Talking Points
December 15, 2023 | 13:00
Global Outlook 2024: The Long Descent
Economics
Economics
Let’s start with the good news—inflation has plunged across most major economies from last year’s peak without the assistance of a recession. In fact, most G10 economies performed better than expected in 2023, and yet inflation eased largely on script. And this welcome retreat in headline inflation, with core in tow, is setting the stage for rate relief in 2024, a point that this week’s FOMC decision made amply clear. In turn, financial markets enjoyed a relatively solid year, nearly reversing the brutal performance for both stocks and bonds in 2022. Thus, after inflation’s two-year reign of terror, and a sustained episode of rising rates, the switch will flip in the coming year as central banks begin the process of unwinding heavily restrictive policies. |
So, can we now say with some confidence on the economic outlook that “all’s well that ends well”? Not with confidence, no. Admittedly, we and the consensus were far too bearish on this year’s growth outlook, particularly for the U.S. economy. In this space last year, we opined that global growth would chill to around 2¼% in 2023, just above the recession waterline and well below the long-run average of nearly 3.5%. Instead, it now looks like global growth will come in closer to 2.9%; below average to be sure, but significantly better than expected. What does 2024 hold for the global economy? In a year that will be dominated by the election cycle—in the U.S., Mexico, Taiwan, likely Britain, and even possibly Canada—the delayed impact of rate hikes is expected to weigh a bit heavier. However, sturdy financial markets, the prospect of rate cuts, cooler energy and food prices, and normalized supply chains all suggest that the global economy will grind out modest growth again in the coming year. We are looking for some underlying slowdown overall to around 2.6%, with most major economies printing a tad lower than this year, but still keeping global growth just out of recession waters. |
Among the larger economies, we look for U.S. growth to step back almost a full point from 2.4% this year to around 1.5% in 2024. That’s a bit above the latest consensus, but below the economy’s long-run trend (the Fed pegs the latter at 1.8%). Milder growth and calmer inflation should open the door to rate relief; we now look for four 25 bp trims from the Fed in the second half of the coming year. Even though it’s an election year, fiscal policy is likely to be less supportive than the big boost seen this year—the budget deficit is now above $1.7 trillion (more than 6% of GDP). Consumer spending is also expected to calm amid slower job gains, milder wage increases and with pandemic savings largely tapped out. |
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Europe held up a bit better than projected this year, but only just. GDP struggled to stay above zero, and saw a Q3 drop. Arriving late to the tightening game, the ECB cranked rates 200 bps this year (versus 100 bps from the Fed, and 75 bps from the BoC), and fiscal policy is much more constrained than stateside. Add on less favourable demographics and a war next door, and the Euro Area managed only 0.5% real GDP growth—Germany will be the only major economy to report a decline this year. But with inflation retreating to 2.4% in November, and much lower in some key economies, the ECB is also expected to begin cutting around mid-year and could roughly match the Fed. Still, we look for meagre growth across the continent again next year, at around 0.4%. It’s a broadly similar story in Britain, where growth fared slightly better at 0.5%—a repeat is expected for 2024—but inflation has proven much stickier than elsewhere. Japan ran against the grain this year, as is so often the case. Real GDP actually perked up to nearly 2%, and inflation followed suit. After lodging itself in deflation terrain for three decades, Japan has quietly welcomed the upswing in inflation to above 3%. Still, there can be too much of a good thing, and the BoJ is finally preparing to edge out of negative interest rates. After nearly touching 1% for the first time in more than a decade amid the October spike in yields, 10-year JGBs have cooled to around 0.7%. With GDP pulling into reverse in Q3, we look for much slower growth in the year ahead of a below-trend 0.3% rise. China’s economy came close to matching growth expectations this year, despite many twists and turns. The abrupt re-opening provided a small bump, as did cooler commodity costs and a slightly better-than-anticipated global backdrop. But the property crisis and de-risking—which saw foreign direct investment inflows dry up—restrained GDP growth to 5.2%. While that was about as expected, inflation was anything but, with CPI falling 0.5% y/y in November and PPI down 3.0% y/y. By year-end, retail sales were on track for a 7% yearly gain, industrial production up a milder 4%, and exports likely to drop almost 5%. We look for China’s GDP to cool further in 2024, albeit to a still-decent 4.5% pace, not far from its medium-term potential. For commodities, the combination of milder global growth but some softening in the U.S. dollar is a mixed blessing. Prices have been grinding lower since peaking in the first half of 2022. The backing down in oil and other prices has played a big role in calming inflation. For 2024, we look for oil to firm slightly on supply constraints from OPEC+. Natural gas, food, and forest products are also projected to edge higher, while we look for base metals to ease, partly reflecting cooler growth in China. Pulling these loose strands together, the external backdrop for Canada will be slightly less favourable in 2024, but not a heavy weight. Canada’s challenges are more homegrown, with the heavily indebted consumer still digesting the ferocious rate-hike cycle. The debt-service ratio hit a record high of 15.2% in Q3, and even anticipated rate relief next year will arrive too late to avert a further rise. While GDP growth did manage to rise 1% this year, that was pumped up by nearly 3% population growth. We expect very modest GDP growth of 0.5% in 2024, with the economy dancing around the edge of recession in the first half of the year. While the Bank of Canada is still talking hawkishly, further progress on inflation and the chilly growth backdrop will pave the way for rate cuts, possibly beginning in June (a step or two ahead of the Fed). The overnight rate is expected to end next year 100 bps lower at 4%, but with little change in longer term bond yields, since the latter have already more than fully priced in hefty rate relief. The Canadian dollar never left the 1.30s this year, and at around $1.34 (or 74.6 cents) ended close to where it finished off 2022. While the BoC may lead the Fed, it probably won’t out-do it on the rate-cutting cycle, and we look for some further modest pullback in the U.S. dollar, and thus some further modest strengthening in the loonie in 2024. Summarizing, our forecast is a tad above expectations for U.S. growth and inflation in 2024, yet the Fed appears willing to tolerate the latter mild transgression. Not wanting to label it, but yes that could be characterized as a soft landing. Cushy soft is not how we would describe Canada’s outlook, which is clearly bumpier due to a more exposed consumer. Famously strong population growth of now nearly 3% is papering over an even rockier performance on the ground, while also pressuring shelter costs and pushing up the jobless rate. Even so, given the experience of the past 12 months, the risks to our growth outlook may actually be to the high side, not the low for 2024. |