The global economy was remarkably resilient in 2023. Key drivers being consumer spending, a robust labour market, and increased business capital spending.
For investors, the journey was more challenging: major central banks, in their efforts to combat inflation, consistently raised rates and tightened conditions.
The cumulative impact of this tightening should be fully felt in 2024, translating into slower growth and lower (albeit somewhat persistent) inflation. The natural consequence should be lower interest rates, but this process may not unfold as swiftly as the market anticipates.
The silver lining is that the world’s largest economies, spearheaded by the United States, are likely to sidestep recession. Most discussions revolve around concerns of a US recession and the potential of a soft landing, but sluggish growth is actually a more distinct possibility.
Absence of clear market bubbles, solid corporate balance sheets (excluding cyclical small cap aside), reasonable valuations, and a lack of investor euphoria suggest that any downturn would be unlikely to trigger adverse negative feedback cycles.
Inflation on the right path, but the last innings could be trickier…
Global inflation will keep falling (to the relief of major Central Banks!). Up until this point, beneficial base effects, i.e. elevated price levels 1 year ago, and better-working supply chains have helped make the inflation normalisation process a quick one.
Progress from here is likely to be slower and require some degree of loosening in labour markets.
…which could force Federal Reserve System (FED) to keep conditions tighter for longer than the market expects.
The Federal Reserve’s recent communications align with our belief that interest rates may stay unchanged for a more extended period than the market anticipates. We expect for the Fed to defer any rate cuts to the latter part of 2024: despite a decline in inflation expectations, the threshold for implementing rate cuts remains substantial.
There is a possibility that the Bank of England, faced with the prospect of weaker economic growth, could become the first major western central bank to start cutting rates.
To read the full AndPapers Q1 2024 click here.
