The Year Ahead: Economic Outlook for 2024

The global economic outlook presented here is a collation of the consensus views of multiple large brokerages and asset managers globally, including the likes of Goldman Sachs, Citi Wealth, Morgan Stanley, and HSBC.

Overview:

The global economic outlook for 2024 presents a challenging scenario, with a predicted recession in the US and an underestimation by the markets of the duration for which high interest rates might persist. Inflation remains a concern, stubbornly staying above the 2% target, though it has decreased from its peak in 2022.

The year is expected to unfold in two phases: a cautious first half and a more robust second half. However, the possibility of increased valuations seems limited as markets have already anticipated a smooth transition to lower inflation levels.

Growth is expected to slow down notably in the U.S., Europe, and the UK, partly due to ongoing inflationary pressures. In China, moderate growth might negatively impact emerging markets, with a risk of a debt-deflation spiral. Conversely, there is an expectation that policymakers in the U.S. and Europe might start reducing interest rates by mid-2024, potentially improving the economic outlook for the second half of the year.

The global economy might hit its lowest point between the end of 2023 and the start of 2024, followed by a gradual uptick. The anticipation is for a 'soft landing' in 2024, marked by stable economic activity and declining inflation. Additionally, the political climate will be significant, with elections in 40 nations, including four of the world's largest, poised to influence the economic landscape.

Outlook on Asset Classes:

• Equities: The anticipated market volatility, driven by geopolitical and cyclical uncertainties, offers long-term investors chances to position themselves favourably, especially in companies with robust financials. Investment strategies for 2024 suggest an equal weight in US equities, which are expected to outperform their European and emerging market counterparts. While emerging markets are generally underweighted, there are strong exceptions like Mexico, benefiting from post-pandemic near-shoring trends, and India, with its forecasted strong earnings growth, making it attractive. ?Public market valuations have finally corrected and now stand at pre-COVID levels, however equities from other developed markets are trading at significantly lower valuations compared to U.S. equities, yet they face challenges in terms of economic momentum. This is especially evident in Europe, where economies are on the brink of recession and recent quarters have seen weaker earnings trends.
• Fixed Income: It is likely to be a good year for fixed income investing as high-quality debt continues to provide attractive yields, especially when compared against the risk/reward trade-offs of other assets. Further, there have been recent significant changes in bond market prices, including a surge in DM sovereign bond yields. Opportunities in quality credit, with portfolio returns benefiting from steady income streams in the mid-to-high single digits. Preference for investment-grade credit, given near 5-year highs in Treasury and safe-haven bond yields and credit spreads close to the 5-year average.
• Currencies: The U.S. dollar has experienced a slight decline, dropping just over 3% from its peak in October. However, it appears premature to anticipate a major cyclical downturn for the dollar. This caution is since U.S. short-dated interest rates remain near 5%, and the growth outlook for overseas economies continues to appear relatively bleak. The currencies of Australia and Norway are set to outperform – as a higher US rate environment had prevented these currencies from aligning with the commodity price rally seen in H2 2023. European currencies are set to lag – the Pound/Euro have not been undervalued against the dollar, however rate cuts by the respective central banks may potentially create headwinds for the currencies picking up.
• Commodities: Oil prices are projected to rise in 2024, with Brent Crude exceeding $90 per barrel in the second half and possibly remaining above $80 per barrel in the first half. European natural gas is expected to have stable storage levels through the 2023/24 winter, leading to limited price increases throughout much of 2024. Gold, on the other hand, is forecast to hit record highs, averaging around US$2,100 per ounce in Q4 2024, influenced by anticipated rate cuts.
• Private Markets: Investors in 2024 are facing a situation like the post-crisis years of 2009-2010, presenting a significant window of opportunity with public market correction slowly beginning to translate to private equity valuations. There's a growing recognition among major investors of the vital, lasting role that private markets can play in portfolios. Now is an attractive time to invest in private equity as estimates are optimistic on deal activity picking up in the near-term, with attractive offers in the secondaries market due to a large supply of discounted opportunities. The most compelling investment opportunity heading into 2024 is identified in private credit, which offers an attractive risk-reward profile. Additionally, infrastructure investment stands out as another major opportunity, not only for its resistance to inflation but also for its potential to provide diversified returns and stable cash flows.

