The Year Ahead, 2024

15 January 2024

Global growth slowed last year as the effects of high inflation and rising interest rates weighed on activity in the rich world. Things could have been worse.

Activity in the UK and the euro area has weakened significantly, but among the major economies only Germany has fallen into recession, and a mild one at that. Activity in the US and Japan has accelerated. Emerging market economies as a whole have shown good growth partly as a result of China’s recovery from the pandemic.

A number of big, much analysed risks, failed to materialise. This time last year the talk was all about to the risks to growth, everything from energy blackouts and surging energy prices to mass layoffs, collapsing house prices and deep financial crisis. None occurred.

Those shocks that did occur, including the regional banking crisis in the US, the conflict in the Middle East and the emergence of deflationary risk in the Chinese economy, have not so far had pronounced negative effect on growth.

According to the Internal Monetary Fund global growth slowed from 3.5% in 2022 to 3.0% in 2023, a rather higher growth rate than the IMF had forecast at the start of the year, largely because of the strength of the US economy.

The IMF expects global growth to remain at about 3.0% this year, with emerging markets generally holding up well but a more uncertain picture in developed economies.

It is too early to say that the global economy is out of the woods. The last two years have witnessed a bout of inflation, an energy price shock and a tightening of monetary policy the likes of which have not been seen for 40 years. The impact on growth has been moderate by the standards of past economic cycles, but has not been fully felt. The effect of rising interest rates on mortgage costs, and of rising rents, have yet to fully feed through to consumers. Unemployment lags the economic cycle and is likely to nudge higher this year. We see business insolvencies continuing to rise.

As a result activity in the UK, the euro area and the US is likely to be lacklustre in the first half of 2024 but, with further falls in inflation, activity is likely to stir in the second half of the back of rising real incomes and lower interest rates. We think UK GDP is likely to stagnate in the current quarter but by the end of the year growth is likely to be running close to a trend. A similar outcome, of a weak start being followed by firmer second half seems plausible in the US and the euro area.

For now the risks to global growth lie firmly on the downside. The resilience that helped support growth and shrug off the effect of shocks last year cannot be taken for granted. Economic activity is more volatile than the stylised forecasts of economists suggest. Few expect to see a strong or swift recovery.

We see three particular sources of risk.

Number one is that inflation proves more embedded in the system, with wages and underlying prices, excluding energy and food, holding up. That could force central banks to raise rates increasing the risks of a hard landing.

Geopolitics is an obvious second source of risk. Conflicts in Ukraine and the Middle East, disruption to trade in the Red Sea and elections in the US and more than 50 other countries are the current focus, but new shocks could emerge quickly and unexpectedly. Sometimes they have little discernible effect on overall growth, as with the 9/11 attacks on the US. On other occasions, as happened in the wake of the invasion of Ukraine, with a surge in gas prices, the economic effects are significant. The risks are greatest when geopolitics disrupt financial markets, energy supply or trade. (The last two factors motivate current concerns about the economic impact of attacks on freight shipping in the Red Sea). Elections, particularly the US election on 5 November, are another event risk. The US elections currently seems likely to be a contest between radically visions of America, with Mr Trump promising major new import tariffs, an activist, pro-fossil fuel industrial policy and tax cuts.

The third category of risk relates to financial markets. High interest rates and weakening growth often exposes hidden weaknesses or contradictions in financial systems. This has been a feature of major rate hiking cycles. The dotcom crash of 2000, the global financial crisis of 2008 and last year’s blow up in regional US banks were all preceded by significant rate rises. Our measure of stress in financial markets is currently running at reassuringly low levels and central banks and regulators have responded swiftly and effectively to the shocks which have emerged, such as the turmoil in the UK government bond market in late 2022. Still, history suggests that this is the stage in the economic cycle things have a habit of going wrong in financial markets. Vigilance is warranted.

The good news is that inflation, the principal cause of the West’s problems, is heading down. UK inflation has dropped from an October 2022 peak of 11.1% to 3.9% in November and is running at even lower rates in the US and the euro area. Progress from here will be erratic and dependent on a fading of commodity price pressures, softer wage growth and an absence of supply shocks. But it is quite possible that inflation could drop to around the 2.0% mark in the UK, US and euro by the middle of the year paving the way for central banks to reduce rates. Financial markets have become more optimistic on this front, and are now pricing interest rates cuts of more than 100bp in the UK, US and euro by the end of this year.

Falling rate expectations have, in turn, bolstered equity prices, with US and euro area equities up by 16% and 14% respectively since late October. Since the end of December rising oil prices and the disruption to trade in the Red Sea have unsettled markets. But investors still seem to be positioned for a relatively benign outcome for the global economy this year.

That the global economy has weathered the effects of high inflation, high interest rates and an energy shock as well as it is quite an achievement. A soft landing is not in the bag. Engineering a return to low inflation without landing the economy in recession is notoriously difficult, especially against a background of elevated geopolitical risk. The most likely outcome is that growth will come back in the rich world this year. Quite a lot needs to go right for that to happen.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index closed the week down 0.8% at 7,625.

