Macroeconomics in 2024: Hunkering down and being patient once more
2023 proved to be a curious year for the global economy and for global investment markets. The global economy has continued to recover from its post-pandemic shock and, rather surprisingly, has remained resilient in the face of rising geopolitical risks and the ongoing cost-of-living crisis. This overarching resilience, especially in the US, is notable because it has taken place within an environment that has seen the world’s central banks deliver their most aggressive interest rate hiking cycles of recent economic history.
But, in our view, the global economy is limping-along rather than decisively establishing a new upward trend.
Across regions, there has been growing divergences. In the US and, to a lesser extent, in Japan, strong growth momentum through the Spring and Summer of 2023 has led many market commentators to upgrade their expectations for 2024. Whereas, in China, a muted response to the post-lockdown reopening of the economy has disappointed the more optimistic expectations of how China might support global growth.
On balance, 2023 definitely surprised us to the upside. Yet we see darker clouds on the horizon.
The higher global interest rate environment is starting to bite; tighter credit conditions are weighing on housing markets; upon corporations’ capital expenditure plans and upon consumer activity. Corporate bankruptcy rates and credit card and auto loan delinquency rates have started to increase.
We think that the prevailing consensus may be overestimating the strength of the present underlying growth momentum. Accordingly, whilst our expectations are pushed out a little further into the future, we expect the onset of a US recession in mid-to-late 2024. Ahead of this downturn in the US, we expect a recession to commence in the UK, and in the euro-area too, a little earlier in the year to come.
Should 2024 play-out according to our expected pattern, a real dilemma will face the world’s central banks. Whilst inflation is set to fall, it will remain elevated relative to central bank targets largely due to relatively tight labour markets. Premature easing (as might be expected as a traditional counter-cyclical monetary policy response) risks giving away the gains made by the past tightening cycle. We are very much in the “higher for longer” camp and, accordingly, see the overall interest rate environment as being a headwind well into 2024. Shallow post-recession recoveries are expected. Importantly, we don’t think that corporate earnings forecasts nor price to earnings ratios properly reflect this outcome. Equity markets start the year too high in our view.
Where does this leave investment markets and the prospects for UK pension schemes’ growth portfolios?
Unfortunately our forecasts show very few asset classes as having return expectations higher than cash over the forthcoming 12 months. For investors with high allocations to global equity markets this probably means that a review of the adequacy of protection overlay strategies is warranted. For schemes that are already substantially de-risked, ‘less excitement’ from rising government bond yields now looks to be more likely.
This promise of ‘less excitement’ does lead us to being a little more optimistic on the returns available from government bonds and credit. The higher yields that now prevail at least are starting to properly discount future economic conditions.
For 2024, it may be a case of hunkering down and being patient once more.