Executive Summary

Recession (mostly) avoided. A trough in global economic activity is expected at the turn of the year followed by below-trend growth in 2024-25. Consumer demand will remain soft amid negative wealth effects and increasing precautionary savings. Global trade dropped to its lowest level in the last two years amid the ongoing destocking process in the manufacturing sector and we only project a timid exit from recession from -0.6% in 2023 to +3.3% in 2024. Overall, the US will see a mere +1.1% GDP growth in 2024, the slowest rate since 2009, followed by +1.7% in 2025. Both Germany and France will only grow by +0.7%, followed by +1.6% in 2025. China’s growth is expected to slow down to +4.7% and +4.2% in 2025. Emerging markets will face a growth deceleration to +4% and +3.9% respectively, below pre-pandemic levels.

Inflation (mostly) circumscribed, leading to timid pivot in interest rates. We expect global inflation to fall to 4.3% in 2024, -2pps from 2023 levels, but to remain above 3% in 2025. In the short run, commodity prices, notably energy, will bring volatility. Moreover, wage growth will bite corporate profitability, notably in Germany and the UK, but a spiral should be off the cards, given the sluggishness in growth. Finally, the USD should remain strong in the next six months, putting downside pressures on currencies. In this context, pivots in key interest rates are likely to remain gradual and timid, led by the Fed in summer 2024 (a total of -100bp over the year), after one last hike in November 2023 at 5.75%. The ECB and the BoE will pivot in September 2024, with 50bps in cuts over the year.

Toxic policy mix in a politically busy year. The monetary stance will maintain real interest rates at their highest levels since 2006. In this context, fiscal consolidation will start but remain moderate compared to past austerity episodes, given the very politicized year ahead: countries representing 75% of global GDP are going to the polls (US, EU, Taiwan, UK, Mexico, South Africa, Turkey just to name a few). Corporates are navigating through a period of reducing demand and increasing costs with reduced pricing power, leading to a squeeze in profitability. While corporates have been able to offset some of their interest burden by investing in short term assets, their cash is now rapidly depleting. Particularly in Europe, many corporates are bracing for significant post-Covid debt repayments due in late 2024-25. Business insolvencies are expected to rise by +11% in 2023 and at least +7% in 2024, with Western Europe being a key contributor to the global trend.

Capital markets: caught between a micro rock and a macro hard place. Capital markets continue to grapple with a tug-of-war between macroeconomic and microeconomic forces. Investors remain vigilant on the uncertainty surrounding the economic landing, policy decisions (higher for longer) and the overall economic landscape. Despite the elevated macroeconomic uncertainty, for the time being, investors continue to put their money on the corporates’ balance sheet resilience narrative, with a strong belief that companies’ fundamentals will remain positive until macroeconomic momentum rebounds. On the long-end of the yield curve, with policy rates peaking, there seems to be little upside left but with the supply-demand picture looking less favorable in 2024, we do not expect big downward shifts to occur either. As a result, we expect sideways trading until year-end, with a timid downward trend in 2024 and 2025 (UST 10y at 3.6% by 2025). For equities, we believe the narrative of fundamentals resilience will somehow pay out: We expect positive total returns for the next three years at around ~7 to 10% yearly. A similar story can be told for corporate credit: We expect credit risk to remain tight despite some short-term volatility as both corporate balance sheet resilience and the limited pass-through effect from higher financing costs have not spooked investor appetite. For emerging market assets, we believe the carry trade will remain strong and attractive, but country selectivity will continue to be a key performance factor.