Since our last quarterly economic update in September, growth momentum has been weakening but remained resilient, disinflation is ongoing and interest rates are plateauing, very much in line with our expectations. To build on our September outlook, The last hike?, we updated our forecasts and sharpened our investment calls for 2024 with a twist. Looking back, “there’s no question that 2023 belongs to Taylor Swift” as Forbes put it. Looking forward, we decided to take Swiftonomics to 2024 just because: Taylor rules! (yes, pun intended). While we identified ten key topics that you should keep your eyes and ears open to in 2024, we matched each and every one of them with a hit song by Ms Swift, and created a for you. Disclaimer: the rest of this report is serious stuff. Happy holidays from the Swifties at Allianz Research!
… Ready for it? - 2024 will be a crowded political year. European voters will elect their EU representatives; Portuguese, Belgian, Austrian, Indian, Mexican and UK voters will elect their MPs while the US, Mexico, Taiwan and Romania will also choose new presidents. Amid rising populism, and with a lot of uncertain ballots, households and firms are likely to adopt a wait-and-see approach and postpone key economic decisions from large purchases to major investments.
Is it over now? – We expect a soft landing in the US and the Eurozone to muddle through, with increasing risks of a prolonged recession in H1 2024 for the Old Continent as only 60% of the increase in key policy rates has been transmitted to borrowers in Europe. We forecast 2024 GDP growth at +1.4% in the US, +0.8% in the Eurozone, +4.6% in China and +0.6% in the UK.
Shake it off – Thanks to softening demand and positive base effects on energy and food, disinflation is gaining traction. We anticipate that central banks will pivot earlier than expected by economic forecasters (i.e. summer 2024) but later than market expectations as it takes time to cool down a hot labor market. Indeed, services inflation and wage growth continue to fuel inflationary pressures, especially in the US. By end-2024, we expect policy rates to stand at 4.5% in the US, 3.5% in the Eurozone and 4.5% in the UK.
You’re on your own kid - Fiscal safety nets are unwinding in Europe as most countries have committed to moderately reign in fiscal deficits. The German government managed a last-minute budget agreement, but we do not expect a major boost to economic activity from the deal. However, in the US, fiscal consolidation remains more talk than walk for now.
Out of the woods - Global trade is set to rebound modestly after two consecutive years of below-average global GDP growth. As European countries are emerging from trade recessions and Asian countries (ex-China) are still benefiting from the reshuffle in global value chains, they will lead the rebound. Moreover, destocking in the global business cycle should come to an end in 2024, also contributing to the rebound.
Anti-hero – Earlier this year there were high hopes that Chinese consumers would reignite the global economy, but they did not save the day. China is still grappling with a distressed property market and consumer confident remains muted. To offset some of its losses in global export markets and soft domestic demand, China has increased and will maintain policy support, while also increasing investment abroad to consolidate its influence.
Everything has changed - Most emerging markets managed to successfully curb inflation while battling higher financing costs and sometimes tense social backdrops. Managing the descent in rates, a weaker dollar and lower twin deficits while benefiting from friend-shoring should be prove easier. But it will not be a walk in the park as policy mistakes could derail previous success. Countries such as Egypt, Argentina and Ghana will continue to face major hurdles due to large amounts of debt that need to be refinanced at a high cost.
I knew you were trouble - Corporates have managed to navigate the higher yield environment quite successfully so far. However, insolvencies are picking up in most countries, suggesting the large divide between SMEs that are facing liquidity and profitability issues and larger firms that remain resilient. Going forward, rising rates should continue to bite profitability and liquidity, while revenue growth should soften. Some sectors such as real estate, renewable energy and construction are in the midst of the storm, with high leverage, depreciating assets and large financing needs for both opex and capex.
Bad blood - In 2024, long-term interest rates are unlikely to decrease significantly as policy cuts are already priced in and the supply factor will maintain upside pressures. Equities in advanced economies are expected to yield returns close to 5% amid increased volatility. Corporate credit spreads have shown resilience, indicating market confidence in a soft landing. While the overall outlook is cautiously optimistic, watch out for potential risks in specific market segments (i.e. commercial real estate, energy etc.).
Delicate – Despite a challenging environment and some financial cracks under the surface revealed by the short-lived banking crisis in the US, markets have been dismissive of mounting liquidity pressures. We expect the liquidity squeeze to intensify and add pressure on corporate spreads. However, the risks do not seem systemic, as some buffers remain on both the corporate and policymaker sides.