The global economy slowed but remained resilient, skirting what many feared would be an inflation and commodity price-driven recession this year.
Although growth is estimated to be even slower in 2024, the worst is perhaps over and headwinds are expected to ease, analysts say.
The consistently high interest rates are expected to come down, although inflation, trending down, is still not in the 2 per cent target range of most central banks in the world.
Many analysts expect the next major monetary policy move in 2024 from the US Federal Reserve will be a rate cut, although they remain divided on when the Fed is likely to slash its benchmark rate and by how many basis points the regulator will lower it.
While inflation and rates trending down will bode well for growth in the latter half of next year, risks remain that can hamper economic momentum.
Geopolitical tensions, the health of the US and Chinese economies, volatility in oil prices, widening growth divergence, worryingly high global debt levels, and the mounting cost of climate are among the factors that will determine if the global economy has a soft landing next year.
Recession fears
The entirety of this year was defined by muted growth, dotted with geopolitical shocks and an abrupt banking crisis that threatened to derail growth. The continuation of the sharpest monetary policy tightening in decades to subdue consumer prices also took the wind out of sails.
The International Monetary Fund expects global economic growth at 3 per cent this year, slower than the 3.5 per cent expansion recorded in 2022, remaining below the historical world growth average, the Washington-based fund said in its World Economic Outlook in October.
For next year, the IMF expects global gross domestic product to expand by 2.9 per cent, while the World Bank estimates 2.4 per cent growth and the Organisation of Economic Co-operation and Development forecasts it at 2.7 per cent.
Both the IMF and the World Bank anticipate growth to remain slow and uneven, especially in emerging and developing economies.
“Looking at 2024, we anticipate uncertainty to persist, with sub-trend growth projected across the world’s economies,” State Street Global Advisor said in its 2024 Outlook report.
“While the path to a soft landing appears viable, with growth decelerating but not collapsing, the effects of monetary policy tightening are still working their way through the system.”
In addition, escalating geopolitical tensions and continuing macroeconomic headwinds will continue to test economies and 2024 will “likely be a year in flux with many factors pressuring the path to global recovery”, State Street, one of the biggest global asset managers, said.
Although the global economy will grow at a slower pace next year, it is unlikely to face a recession.
“This time last year there were widespread fears of a recession that was expected to happen this year. Not only did that recession not happen, but we’ve ended up with above-potential GDP growth,” Nora Szentivanyi, global economist at JP Morgan, said.
The global economy, as of the fourth quarter this year, is tracking 2.8 per cent year-on-year growth.
“I think we can safely say that the global economy has gone through this year being a lot more resilient than anticipated, because of strong private sector fundamentals – healthy balance sheets and a little bit of government support as well,” Ms Szentivanyi said.
However, despite recent progress, “the path to a soft economic landing remains challenging”, Michael Strobaek, chief investment officer at Swiss private bank Lombard Odier, said.
“The historical evidence argues against ruling out a recession, but we do not expect to see a severe US downturn this time.”
Among the main concerns next year is geopolitics outweighing economic risks in the wake of a flare-up in the Israel-Gaza war or a deterioration in the US-China relationship.
“We think the bigger dangers in 2024 will be geopolitical, which have more potential to throw expectations off track,” William Davies, global chief investment officer at asset manager Columbia Threadneedle Investments, said.
“These pressures impact companies directly, as finding alternative energy supplies or building new supply chains will be costly.”
The global economy, he said, “appears to be travelling on a path guided by low or even slowing growth, falling inflation and high interest rates”.
However, sceptics believe a deeper recession is possible due to lingering high interest rates.
“Investors should prepare for that middle road between those outcomes, which I think is the most likely scenario over the next six months,” Mr Davies said.
Inflation and rates outlook
US inflation eased in November but was higher than some market expectations, cooling any hopes that the Fed would cut interest rates early next year.
The Consumer Price Index (CPI) rose 0.1 per cent last month. On an annual basis, inflation rose 3.1 per cent, down from 3.2 per cent in October.
Core CPI rose 4 per cent annually, unchanged from October.
The Fed left interest rates unchanged at its last policy meeting of the year. Interest rates are now at 5.4 per cent, a 22-year high, up from close to zero in March last year.
However, the central bank has indicated that it would cut interest rates more than once next year.
“According to activity on Fed funds futures, the Fed should gently start cutting the rates by May; that possibility is given around 75 per cent probability, slightly less than 80 per cent before [the latest] CPI print, while the probability of a March hike fell to around 44 per cent from nearly 50 per cent on that mini spike in monthly headline inflation,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said.
“In summary, rate cut bets are being placed for a rate cut in March or May 2024.”
High interest rates should remain in place at least through the first half of 2024, and the European Central Bank is likely to be the first to cut rates midyear, with the Fed following suit in September, Mr Strobaek said.
“The global economy should then start to benefit from lower borrowing costs. If inflation proves sticky, or strong growth persists, that scenario would be at risk."
Lawrence Golub, chief executive of Golub Capital, a $60-billion US-based private credit company, said they are very confident that the reported inflation in the US will continue to be low, “maybe not 2 per cent, the Federal Reserve's target but more generally heading in that direction”.
