Economic growth in the first half of 2024 is set to be constrained, in our view, since we expect to see monetary policy on hold – most likely until sometime in the second quarter. Thereafter, we expect the current cycle to come to an end when the first rate cuts are implemented by central banks, marking the beginning of a new cycle. This end-of-cycle environment could, however, result in some nervousness in the first few months of the year, because there are still a number of uncertainties.
Where will inflation settle?
Inflation usually lags growth, i.e. there is generally a delay in terms of when inflation is visible in an economy. However, in the current cycle, the effects have been immediate and enormous. Looking ahead, inflation should continue to fall closer to the comfort zone of central banks. The question now is when will inflation bottom? The risk is that overly restrictive policies for a longer period of time could hamper the recovery of economies. Thus, we believe that Western governments and central banks will choose to accept slightly higher inflation of around 3%. The reasons for this include the post-crisis normalisation of demand, and more importantly, supply-side factors, e.g. geopolitical tensions have led to a change in global supply chains, and demographic pressures in the workforce in the West and in China could limit the labour supply going forward and put upward pressure on wages.
While we believe our base case scenario is most probable, a number of different scenarios could change the market environment. Let’s take a closer look at the four biggest wildcards that could disrupt the markets in 2024.
1. US recession jitters
While our base-case scenario does not involve a recession in the US, there is a scenario where potential cracks in the labour market could develop and growth could slip into negative territory. If the US were to fall into a recession, this would most likely also impact growth elsewhere.
2. China fails to stimulate its economy
China is another source of concern, as the economy faces a number of structural headwinds due to very adverse demographic and economic developments. In fact, China is still the biggest uncertainty in terms of growth and inflation in 2024. All measures implemented by the government thus far have not been sufficient for the country to avert growth headwinds. Crucially, what happens in China also has knock-on effects on the rest of the world, especially those economies that have become heavily tied to the Chinese economy. It remains to be seen what stimulus measures the Chinese authorities will put in place and how effective they will turn out to be.
3. US election turmoil
All eyes will be on the US presidential election that will take place in November of this year. Recent polls suggest that it will be a close call between the return of President Trump and the re-election of President Biden. In terms of the potential economic impact, a shift back to Trump would likely result in more policy uncertainty, particularly in foreign policy matters. However, the overall confrontational stance of the current government towards China would likely not change significantly. If Biden were to be re-elected and have sufficient backing by Congress, there is a risk that fiscal policy would remain highly expansive, which might mean more financial stability risks and also a weakening of the US dollar.
4. Geopolitical risks
Finally, geopolitical events are among the other potential wild cards that we could foresee. Geopolitical rivalries have returned with a vengeance in the last few years, extending well beyond the strategic confrontation between the US and China. Thus, the new geopolitical landscape is complex and fragile.