Economics

The UK economy bounced back in November with a better-than-expected monthly growth of 0.3% driven by the service sector, easing fears of a recession in the second half of 2023
Brent Oil prices rose above $80 a barrel after tensions in the Red Sea after the world’s largest tanker industry body Intertanko advised its members to “stay well away” from the Bab al-Mandab strait near Yemen
AP Møller-Maersk CEO Vincent Clerc warned that it could take months to reopen the crucial Red Sea trading route meaning the region’s geopolitical conflicts may cause a global inflationary shock
US consumer price inflation increased more than expected to 3.4% in December, causing markets to pair back expectations for rate cuts by the Federal Reserve
President of the New York Federal Reserve, John Williams, reiterated that the central banks will “need to maintain a restrictive stance of policy for some time” to bring inflation down to the 2% target
US consumer credit card delinquency rates surpassed pre-pandemic levels in Q3 2023, driven by higher borrowing costs and dwindling savings
Lower oil and gas prices, as well as a weaker rouble in 2023 cut Russia’s energy revenues by 24% in 2023, contributing to a rising budget deficit which reached 1.9% of GDP last year
European Central Bank vice-president Luis de Guidos expects the euro area economy to contract in Q4 2023 and enter a technical recession
Euro area monthly retail sales fell by 0.3% in November, pointing to continued weakening in the region
House prices in the euro area rose by 0.8% in Q3 2023 from the previous quarter driven by strong growth in Poland, Romania, Denmark, Bulgaria and Spain, while prices fell again in Germany, Finland and Luxembourg
Consumer prices in China fell by 0.3% on an annual basis in December as the economy remained in deflationary territory amid a lack of internal and external demand
Chinese annual total trade volume fell by 4.6% in 2023 due to weak global demand, despite a 47% rise in exports to Russia
The OECD urged the Bank of Japan to increase interest rates and abandon its ultra-loose monetary policy as inflationary pressures continue
The IMF agreed to release $4.7bn to Argentina despite the country’s failure to meet the terms of its $47bn loan agreement, in a boost to the new libertarian president Javier Milei as he grapples with the country’s severe economic crisis

Business

Aircraft manufacturer Airbus posted record orders in 2023 while Delta Air Lines reported a record $55bn in revenues last year as tourist demand returned to pre-pandemic levels
Car rental group Hertz announced plans to sell a third of its global fleet of electric vehicles to purchase more internal combustion engine cars, due to the higher damage cost of electric vehicles and slower-than-expected take-up
Profits of real estate company Savills were dented by an “extremely subdued” property market as higher mortgage rates in Europe and North America dented demand
UK housebuilder Persimmon reported higher-than-expected sales as mortgage rates eased in Q4 2023
High street retailer Marks and Spencer and supermarkets Tesco and Sainsbury’s reported better-than-expected sales over the holiday period, mainly due to the strong performance of their luxury ranges
US bank Citigroup announced 20,000 job cuts after reporting its worst quarterly loss in 15 years also due to a $4bn loss tied to operations in Argentina
US bank JPMorgan Chase earned a record $50bn in profits in 2023 as higher interest rates increased revenues offsetting lower credit demand
US bank Wells Fargo reports a 9% rise in profits in Q4 2023 despite an increase in bad loans provisions as delinquencies rise
The world’s largest asset manager BlackRock revealed its assets surpassed $10tn for the first time since 2021 as revenues rose 7% in Q4 2023, yet announced 600 job cuts to reallocate resources to their fastest growing areas such as technology, ETFs and private markets
Luxury retailer Burberry announced weak sales over the holiday period and warned that its full-year forecast for 2023 would be lower than expected due to a global slowdown in demand for luxury goods and volatile foreign exchange rates
Launches of new ESG funds collapsed in the second half of 2023 – only six new EFT funds were launched compared to 55 in the first half and an annual average of 100 between 2020 and 2022 as ESG funds encounter more scrutiny than ever before

Global and political developments

The US and UK launched air strikes against Iran-backed Houthi rebels in Yemen following an increase in attacks on commercial ships in the Red Sea
Lai Ching-te's Democratic Progressive party won the Taiwanese presidential elections despite losing its legislative majority, in a blow to China’s hope of a unification with Taiwan
US President Joe Biden send a high-level delegation of former top officials to Taipei after the election in Taiwan on Saturday – a move that has increased tensions with China
Beijing called for a reduced US military presence in the South China Sea
UK prime minister Rishi Sunak visited Kyiv and announced a further £2.5bn worth of military aid to Ukraine

And finally… a misunderstanding between France’s mint, Monnaie de Paris, and the European Commission meant that France had to destroy and remint 27 million coins after it was found that the way the stars of the EU flag had been depicted was not in line with Commission rules - franc-ly flawed

Back to News listing