The economic battle between the resilience of growth and the stickiness of inflation will be front and centre in 2024. Here’s how we believe it will play out.
We believe the disinflation process will continue in Europe and North America, and policymakers will begin to cut rates — first in Europe given the poorer growth outlook.
In our view, Chinese growth will likely be subdued in the first half of 2024 but should improve in the second half. We expect authorities to help support the property sector.
Given the uncertainty around the timing of rate cuts, there could be some volatility early in the year, but we expect risk assets to benefit once the timing becomes clear.
Growth vs. inflation: Central banks in Europe and North America have been trying to balance the two by hiking interest rates enough to temper inflation without causing recession. As we move into 2024, we expect the global economy to slow marginally and inflation to gradually subside — clearing the way for rate cuts around mid-year. This should help enable a global economic recovery and provide renewed strength to risk assets in the second half.
For almost two years, many of the world’s central banks have been hiking rates to fight inflation. And yet, the global economy, especially in the United States, has remained remarkably resilient. Our 2024 outlook examines the balance between the resilience of growth and the stickiness of inflation.
We expect global growth to slow down in the first half. And we believe disinflation will continue to make uneven progress. By the end of 2024, we expect year-over-year US inflation to be appreciably below 3%, with eurozone and UK inflation coming considerably closer to target rates.
As both growth and inflation soften, we expect central banks to start cutting rates—and that should help power a second-half recovery and renewed strength in risk assets. Learn more about our base case — and alternative scenarios that could occur — in our 2024 annual investment outlook.
After nearly two years of fighting inflation with rate hikes, we expect the year ahead to bring uneven but continued disinflation for North America and Europe. By year-end 2024, we expect year-over-year US inflation to be well below 3%, with eurozone and UK inflation considerably closer to target rates. Hear more from Chief Global Market Strategist Kristina Hooper.
Video watch time: 1:09 minutes
While we anticipate the end of rate hikes and the beginning of rate cuts for Europe and North America, China is in a much different situation. Explore more details about our base case for 2024, as well as two alternative scenarios.
Despite rapid policy tightening over the past two years, North America, the eurozone, and the UK have only recently begun to show signs of strain. As we move into 2024, we expect economic growth to slow marginally, with a bumpy landing for these economies in the first half. We believe the disinflation process will continue (albeit unevenly) and policymakers will begin to introduce rate cuts — first in Europe given the poorer growth outlook. We believe growth will start to re-accelerate in the second half of 2024, starting in the US, and risk assets should see renewed strength.
Source: Bloomberg, as of 3 November 2023. Note: Chart shows market-implied policy rate paths for the central banks of the respective countries shown. Market-implied policy rate is based on overnight index swaps pricing available for the term structure shown.
China is in a much different place in its cycle. The relaxation of COVID restrictions has helped China’s growth somewhat, but it’s been curtailed in part by slowing global growth, less fiscal policy support than expected, and weakness in the local property sector. In our view, Chinese growth will likely be subdued in the first half of 2024 but should improve in the second half. We expect Chinese authorities to use fiscal policy to stabilise growth rates and to implement more targeted measures to support the property sector, which would help reassure the markets and boost sentiment.
Source: China National Bureau of Statistics (NBS). Data as of September 2023.
For the first time in decades, Japan is facing more sustained, higher inflation. We expect the Bank of Japan (BOJ) to hold back on material tightening due to significant uncertainties over the sustainability of rising inflation, but to start tightening marginally during the first half of 2024.
Note: Japan's fiscal year starts from April and ends in March. Median outlook by BOJ's Policy Board members. Source: The Bank of Japan and CEIC
The balancing act between growth and inflation could swing in either direction. Here are two alternative scenarios to consider:
One risk is that the full impact of policy tightening will take effect over the course of 2024 and prove to be too much for the economy to handle. Another risk is more persistent inflation that requires policymakers to keep rates higher for longer, impacting the economy.
If supply-side shocks dissipate and demand cools, we could see a “soft landing” scenario for the US: Core inflation falls with more certainty, the Federal Reserve eases rates sooner, and the economy reaccelerates in the first half. This environment could be beneficial for the eurozone and certain emerging markets.
Recent geopolitical events including the Russian invasion of Ukraine, events in the Middle East, and continued tensions over Taiwan have introduced greater uncertainty for global markets. And political uncertainty in the US has also exacerbated concerns about the fiscal sustainability of the US and the potential for further government shutdowns and even default. Meanwhile, the rapid tightening of financial conditions across many major economies has raised fears about potential financial accidents. Our base case assumes no impact from these factors, but we recognise that they do present risks to our outlook.
Sources: Sources: Invesco, Bloomberg, and Macrobond, as of 3 October 2023. Note: Chart shows eurozone housing-related inflation, which includes energy, and natural gas futures.
We polled our portfolio managers across equities, fixed income, and alternatives to gauge their views for the year ahead. Here’s where they’re seeing risks and opportunities.
Within equities, we see the greatest potential in emerging markets, although developed market equities outside the US also appear attractive. We anticipate that value, cyclical and small cap stocks will outperform. In terms of sectors, we prefer consumer discretionary (which would likely benefit from an economic recovery) and technology (which may see a boost to earnings multiples as rates come down).
We favour high quality credit and long duration, and we anticipate nominal bonds will perform well as disinflation continues. We believe the US dollar will ease as markets anticipate rate cuts by the Fed, resulting in non-US dollar foreign exchange performing better than the US dollar. We favor emerging market local debt as it should benefit from a weakening US dollar.
Within private assets, direct lending is currently attractive given its high yields, floating-rate nature, and favorable lender terms and protections. The potential for modest default rates next year should also set the stage for distressed lending to outperform.
We favour commercial real estate lending as a way to access real asset markets, which could fill the financing gap left after recent regional banking failures. Higher interest rates may continue to pressure real estate assets, however we find fundamentals improving as there are pockets of strength in various sectors and markets.
When focused on private equity, we prefer assets that focus on cash transactions because we see opportunities for growth equity firms to provide capital to private companies that would historically have looked to access the IPO market.
We anticipate that cyclical commodities, especially industrial metals, will perform well earlier in the year because of expectations of an economic recovery. However, we recognise that, given the increase in geopolitical risks, gold could have periods of strong performance.
All data as of November 3, 2023, unless otherwise stated.
