, dampening growth. (8) Declines in residential house prices in Western Europe have further to go- Tight credit conditions and rising borrowing costs will continue to drive prices down in 2024. The speed and intensity of the correction among economies varies, depending on the imbalances accumulated in the last decade in each housing market as well as mortgage rate fixation periods.
(9) A busy electoral calendar will create policy uncertainty- Geopolitical factors will remain an important source of risk and uncertainty surrounding our economic forecasts, potentially aggravated by important elections taking place across an unusually large number of countries. Election campaigns will set the policy agenda across several important emerging economies, including India and Indonesia in the spring and Mexico in midyear, with elections to the European Parliament also scheduled in June. Uncertainty about the outcome of the US election, along with the policy implications, will likely be a hindrance to economic prospects. (10) The energy transition may support growth in the US and Canada-US fiscal policy has turned somewhat stimulative again as the incremental funding in the Infrastructure Investment and Jobs Act begins to support actual construction, as Inflation Reduction Act subsidies for green energy projects support a huge rise in construction of electrical manufacturing and related facilities, and as the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act similarly boosts production of US fabrication plants.
These policy initiatives are one of various factors leaning against a US recession. In Canada, climate initiatives have already been in place in Alberta and Saskatchewan with the existence of eight operational carbon capture facilities. New, similar projects are in the planning stages or under construction.
