Around this time last year, about 85% of economists and market analysts – myself included – expected that the US and global economies would suffer a recession. Low, but still steady, inflation suggests that monetary policy will become tighter before quickly retreating once a recession occurs. Stock markets will fall, and bond yields will remain high.
Instead, the opposite often happened. Inflation fell more than expected, a recession was averted, stock markets rose, and bond yields fell after rising.
Therefore, one should approach any predictions for 2024 with humility. However, the basic task remains the same: start with a baseline, an upside scenario, and a downside scenario, and then assign time-varying probabilities to each.
The current baseline for many, though not all, economists and analysts is a soft landing: advanced economies — starting with the United States — are avoiding a recession, but growth is below potential and inflation continues to fall toward a target of 2% by 2025, and central banks may begin To reduce interest rates in the first or second quarter of this year. This scenario would be the best for stock and bond markets, which have already begun to rise in anticipation.
The other bullish scenario is the no-fall scenario: growth – at least in the US – remains above potential, and inflation falls below what markets and the US Federal Reserve expect. Interest rates will be lowered later and at a slower pace than the Fed, other central banks, and markets currently expect. Ironically, a no-fall scenario could be bad for stock and bond markets despite surprisingly stronger growth, because it implies that interest rates will remain somewhat higher for a longer period.
The modest downside scenario is a bumpy landing accompanied by a short, superficial recession that pushes inflation down, more quickly than central banks expect. A rate cut will come sooner, and instead of the three 25 basis point cuts the Fed has indicated, there may be the six cuts that markets are currently pricing in.
Of course, there may also be a more severe recession, leading to a credit and debt crisis. But although this scenario seemed highly likely last year – given the rise in commodity prices following the Russian invasion of Ukraine and the failure of some banks in the US and Europe – it seems unlikely today, given weak aggregate demand. This will only become a concern if there is a new major inflationary shock, such as the rise in energy prices resulting from the conflict in Gaza, and especially if the matter escalates into a broader regional war involving Hezbollah and Iran that disrupts oil production and exports from the Strip. Gulf.
Other geopolitical shocks, such as new US-China tensions, are likely to be less deflationary (lower growth and higher inflation), unless trade is significantly disrupted, or Taiwanese chip production and exports weaken. Another major shock could come in November with the US presidential elections. But this will further affect the outlook for 2025, unless there is significant internal instability before the vote. But again, political turmoil in the United States would contribute to recession, not stagflation.
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Regarding the global economy, both the no-landing scenario and the hard-landing scenario currently look like low-probability tail risks, even if the non-landing probabilities are higher for the United States than for other advanced economies. Whether there is a smooth landing or a bumpy landing depends on the country or region.
For example, the United States and some other advanced economies appear to have a soft landing. Despite monetary policy tightening, growth in 2023 was above potential, and inflation continued to decline as negative pandemic-era aggregate supply shocks abated. By contrast, the Eurozone and the UK have seen growth below potential near zero or negative over the past few quarters with low inflation and may fail to deliver a stronger performance in 2024 if factors contributing to weak growth continue.
Determining whether most advanced economies will experience a soft or bumpy landing depends on several factors. For starters, monetary policy tightening, which operates with a time lag, could have a greater impact in 2024 than it did in 2023. Moreover, debt refinancing could leave many firms and households with much higher debt servicing costs. year and next year. If a geopolitical shock leads to another bout of inflation, central banks will be forced to postpone interest rate cuts. It would not take much for an escalation of conflict in the Middle East to push energy prices higher and force central banks to reconsider their current forecasts. Several stagflationary threats over the medium horizon could push growth down and inflation up.
“China is already experiencing a bumpy landing. “
Then there is China, which is already experiencing a bumpy landing. Absent structural reforms (which do not appear imminent), its growth potential will fall below 4% in the next three years, then fall to nearly 3% by 2030. Chinese authorities may find it unacceptable that actual growth Less than 4% this year. But a 5% growth rate is not achievable without massive macroeconomic stimulus, which would push already high leverage ratios to dangerous levels.
China is likely to implement moderate stimulus, sufficient to achieve growth slightly above 4% in 2024. At the same time, there are structural pressures on growth – an aging society, debt and real estate accumulation, state intervention in the economy, and the absence of monetary policy. A strong social safety net – it will last. Ultimately, China may avoid an all-out hard landing amid severe debt and financial crisis; But it will likely look like a bumpy landing ahead, with disappointing growth.
The best case scenario for asset, stock and bond prices is a soft landing, although this may now be partly in the cards. A no-land scenario is good for the real economy but bad for stock and bond markets, because it will prevent central banks from holding on. From following interest rate cuts. A bumpy landing would be bad for stocks — at least until the short, shallow recession looks like it has bottomed out — and good for bond prices, because it implies sooner and faster interest rates. Finally, a more severe stagflation scenario is clearly worse for both stock and bond returns.
Right now, the worst-case scenario seems least likely. But any number of factors, not least geopolitical developments, could spoil the outlook this year.
This commentary is published with permission from Project Syndicate – Where will the global economy land in 2024?
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