“Combine that with there being a presidential election and the Fed not wanting to seem to be taking political sides. In this particular cycle … unless there's a surprise on CPI, they absolutely are going to have to cut [rates] and cut multiple times,” he told The National.
“The forward curves show about 100 to 120 basis point reduction over the next 12 months, and I see the first cut in the spring,” he said.
Demand fears weigh on oil
Oil prices, which touched nearly $140 a barrel following Russia’s invasion of Ukraine last year, have taken a beating this year, despite supply cuts made by the Opec+ alliance and record crude demand from China, the world’s second-largest economy.
Brent prices are down nearly 8 per cent since the start of the year.
Analysts blame the fall in prices on concerns of non-compliance by some producing countries and fears that the Opec+ group would unwind its production cuts in the second quarter.
On November 30, the group announced voluntary production cuts of 2.2 million barrels per day for the first quarter of 2024.
“With market liquidity drying up as we approach the end of the year, prices are likely to stay volatile and further lows cannot be excluded,” UBS strategist Giovanni Staunovo said in a research note.
Record production in the US and higher crude supply from Iran have eased concerns of a tight crude market in the fourth quarter.
“We classify the year 2024 for the energy complex as one of balance with bearish skews,” MUFG, Japan’s largest lender, said in a research note.
However, global oil markets will remain supported by “tight” micro fundamentals, Opec+ driven cuts and effective hedging value against negative geopolitical supply shocks, the bank said.
Opec expects oil demand to expand by 2.2 million bpd next year, nearly double the International Energy Agency’s estimate of a growth of 1.1 million bpd.
Meanwhile, natural gas prices are expected to be stable next year on high European gas stocks and lower demand growth in the US, MUFG said.
Dutch Title Transfer Facility gas futures, the benchmark European contract, were trading at €34.17 ($37.67) per megawatt hour on December 22 after falling about 60 per cent since the start of the year.
What’s in store for stock markets?
This year so far has turned out to be a great year for equity investors after a dismal 2022.
Developed market equities are up almost 20 per cent year-to-date in total return terms.
“That said, digging below the surface, the rally has been mainly driven by a few mega-cap technology stocks in the US,” Mathieu Racheter, head of equity strategy research at Julius Baer, said.
The so-called “Magnificent 7” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla – did the heavy lifting in equities this year, he said.
“After the phenomenal outperformance, consensus has shifted towards expecting a mean reversion, ie the rest of the market catching up and outperforming the cohort in 2024,” he said.
“We disagree with that notion and believe the outperformance is sustainable beyond 2023.”
However, despite a stellar year, investors will closely be watching geopolitics that can potentially derail the stocks rally next year.
“Another wild card is the US elections. It is hard to predict the effect, if any, it will have on the markets – and it is that very unpredictability that is the problem. Markets hate uncertainty,” Mr Davies at Columbia Threadneedle Investments said.
The UK may also go to the polls, with January 2025 the very latest Prime Minister Sunak can wait until he calls a ballot.
“Investors with exposure to European assets will also be watching political developments across the EU, too, as so-called populist parties and their leaders continue to make inroads,” Russ Mould, investment director at AJ Bell, said.
Monetary policy and economic growth will remain key drivers of financial markets in 2024. However, “we do not underestimate the risks from geopolitics, energy, strategic competition between the US and China, and a high-stakes, highly polarised US presidential election”, Mr Strobaek said.
“Equities are likely to be supported by mid-single-digit earnings growth and rate cuts in the second half of 2024, but growth is slowing and valuations appear, on aggregate, demanding versus other asset classes,” he said.
“Equity markets can deliver positive – although very volatile – returns in the late stages of an economic cycle. Such a scenario would be consistent with a gradual rise in equity indices, but also with a quality bias given lingering uncertainty over the macroeconomic backdrop.”
Meanwhile, restrictive financial conditions and slowing growth will continue to add pressure to indebted corporate borrowers, including some governments, Lombard Odier believes.
“We think bonds represent one of the strongest risk-adjusted opportunities in what we expect to be a volatile 2024,” Mr Strobaek added.
Mounting cost of climate change
In all the talk of economic growth, a key element that has taken centre-stage globally is the rising cost of climate disasters.
If left unchecked, climate change could cost the global economy $178 trillion over the next 50 years, or a 7.6 per cent cut to global GDP in the year 2070 alone, Deloitte said.
The Cop28 climate conference in Dubai highlighted the massive investment efforts required for scaling up global climate financing.
By 2030, emerging markets and developing economies will require $2.4 trillion every year to address climate change, the Climate Policy Initiative said.
At the UN summit, the UAE launched a $30 billion fund for clean energy, backed by major US institutional investors such as BlackRock, Brookfield and TPG.
The money will go towards a new private investment vehicle, Alterra, which aims to raise $250 billion globally in the next six years to create a fairer climate-finance system.
But the challenge remains significant.
“We struggle to see how the finance for mitigation and adaptation efforts, which may cost $4 trillion to $5 trillion a year, can be made available quickly at affordable cost,” consultancy Wood Mackenzie said in a research note.
“The current increases in renewables development costs due to higher cost of capital and supply chain bottlenecks are amplifying the challenge,” it said.
