Economic and Market Commentary

Four Economic Themes to Know in 2024

Economist Tiffany Wilding shares four macro themes from our 2024 outlook likely to influence global markets, including the potential for a U.S. interest rate-cutting cycle.

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Text on screen: Ken Chambers, Fixed Income Strategist

Ken: Tiffany, we always talk about the health of the US economy, global economies with respects to things like just growth and inflation and just general trends. Can you share a few key conclusions from that December conversation we had? And what are we going to be watching for in the year ahead?

Text on screen: Tiffany Wilding, Economic Advisor

Tiffany: Yeah, those are all great questions.  The fact that inflation has come down more convincingly, you are starting to see unemployment rates move up, has given central banks the confidence to shift their communication towards basically saying, we think we're at the top of our rate hiking cycle, and this has had important implications for markets.

FULL PAGE GRAPHIC TITLE: Navigating the Descent: Four economic themes

The chart shows four economic themes: 1) Markets already pricing a substantial cutting cycle; 2) Peak inflation and rising unemployment consistent with rate cuts; 3) Global divergence in monetary policy; and 4) Soft landings are possible, but risks remain.

So markets focus now is obviously on when and how fast cuts will come or central bank easing will come. We think central banks probably will continue to be somewhat more delayed than what markets are pricing.

We think that relative resilience from 2023, will fade away this year in 2024. And that's because the real savings buffers that households accumulated post pandemic as a result of government supports, those are fading away if not having already been depleted. Higher inflation, higher price levels have eroded the real value of households’ total wealth, that's happened at the same time that government policy and fiscal policies are likely to be moderately contractionary in 2024 this year.

And obviously, central banks are still tight and restrictive. So the question is how much deceleration in growth do we expect to see?

And I think that'll differ a little bit across economies but our outlook there hasn't really changed. But in some of the economies that are more dependent on variable rate debt structures, they are more interest rate sensitive. They'll potentially slow more quickly. Canada, Australia, New Zealand, even Sweden, fall into that category. But even if you look to Europe and the UK, those economies also look vulnerable. Their growth has also been tracking much lower, much more stagnant, even mildly recessionary. They're still dealing with the implications of a terms of trade shock due to disruptions on energy and imports from the war in Ukraine.

The growth picture is going to feel a lot different in 2024 we think. That is going to result in labor markets that are continuing to ease. We've already started to see unemployment rates start to tick a little bit higher across developed markets.

Obviously, the vacancy ratios have come more close to pre-pandemic levels, and all of this is resulting in inflation that's fallen pretty dramatically, and we expect that to continue as well. We are projecting that inflation continues to fall, all be at a slower pace, but gets down to the 2.5% to 3% zone where we think central banks can start to cut rates.

Ken: A topic that we spend a lot of time talking about was the risks to a soft-landing outcome or the market, the fact that it's pricing in that soft landing outcome. What risks do we see there?

Tiffany Wilding: Yeah, and that's another great question. Now, one of our main arguments for why we saw elevated recession risks was just that this higher for longer monetary policies strategy that central banks were communicating has historically just not been consistent with soft landings. The soft-landing cycles historically are the hiking cycles that don't coincide with recession. Central banks tend to - they hike to a much lower rate but then they also start cutting more aggressively because you get some positive supply shock that brings inflation down.

So in this cycle we have seen supply sides of economies normalized post pandemic, but central banks were basically telling us they're going to be on hold for a while. And so, that's why we argued there'd be elevated recession risks. Now that we've seen some pivot towards maybe we're going towards easing from the central bank rhetoric, I think that is very consistent with some higher probability of a soft landing. And the markets have priced that in. Nevertheless, we would argue we are not out of the woods yet, right? There are still fat tails on either side of this distribution.

On the one hand, the stagnant growth outlook that we have means - and it's even small, relatively small negative economic shocks can push economies into recession. If you look at Europe, it already looks stagnant to mildly recessionary but nevertheless, on the other side of that elevated inflation risk, there's still the risk that inflation could be sticky. Real wages haven't fully caught up to pre pandemic levels, and you've had productivity that's not really doing that well. I think these elevated inflation risks maybe are most acute in the US where we have had more resilient growth. And certainly, that could continue, so there's a range of possible outcomes here. The markets are very focused on soft landing, but you certainly want to think about those other scenarios when coming up with the outlook.

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