Investment Outlook 2024 : Stepping into a new reality

The recessions that seemed so certain to arrive in 2023 may simply have been delayed. At the beginning of the year, US 10-year Treasury yields were 3.9% and the US fed funds rate was forecast to peak at 5%. While Treasury yields are significantly higher at the time of writing, expectations for the fed funds rate were not far off.

The reason the GDP growth forecast was further off the mark is primarily the lingering impact of the massive fiscal stimulus at the beginning of the Biden administration, followed by the ‘green New Deal’ Inflation Reduction Act. This stimulus has spurred growth and investment as intended, though at the cost of Treasury yields at times above 5%.

The cash that drove the US economy in 2023 will, we fear, run out in 2024. Excess consumer savings are waning, and higher interest rates are having the inevitable effect on demand, both for goods and services, and particularly housing.

We nonetheless do not believe the slowdown will end in recession. We expect US quarterly GDP growth to weaken at the beginning of 2024, but only briefly.

We expect core inflation to moderate further based on the view that several quarters of below-trend GDP growth will be enough to return core personal consumption expenditures (PCE) inflation to the US Federal Reserve’s 2% target, albeit not until 2026 (see Exhibit).

The Fed’s patience in allowing inflation to exceed its target for so long is one of the main reasons why the inverted yield curve, which seemed to signal a recession so clearly at the beginning of 2023, will likely turn out this time to have been a false alarm.

Exhibit 1 Inflation is decelerating Year-on-year change; CPI = Consumer Price Index; PCE = Personal Consumption Expenditures

Another region where many investors failed to predict the trajectory of growth was China. The belief had been that China would experience a reopening like those seen in the US and Europe, with significant pent-up demand after three years of zero Covid policies poised to spur strong growth.

This seemed to be the case initially, but the rebound faded much sooner than expected. Chinese households had not accumulated as much savings as those in the US and Europe as government support was far more modest, and worries about the property market dampened consumer and business confidence.

Until China’s authorities take more forceful measures to address insolvencies among property developers, and indebtedness among local governments who depend on property sales for revenue, economic growth will likely continue to disappoint. Trade relations with the US will probably also remain difficult, regardless of who is elected the next president.

US growth to weaken briefly; China awaits more stimulus

Europe is the region where pessimistic forecasts were largely realised, and where pessimism is potentially still merited. Europe has faced a similar increase in policy rates as the US, and a bigger jump in energy prices, but without much fiscal stimulus.

The eurozone may well experience a mild recession in 2023 and, will hardly grow by our estimates in 2024. Another external shock could easily tip the region into a deeper recession. For all that, we do not see inflation decelerating much more quickly than in the US, meaning our outlook on Europe is essentially one of stagflation.

A US recession could still be needed to get inflation back to the Fed’s target if inflation stabilises at a higher level; the ‘easy’ gains from normalising supply chains and the end of ‘revenge’ travel may already be behind us. Deglobalisation, constrained labour markets, and energy transition investments are all inflationary factors.

Moreover, as wages catch up with inflation, the increase in real wages and incomes could lead to a reacceleration in consumption. The unprecedented disruptions of the last four years have made economic forecasting particularly difficult. Investors and central banks have thus had to simply await the next batch of economic data to see how growth and inflation were evolving. Forecasting has hardly become any easier and data dependency has not ended.

Finally, we note that the geopolitical landscape is becoming increasingly complex and challenging, with tensions evident from Ukraine to Taiwan and now Israel. Although geopolitics and the electoral landscape are likely to have a significant impact on markets in 2024, it is not currently possible to assign meaningful probabilities to potential outcomes.

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