At the start of the year, we try to find some of the major themes that could influence markets this year: 2024 has the potential for wild swings. One only needs to look at the news wires where higher interest rates are grinding their way through the system, wars are wreaking havoc around the world, and climate disasters are becoming increasingly common. Five-year growth prospects for the global economy have never been worse.
The above makes it very difficult to predict what will happen in the macroeconomic space, but we can provide some insights into the market’s key players for the year.
Inflation could remain sticky
The jury is still out on whether the inflation demon will be slayed in 2024 or if there will be some inflation flare-up during the year. The arguments for inflation close to central bank targets are that the pandemic-era distortions will gradually fade, bringing inflation lower. Some arguments are also that Central Banks will keep interest rates higher for longer and thus will bring inflation down as interest rates start to bite. This is mainly because the US economy is more robust than initially thought.
Some of the arguments that inflation will remain elevated are that wages and spending rose faster than before the pandemic, leading one to believe that inflation could remain elevated. The second argument is based on the fact that the Central Bank policies are mostly done to control the demand side of the economy, while the issues facing the economy in 2024 will be on the supply side, which could see prices distorted and could see sticky inflation.
Growth will start to slow
Higher interest rates and higher inflation are starting to take a significant toll on the consumer percentage of countries’ GDP, and consumer health will come under severe pressure. Areas like the UK and the Eurozone will underperform the US as headwinds from the previous years will throttle the economies of the Eurozone and the UK.
This means that the Eurozone and the UK are likely to experience (mild) recessions in early 2024, whereas there is only a 50:50 probability of a recession in the US. One implication is that 2024 is likely to be another year in which the dollar stays stronger than most analysts appear to expect.
The interest rate cycle will turn
We know right off the bat that the era of ultra-low interest rates is in the rearview mirror. Still, with inflation steadily coming down and higher interest rates stifling economies, the question becomes when the opportune time to start cutting interest rates will be.
The overwhelming feeling is that interest rate cuts are the next moves by central banks, but the real speculation is which central bank will cut first and how much they will cut by year’s end. The smart money is that the Fed will cut first, as they were ahead of the curve when it came to hiking its interest rate, and structurally, their economy is in more of an advanced deflation phase.
All major central banks are expected to cut in 2024, with the developed market central banks first. The feeling is that EM Central Banks will also cut but at a slower pace as the contagion effect of the advanced economies first needs to wash through the EM economies.
Year of elections
It’s the year of the vote. Countries home to nearly half of the world’s population will pick their governments in elections in 2024 – something that has never happened in a single year before. As countries representing 60% of the global GDP head to the polls, governments, businesses, and households are adopting a widespread ‘wait-and-see’ attitude that will likely delay critical economic decisions.
This heightened uncertainty seems acute in nations like China, Germany, and the United Kingdom. This a stark warning that such uncertainty could act as a negative supply shock, potentially raising prices and curtailing output, investment, and consumption.
The most significant election this year is at the back end of the year. With the US Presidential election, the race seems set to come down to a rerun of 2020, with Donald Trump leading opinion polls to be the Republican candidate despite his mounting legal battles.
On a South African front, we have our local elections, and this could be a time of Rand volatility as the polls indicate that this could be a fascinating election with whispers of coalition governments doing the round.