Rolling with the economic punches

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Equity markets rallied in December, and into this year, on growing hopes that leading economies would avoid a ‘hard’ landing and that the inflationary backdrop would be benign. Several economists also upped growth forecasts for 2024. That said, with the US powering up global growth prospects while China and Europe disappoint, and with central banks remaining in caution mode, have financial markets got ahead of themselves?   

The outlook is far from uniform across the world, and the spectre of geopolitical flashpoints might upend forecasts. Add in that around a quarter of the global population heads to the polls this year¹, a record, and one thing is clear: several twists and turns lie ahead for investors.  

The US: start me up

Economists have lifted their growth forecast for most leading economies in 2024. Buoyant US consumer spending and a resilient job market have once again defied expectations, complicating the outlook for the timing and pace of rate cuts. Against that backdrop, the US Federal Reserve kept rates on hold at their January policy meeting and seemingly dashed hopes of a cut in March. 

At some point, US consumers will run out of excess savings built up in the COVID-19 pandemic, and spending will likely stall. That said, higher wages, after adjusting for inflation, and low unemployment should help to soften the blow. While growth may end up finishing 2024 being stronger than had been expected at the start, a slowdown still seems to be on the cards.

Europe: stuck in first gear

Meanwhile, in Europe both the eurozone and UK economies are struggling to grow. Indeed, a magic bullet is still proving to be illusive, and both show little evidence of having much hope of escaping last year’s doldrums. As such, growth in both areas will probably remain anaemic at best in 2024.

China: wildcard in the pack 

With pandemic-related restrictions lifted in late 2022, a strong rebound in Chinese growth was anticipated by many, twelve months ago. 

Unfortunately, the initial hopes were largely dashed. The country might have hit its annual gross domestic product (GDP) growth target of 5%, if only just. However, this still fell short of the 6% or even 7% figure that some had expected. In addition, a troubled real estate sector that is mired in debt, and a further loss of confidence, added to the gloom. 

In trying to give the economy its mojo back, the Chinese authorities are primed to support the economy further. However, so far, their initiatives have been too timid to turn things around much. There are reasons to be hopeful. Expectations for the country’s prospects are so pessimistic, with consensus pencilling in real GDP expansion of 4.6% in 2024, that there is plenty scope for a positive surprise.

Steady as we go 

The outlook for 2024 is one of weaker growth, collapsing inflation and shrinking rates. The main question is just how quickly, and by how much, will rates and inflation descend? On that point, with conflicts in the Middle East and Ukraine a source of real concern, from an economic perspective, there is much risk to supply-chain, energy-market and inflation dynamics.  

Already this year, economists have already changed their 2024 growth forecasts for most major economies. In Europe, GDP expectations have been cut, with eurozone and UK consensus forecasts slashed to 0.6% and 0.4%, respectively. Meanwhile, US consensus expansion is up to 1.3% for this year, from 0.7% in the middle of 2023. Barclays Investment Bank is even more optimistic, with 2.3% real GDP growth pencilled in. 

So far, the impact of recent events in the Middle East on energy costs has been limited and oil prices have been remarkably stable. It is, perhaps, another reminder that geopolitics rarely has a long-lasting effect on financial markets. In the face of this much uncertainty, and with macroeconomic and geopolitical landscapes able to shift quickly, appropriately diversified portfolios will be essential.

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