Regional Outlook:

North America: The US economic outlook for 2024 indicates an easing of inflation, expected to reach the Federal Reserve's 2% target by the second quarter. Goods price inflation is almost zero, a sign of resolved supply chain issues, while the service sector shows promising responses to monetary policy adjustments. Housing should contribute to lowering core inflation soon due to a lag in rents observed. A significant slowdown in US activity is projected, with a slower-than-expected recovery. However, with inflation likely stabilizing at 2% by next summer, there's a possibility of the Federal Reserve cutting rates earlier and more aggressively than anticipated. Rate reductions estimates vary ranging from none to over 150 bps, possibly front-loaded if financial stress increases.

EU: Economic outlook for 2024 remains cautious due to the lingering impacts of the energy crisis and a sharp contraction in private consumption. Real wage growth is turning positive, but spending is expected to grow only by 0.8%, limited by a gradual rise in unemployment and increased precautionary savings. Higher interest rates are likely to affect mortgage payments and credit purchases, contributing to subdued consumption growth and keeping GDP growth below 0.5%. Inflation, which has been a significant concern, is showing signs of easing. The impact of the ECB’s monetary tightening this year will continue to unfold, contributing to a disinflationary trend. Core inflation is projected to drop to 2.3% by the end of the year. Given this weaker-than-expected economic performance, the ECB is likely to ease its monetary policy with rate cuts estimated at 75 basis points in 2024.

Asia: ?Economic outlook is cautiously optimistic, marked by a modest recovery hampered by several factors. Persistent inflation is expected to keep monetary policies tight, and fiscal consolidation is anticipated following the pandemic's spending surge.

China faces specific challenges, primarily due to a weakened property market. However, retail sales in the household market exhibit some resilience. The government is implementing measures to address this and shift the economy's reliance on property-led growth. While China is likely to have achieved its 5% growth target for 2023, maintaining this in 2024 could be challenging.

The rest of Asia hasn't seen significant growth in exports or industrial production. Additionally, the region faces political uncertainties with upcoming elections in key countries like Taiwan, India, Indonesia, and South Korea. These events could influence the regional economic stability and growth trajectory and international challenges.

India: Fiscal years 2024 and 2025 paint a picture of resilience and moderated growth amidst global uncertainties. GDP growth is anticipated to remain robust yet shows signs of a slight deceleration. Estimates show a growth rate of 7.0% for FY24, easing down to 6.5% for FY25. This trend reflects a mix of strong domestic fundamentals counterbalanced by the broader global economic climate.

Inflation, always a key concern, seems to be on a path of gradual moderation. CPI is projected to be at 5.6% in FY24, inching down to 4.8% in FY25. While these figures are still above the ideal target, they indicate a softening of the ongoing cost pressures in the economy. Current trends suggest that inflation may not fall meaningfully below the 4% mid-point of the range for the Monetary Policy Committee (MPC) in CY24. Therefore, even if the MPC wants to act pre-emptively, conditions may not be favourable for it to cut rates. The monetary policy stance still appears to be on the tighter side, with the repo rate expected to be around 6.5%.

India’s push on capex is notable, with investments in renewable energy infrastructure are projected to drive significant capital expenditure, supporting a 4%+ growth in capital formation and propelling GDP growth to over 7% in the next few years. The capex cycle, intensified since 2004 with initiatives like the Electricity Act and Golden Quadrilateral, has revitalized capital input, leading to an upward revision in trend growth estimates. Fiscal discipline is also evident, with the Centre incurring only 45% of its fiscal deficit target in the first seven months of FY24, the lowest in 15 years, and direct tax collections reaching a 20-year high. These factors collectively signal a robust economic trajectory for India.

A notable aspect of India's economic stability is the manageable current account deficit, forecasted at 1.4% of GDP in FY24 and slightly improving to 1.2% in FY25, driven by a growth in services exports. Amidst these domestic dynamics, India, like the rest of the world, faces external challenges and the impact of global economic shifts. The anticipated easing of monetary conditions in major markets by mid-2024 could have ripple effects on India's economic policies and stability.