Economic and Strategy Viewpoint – Q4 2023

The latest Economic and Strategy Viewpoint is available in full here

Summary:

• The global economy is set to trundle along at fairly sluggish rates of growth of about 2.2% over the next two years as it continues to disinflate. But while the headline figures may be uninspiring, less synchronised global activity means that the diverging fortunes of the world’s major economies are likely to have important implications for policymaking and financial markets.
• The US economy has continued to defy gravity as consumers keep spending against a backdrop of buoyant labour market conditions and excess household savings.
• Question marks over how the budget deficit will be funded have further tightened financial conditions through the bond market, and we do expect growth to slow as higher rates feed through to activity. However, an outright recession remains unlikely and we expect the economy to largely stagnate in 2024.
• The growth outlook in other parts of the world is not rosy. While fading activity has helped to bring down inflation, the European economy is likely to have fallen into recession before the end of 2023. Meanwhile, following a long period of stagnation, the UK economy will probably follow suit in the first half of 2024.
• Monetary policy in advanced economies is probably at peak restrictiveness, but the divergence in economic fortunes is likely to determine whether interest rates really will remain “higher for longer”.
• The case for keeping interest rates elevated in Europe is not obvious and the European Central Bank could deliver a first rate cut fairly early in 2024. Deteriorating fundamentals also suggest that the Bank of England may not be far behind.
• Despite early signs of softening, however, we have pushed back our expectations for US monetary policy and now think the Federal Reserve will not start easing until the second half of 2024 as policymakers fret about a second wave of inflation.
• Continued US exceptionalism is likely to keep the dollar supported in the near term, before gaping twin deficits eventually start to weigh on the currency. Meanwhile, delayed rates cuts, along with question marks over who will fund the larger fiscal deficit, suggests that Treasury yields will remain relatively high.
• Elsewhere, despite recent signs of stabilisation, the ongoing bust in China’s housing market continues to hang over the economy.
• The authorities in China have been in loosening mode for some time and further easing is likely as Beijing attempts to manage the end of its housing-led economic model. And with fractious US elections on the horizon, policymakers will be keen to ward off any further threats from trade sanctions and the break-up of supply chains.

The full Viewpoint is available as a PDF here