THE global economy has held up pretty well in 2023, supported by the US economy, which has pulled off recession fears while China is falling below growth expectations after reopening, dragged down by debt and credit malaise in the real estate sector.
These two economies’ decent economic outturn has outweighed uneven growth in Japan and a sharp slowdown in Europe.
It is heartening that global monetary tightening has tamed strong inflationary pressures though both headline and core inflation are still above the central banks’ desired level.
This means that major central banks in advanced economies would continue to remain nimble and their battle against inflation is not over yet.
While major central banks have paused their interest rate hiking cycles in recent monetary policy meetings, their narrative is keeping higher interest rates longer.
Geopolitical tensions continue unabated; there is no end in sight for the prolonged war in Ukraine as well as a near-term truce in the Israel-Hamas war erupted recently; and de-dollarisation is gaining traction.
How is the 2024 global economic landscape shaping up? 2023 was a year of macro, market and policy pivots; 2024 will be a year of reckoning as investors and markets begin digesting the lag impact of these dynamics.
In 2023, the global economy remained resilience amid high inflation and rising interest rates.
There remain many lingering concerns and risks in 2024. Will there be a delayed recession in the US economy; and will the economic risks accelerate in China?
Amid the Federal Reserve’s (Fed) insistence of keeping restrictive monetary stance for a longer while, when is the timing of the Fed rate cuts in 2024; and by how much? Will Bank of Japan (BoJ) consider to ditch its prolonged period of negative interest rate in 2024?
We expect the global economy to slow to estimated 2.7% in 2024 from estimated 3% in 2023, as the lag impact of higher interest rates is fully felt in some advanced economies amid the weakening economic data.
We expect the US economy to grow at a slower pace of 1.5% in 2024 from estimated 2.6% in 2023. It may experience a mild technical recession in the first half of 2024 (1H24) as the lag impact of higher interest rates take a broader effect on consumer spending and business activity.
Higher mortgage rates have dampened activity in the housing sector, which has flattened out. It must be noted that certain favourable economic trends to unwind in 2024.
There are diminished excess households’ savings value (from US$2.7 trillion in 2020 to US$2.2 trillion in 2021; to US$807bil in 2022; and to US$768.6bil at end-October 2023); plateauing wage gains, and less pent-up demand; reinstatement of student loans repayment; and fiscal largesse may recede in 2024 as major spending programmes (the CHIPS and Science Act and the Infrastructure Investment and Jobs Act) have heavily front-loaded.
While the Fed has signalled that the policy rate is likely at or near its peak for this tightening cycle, it is prepared to tighten policy further if appropriate as the 2% inflation target is not fully assured.
The monetary decision in 2024 will be data dependent, based on its implications for the outlook for economic activity and inflation as well as the balance of risks.
We assume the hiking cycle is over, leaving the Fed funds rate on hold at 5.25%-5.50% until the first quarter (1Q) of 2024.
If the economy slows and inflation continues its moderating trajectory over the coming quarters, it is likely that the Fed will start to slowly normalise policy rates in 2Q, taking the Fed funds rate to 4.50%-4.75% at end-2024.
The risk of a recession in the eurozone has increased with economic activity data pointing to stagnation. Gross domestic product (GDP) dipped 0.1% quarter-on-quarter in Q3 (+0.2% in Q2) due to the worsening external demand and higher interest rates.
The measurement for the manufacturing and services have fallen into contraction territory while business confidence declined in November and consumer sentiment improved mildly.
We expect economic conditions in eurozone to remain subdue in 1H24, restrained by higher interest rates and cautious domestic demand.
Economic stabilisation is likely in 2H24 as the industries rebuild depleted inventories, and consumer confidence could improve on abating price pressures. Real GDP is estimated to grow by 0.8% in 2024 compared to an estimated 0.5% in 2023.
The European Central Bank (ECB) reiterated that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
Though inflation has decelerated sharply to 2.9% in November 2023, labour cost (wages) is still growing at 4%, which could add risk to inflation.
Sagging growth in eurozone should ensure the ECB’s rate-hiking journey is over. The concern is the wage pressures that still exist, and hence, it needs to wait for evidence that this is rolling over too before bringing rates down.
Hence, we think any rate cut by the ECB is likely to happen in 2H24, taking the deposit facility rate to 3.50%-3.75% by end-2024 (4% at end-2023).
Japan’s economy will continue face headwinds in 2024 (estimated GDP growth of 1.2% in 2024 versus 1.5% in 2023), leading to more fiscal and monetary stimulus ahead.
Its GDP had shrunk by 2.9% year-on-year (y-o-y) in Q323 (1.5% in Q2 and 0.9% in Q1), marking its first economic contraction in four quarters, as inflation weighed on private consumption and corporate investment slowed as well as a deceleration in exports.
The government unveiled a stimulus package worth 17 trillion yen (around 3% of last year’s GDP).
Amid a weak economic recovery, BoJ may not rush into scrapping its negative interest rate policy, which started in 2016, though the current prolonged period of above-target inflation provides the bank a window of opportunity to finally get rid of ultra-loose monetary policy.
While BoJ will wait for concrete evidence that wages will rise broadly, we expect BoJ to lay the groundwork for the ending of negative interest rates policy in the first half-year of 2024.
The ending of negative interest rates could unwind the yen carry trade and spark a return of Japanese capital to its domestic bond markets, a move could trigger volatility in the exchange rate and financial markets.
The anticipated strong economic recovery in China did not materialise in 1H23 though assisted by lower base effect in 2022. The economy grew by 5.2% in first nine months of 2023 amid raft of unresolved risk from the real estate sector.
The China authorities have implemented monetary and fiscal policies to avert a prolonged economic slowdown amid standing at the crossroads of economic risks.
Consumer and producer prices are falling, the real estate stress still on the mend, and local governments and property developers are still struggling with high debt.
Recent slew of economic data has showed some economic stabilisation, albeit risks still prevalent in the real estate sector. Industrial output grew by 6.6% y-o-y in November from +4.6% in October.
Retail sales climbed 10.1% in November (7.6% in October), the fastest pace of growth since May though below market estimates despite a low base in 2022.
However, fixed-asset investment in urban areas cumulatively grew by 2.9% in the first 11 months of 2023. Investments in infrastructure and manufacturing increased 5.8% y-o-y and 6.3% y-o-y, while real estate development investment dropped 9.4%.
We expect China’s economy to grow by 4.6% in 2024 compared to an estimated 5.2% in 2023. This is attributable to continued growing of global economy, which helps to revive exports and also China’s approval of a one trillion-yuan sovereign bond issue and the implementation of measures aimed at bolstering the economy, technological innovation in the industrial system, boosting domestic consumption, and expanding high-level foreign investment.
What are the risks to the global economy in 2024? Geopolitical risks are always a wild card for the global economy, especially in the US Presidential election year in 2024.
Elevated trade tensions between the United States and China, the ongoing conflict in Ukraine and the recent outbreak of war between Israel and Hamas in the Middle East could have a significant impact on the global economy, financial and commodities markets.
Amid the softening crude oil prices on oversupply concerns in 2024, the risks of geopolitical and climate change could induce a supply shock of commodities, energy and food.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
