The balancing act between the resilience of growth and the stickiness of inflation will be front and center in 2024. Here’s how we believe it will play out.
Growth vs. inflation: Central banks in North America and Europe have been trying to balance the two by hiking 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 interest rate cuts around midyear. 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.
While we anticipate the end of rate hikes and the beginning of rate cuts for North America and Europe, 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.
Markets anticipate interest rates to ease in North America and Europe
Market-implied policy rates for major central banks
Source: Bloomberg, as of 3 November 2023. Note: Chart show 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 stabilize growth rates and to implement more targeted measures to support the property sector, which would help reassure the markets and boost sentiment.
China's housing market remains weak, but we expect stabilization
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.
The BOJ’s outlook for core inflation has risen over 2023
Sources: Bank of Japan, CEIC, and Invesco, as of 1 November 2023. Note: Japan's fiscal year starts from April and ends in March. Median outlook by BOJ's Policy Board members.
The balancing act between growth and inflation could swing in either direction. 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.
In the near term, we expect yields to peak as the tightening cycle draws to a close. 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. Later in 2024, a global easing cycle should increase risk appetite, but we do not expect this to last too long due to the shallowness of the slowdown and our view that markets have already priced in many of these macro headwinds.
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A collection of charts that illustrate the details of our base case and alternative scenarios.
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The opinions referenced above are those of the author as of Nov. 22, 2022. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.
