A security guard at the New York Stock Exchange (NYSE) in New York, U.S., on Tuesday, March 28, 2023.
Victor J. Blue | Bloomberg | Getty Images
With central banks raising interest rates quickly and those rates likely to remain higher for a longer period of time as the lagged effects kick in, the macroeconomic outlook for 2024 is far from clear.
The International Monetary Fund’s baseline forecast is for it to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024, well below the historical average of 3.8% between 2000 and 2019, led by a considerable slowdown in advanced economies.
The Washington-based institution sees US GDP growth, which has remained surprisingly resilient in the face of more than 500 basis points of interest rate hikes since March 2022, remaining among the strongest developed market performers at 2.1% this year and 1.5% next year.
The resilience of the US economy has fueled an emerging consensus that the Federal Reserve will achieve its desired “soft landing”, slowing inflation without tipping the economy into recession.
The market is now largely pricing in a peak at the current Fed funds target range of 5.25-5.5%, with rate hikes coming next year.
However Deutsche BankThe economists, in a 2024 outlook report published on Monday, were quick to point out that monetary policy operates with lags that are “highly uncertain about their timing and impact”.
“With the delayed impact of rates taking effect, we can already see clear signs of data softening. In the US, the most recent jobs report showed the highest unemployment rate since January 2022, credit card delinquencies are at 12-year highs, and defaults of high performance is comfortably off the lows,” Deutsche’s Head of Global Economics and Thematic Research, Jim Reid, and Group Chief Economist David Folkerts-Landau said in the report.
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“At the outer edges of the economy there is obvious stress, which is likely to spread in 2024 with rates at these levels. In the Euro Area, Q3 saw a -0.1% drop in GDP, with the economy in a period of stagnation since Fall. 2022 that will probably extend to mid-summer 2024.”
The German lender has a considerably gloomier forecast than market consensus, projecting that Canada will have the highest GDP growth among the G7 in 2024 at just 0.8%.
“While this is still positive and the profile is improving over the year, it means that the major economies will be more vulnerable to a shock as they work through the lag of this most aggressive migration cycle for at least four decades,” Reid and Folkerts-Landau . said, noting that potential “macro accidents” would be more likely after such a rapid tightening.
“We’ve had 10-15 years of zero/negative rates, plus an increase in global central bank balance sheets from about $5 to $30 billion at the recent peak, and it was only a few years ago that most expected ultra-loose policy for a large part of this decade. So it’s easy to see how bad leveraged investments could be made that would be vulnerable to this higher tax regime.”
US regional banks sparked global market panic earlier this year when Silicon Valley Bank and several others collapsed, and Deutsche Bank suggested some vulnerabilities remained in that sector, along with commercial real estate and private markets, creating “a bit of a race against time”. “
“Higher longer” and regional divergence
The prospect of “higher for longer” interest rates has dominated the market outlook in recent months, and Goldman Sachs Asset Management economists believe the Fed is unlikely to consider cutting rates next year unless growth slows substantially more than current projections.
In the euro zone, weaker growth momentum and a significant tightening of fiscal policy and lending conditions increase the likelihood that the European Central Bank will end its monetary policy and possibly pivot to cuts in the second half of 2024.
“While the Fed and ECB appear to have averted a hard landing during the tightening cycle, exogenous shocks or a premature pivot to policy easing may reignite inflation in a way that requires a recession to force it lower,” GSAM economists said.
“Conversely, further monetary tightening could trigger a downturn just as the effects of a previous tightening begin to take hold.”
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GSAM also noted a regional divergence in the trajectory of growth prospects and inflation patterns, with Japan’s economy surprising positively with resurgent domestic demand driving wage growth and inflation after many years of stagnation, while China’s property market leverage and demographic headwinds skew its risks to the disadvantage
Meanwhile, Brazil, Chile, Hungary, Mexico, Peru and Poland were early hikers in emerging market interest rates and were among the first to see inflation slow sharply, meaning their central banks have either started to cut rates or are close to doing so.
“In an out-of-sync global cycle, with higher for longer rates and slower growth in most advanced economies, the way forward remains uncertain,” GSAM said, adding that this requires a “diversified and risk-aware investment approach across public and private markets. .”
Recession risk ‘delayed rather than diminished’
At a roundtable event on Tuesday, JPMorgan Asset Management strategists echoed this note of caution, asserting that the risk of a US recession was “delayed rather than diminished” as the impact of higher rates seeps into the economy.
JPMAM Chief Market Strategist Karen Ward noted that many American households benefited from 30-year fixed rates when rates were still around 2.7%, while in the UK, many switched to five-year fixed rates during the Covid-19 pandemic, meaning the “transition of interest rates is much slower” than previous cycles.
However, she stressed that UK exposure to higher rates will rise from around 38% at the end of 2023 to 60% at the end of 2024, while first-time buyers in the US will be exposed to much higher rates and the cost. of other consumer debt, such as car loans, also rose sharply.
“I think the main takeaway here is that interest rates are still biting, it’s just taking longer this time,” she said.
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Ward emphasized that the American consumer has also spent saved savings faster than European counterparts, suggesting that this is “one of the reasons why the US has outperformed” so far, along with an “incredibly supportive” fiscal policy in the form. of major infrastructure programs and post-pandemic support programs.
“All of that fades into next year as well, so the backdrop for the consumer just doesn’t look as strong for us as we go into 2024, which will start to bite a little bit,” she said.
Meanwhile, corporations over the next few years will have to start refinancing at higher interest rates, especially for high-yielding companies.
“So growth slows down in 2024, and we still think the risks of a recession are significant, and so we’re still quite cautious about the idea that we’re past the worst and we’re looking at an increase from here on out,” Ward said.