• The macro focus has shifted from watching inflation to watching the landing

• US: Clear signs of moderation ahead

• Euro Area and UK: Growth in a hostile environment

• ASEAN: Lead the way

• Inflation: More disinflation is in store over the next year

• Monetary policy: Most major central banks are likely finished hiking, but rate cuts probably would not arrive until 2H2024

• FX: A welcome dollar correction

• Risks to the growth

Overview

2023 turned out to be another year of profound and often unanticipated change in the global economy. Despite fears that recession was inevitable, on the back of multiple rate hikes and a rough reopening in China, it’s been avoided so far, helped by saving buffers, reopening boosts and some labour hoarding. Economic growth in 2023 looks to have been around 2.6% globally. Inflation across major countries has fallen sharply from peaks of 8% to 11% last year to around 2% to 5%. Meanwhile, we could have seen peak in interest rates. While it took longer to get there and there was a “high for longer” scare on rates but most major central bank policy rates look to have peaked. Geopolitical threats proved not to be as worrying as feared – the war in Ukraine remained contained, conflict in Israel flared again but so far has not spread.2024 is likely to bring more of the same. Central banks carried on from where they left off in 2022, raising interest rates to tame inflation. Many would have thought that the global economy would eventually buckle under the weight of the 500 basis points of rate hikes that central banks have delivered since 2021. However, the much-anticipated global recession has yet to materialise. While growth has been anaemic in Europe, it has been remarkably robust in the United States, and employment has proved resilient. And yet, as the year draws to a close, it has become increasingly clear that prices are rising far more slowly than they were a year earlier.

In 2024, focus will be on the outlook for growth and inflation, and what that implies to monetary policy and the state of the economy. But the markets do not just dance to such a short-term cyclical tune. Indeed, the big market movements of recent months have arguably been driven by investors’ changing views on where the economy is heading in the long run. Long term bond yields have marched higher as investors reassessed not so much where policy rates will peak in the short run, but where they will settle in the long run – and the compensation they require for the uncertainty around that path.

The consensus view on global economic growth – and, in particular, on US growth – remains rather benign. Consensus expect a soft landing for the US economy – where the central bank successfully slows the economy without triggering a recession – or only a mild one. A deeper recession is considered only an outside risk. International institutions like the International Monetary Fund (IMF), the World Bank (WB) and the Organisation for Economic Co-operation and Development (OECD) see moderating growth globally followed by a rebound during 2024.

However, while a scenario of moderating growth or mild recession is undoubtedly possible, there are several reasons to think things could turn out differently. A strong US economy, resilient consumption and the services sector boosted global economic projections in 2023. However, the 2024 outlook shows signs of weakened economic activity and even slower growth than this year due to restrictive monetary policy in advanced markets and lower-than-expected performance in China. Restrictive monetary policy will slow consumer spending and business investments, which has negative residual effects on labour markets, the services sector and manufacturing.

The diverging growth trend between advanced and emerging economies could widens in 2024. Advanced economies are expected to register slower GDP growth while emerging economies growth will remain stable. Asia Pacific continues to drive global economic prospects despite challenges in China.

2024 Global Outlook: The Big Picture

Our 2024 outlook for the global economy foretells moderation in economic activity, driven by the impact of persistent inflation pressures and monetary policy tightening we have seen in the past two years. Still, demand for services and strong employment continue to support growth. A global recession is unlikely, but more subdued economic growth is expected over the next year.

The global economy continues to be buffeted by opposing forces, suggesting slower growth over the next year. Rapid monetary policy tightening over the last two years has weakened global housing, bank lending, and industrial activity. Yet, this weakness has been more than offset by strength in other sectors, most notably in demand for services, which has propped up strong labor markets. The underlying strength of consumer spending and the fading impact of shocks of recent years have been difficult to assess, leading to ongoing forecast revisions. Nonetheless, recent data point to moderation in global growth heading toward the end of 2023 and into 2024.
 

Source: BIMB Securities Research - 11 Jan 2024