This time a year ago, about 85% of economists and market analysts, including myself, predicted that the U.S. and global economies would experience a recession. Declining but still persistent inflation suggested that monetary policy would be tightened further once a recession occurred, before easing quickly. Stock markets will fall and bond yields will remain high.
In fact, in most cases the opposite was true. Inflation fell more than expected, recession was averted, stock markets rose, and bond yields fell after rising.
Therefore, predictions for 2024 should be approached with humility. Still, the basic tasks are the same. Start with the baseline, upside, and downside scenarios and assign a time-varying probability to each.
The current standard for many, but not all, economists and analysts is a soft landing. The United States and other developed countries have avoided recession, but growth is below potential and inflation continues to fall toward the 2% target by 2025. The central bank could start cutting interest rates in the first or second quarter of this year. This scenario would be the best-case scenario for stock and bond markets, which have already begun to rise in anticipation.
Another upside scenario is the “no landing” scenario. That means growth is still above potential (at least in the US) and inflation is below market and Federal Reserve expectations. Rate cuts will likely occur more slowly and at a slower pace than the Fed, other central banks, and markets currently expect. Paradoxically, a non-delivery scenario would be negative for stock and bond markets despite unexpectedly strong growth. That’s because it means interest rates will remain somewhat high for a long time.
A mild downside scenario is a bumpy landing from a short, shallow recession that pushes inflation down faster than central banks expect. Rate cuts would come sooner, and could result in six cuts, rather than the three 25 basis point cuts the Fed has suggested, as markets are currently pricing in.
Of course, a more severe recession could occur, leading to a credit or debt crisis. However, while this scenario seemed quite likely last year due to soaring commodity prices following Russia’s invasion of Ukraine and the failure of some banks in the US and Europe, it seems likely today given the weakness in aggregate demand. That seems unlikely. That is a concern, especially if there is another large-scale stagflation shock, such as rising energy prices resulting from the Gaza conflict, which escalates into a broader regional war involving Hezbollah and Iran. Only if oil production and exports from the Gaza Strip are disrupted. bay.
Other geopolitical shocks, such as new U.S.-China tensions, will likely result in stagflationary (lower growth and inflation) unless trade is severely disrupted or Taiwan’s chip production and exports are harmed. It will be contractionary (lower growth and lower inflation) rather than upward (increasing). Another major shock could occur in the US presidential election in November. But unless there is significant domestic instability before the vote, it will have a bigger impact on the outlook for 2025. But again, political turmoil in the US will contribute to stagnation rather than stagflation.
read: Billions of people around the world will vote in 2024, and America and democracy will be on the ballot.
Regarding the global economy, both no-landing and hard-landing scenarios currently appear to be low-probability tail risks, even though the probability of no-landing is higher for the United States than for other developed countries. Whether it is a soft landing or a bumpy landing varies depending on the country and region.
For example, the United States and other developed countries appear likely to have a soft landing. Despite monetary policy tightening, growth in 2023 remained above potential, and inflation remained low as the pandemic-era negative aggregate supply shock subsided. In contrast, the euro area and the UK have been below their potential growth rates in the past few quarters due to low inflation, close to zero or negative, and could miss out on a strong performance in 2024 if the factors contributing to low growth continue. There is sex.
Several factors will determine whether most developed economies have a soft or shaky landing. First, monetary policy tightening, which takes effect over time, may have a larger impact in 2024 than in 2023. Moreover, debt refinancing could expose many businesses and households to significantly higher debt service costs this year and next. And if some geopolitical shock causes inflation to rise again, central banks will be forced to postpone rate cuts. An escalation in the Middle East conflict will also cause energy prices to rise, forcing central banks to reconsider their current outlook. And in the medium term, a number of mega-stagflationary threats could reduce growth and increase inflation.
And then there’s China, which is already experiencing a rough landing. Absent structural reforms (which do not appear to be coming soon), potential growth will fall below 4% over the next three years and close to 3% by 2030. Chinese authorities may consider it unacceptable for actual growth to fall below 4% this year. However, a 5% growth rate is simply not achievable without massive macro stimulus that raises already high leverage ratios to dangerous levels.
China is most likely to implement modest stimulus, enough to achieve growth rates of just over 4% in 2024. On the other hand, there are structural factors that inhibit growth, such as an aging society, excessive increases in debt and real estate, state intervention in the economy, and lack of economic growth. Strong social safety nets will remain. Ultimately, China may avoid a full-blown hard landing with deep debt and financial crisis. However, future growth appears to be disappointing and likely to be difficult.
The best-case scenario for asset prices, stocks and bonds is a soft landing, but this may now be partially priced in. A no-landing scenario is good for the real economy, but bad for stock and bond markets. This is because it would hinder the activities of the central bank. It is unlikely that the rate cuts will be carried through. A shaky landing is bad for stocks, at least until the short, shallow recession appears to have bottomed out, but it’s good for bond prices because it implies interest rate cuts will come sooner. right. Finally, a more severe stagflation scenario is clearly the worst for both stock and bond yields.
For now, the worst-case scenario seems the least likely. But all sorts of factors, including geopolitical developments, could undermine this year’s forecast.
This commentary was published with permission from Project Syndicate — Where Will the Global Economy Land in 2024?
more: Recession in the US remains a threat.China’s Growth Stalls and Other His 2024 Investment Risks
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