CAN THE GLOBAL ECONOMY DEFY THE GLOOM?
After much debate over whether there would be a soft or hard landing, several economic data releases towards the end of 2023 and in January have created a more optimistic growth outlook, and a more benign inflationary backdrop, at least for now. That said, prospects are far from uniform across the world.
The US keeps on giving
Economists have been compelled to revise higher their growth forecast for most leading economies in 2024. The combination of resilient consumption and a resilient job market has once again defied expectations. At some point, the US consumer will run out of excess savings and consumption will likely stall, but so far higher real wages and low unemployment have softened the blow. While growth may end up higher than anticipated at the start of 2024, a significant economic slowdown appears to be on the cards this year.
Europe stuck in a rut
On the other side of the Atlantic, both the UK and the eurozone economies remain stuck in first gear, and show little sign of accelerating from last year’s doldrums. With no obvious catalyst in sight to lift prospects significantly, European economic growth will probably remain anaemic, and flirt with contraction in 2024.
China is the wildcard
Talking of disappointment, a strong rebound in China’s economic growth in 2023 was anticipated by many 12 months ago. At just 5.2%, the country somehow managed to hit its annual gross domestic product (GDP) growth target. However, this still fell short of the 6% or even 7% expansion that some economists had pencilled in as the economy reawakened from its long period of COVID-19 restrictions. A so-called balance sheet recession, coupled with a troubled real estate sector that is mired in debt and a loss of confidence, can all be blamed.
Chinese authorities vow to support the economy and lift the gloom, but their actions have been too limited to turn things around much, so far. Given the prolonged pessimism over the country’s prospects, the good news is that, with consensus anticipating real GDP expansion of just 4.6% in 2024, there is room for a positive surprise.
Geopolitical tensions flashing red
Given the ongoing conflict in Ukraine, as well as events in Gaza since October and with the forthcoming US presidential race heating up, it was easy to predict that geopolitics would be a big feature of 2024. We’re only a month in, and flare-ups in the Red Sea have already been added to the long list of possible flashpoints that investors should monitor.
Encouragingly, the impact of recent events on energy costs – which tend to react to any tensions in the Middle East – has been limited so far, with oil prices having been remarkably stable. This may be the calm before the storm. But it is also an important reminder that geopolitics rarely has a long-lasting effect on financial markets.
Steady as we go
Despite all the noise and scary headlines over the last few months, the outlook for 2024 continues to be one of slower growth, weaker inflation and lower rates. That said, the year is unlikely to be plain sailing and docile, with the potential for the macroeconomic and geopolitical landscapes to change rapidly. This is why, above all else, appropriately diversified portfolios will be essential.
By Julien Lafargue, Chief Market Strategist, Barclays Private Bank
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