Global Economic Overview - December 2023 PDF 1.54 MB


Despite some strengthening in a few survey indicators recently, momentum in the main developed markets is currently lacklustre. Indeed, it is touch-and-go whether or not shallow recessions have begun, under the weight of higher interest rates. We expect similarly challenging conditions to persist at the start of 2024 too.

The better news, however, is that inflation has made substantial progress back down towards target – pleasingly to date without large job losses. Energy prices have been the key driver of that until now. This effect is now probably largely behind us. But encouragingly, core inflation has started to recede too, and to a greater extent than policymakers have forecast. A return to target inflation therefore seems in sight before long. As a result, a restrictive monetary stance looks less necessary.

This has given rise to optimism in markets that over the course of 2024, interest rate cuts can spread from a handful of emerging markets, where they have already begun, to the major developed economies. We share this view. But we are mindful that the ‘last mile’ in bringing inflation down is set to be harder. Going as quickly and as far as now priced in seems a little too optimistic to us: we expect a relatively cautious start to policy loosening, with 75bps of rate cuts in the US and the Eurozone next year and only 50bps in the UK, where the fiscal stance has seen some pre-election loosening in the Autumn Statement. Indeed, amid high indebtedness, fiscal considerations could limit further falls in longer-term bond yields next year. Even so, a turn in the interest rate cycle should help set the conditions for a strengthening in growth momentum in H2 2024, along with the direct boost to purchasing power from lower inflation itself.

Key calls for 2024

Global growth gathers pace after a lacklustre start to 2024

We are looking for global growth of 2.9%, down from 3.1% this year. But this masks an acceleration in H2 2024 as lower inflation and rate cuts boost spending power and investment

China still struggles to overcome its property slump

Stimulus measures by the authorities are likely to bear some fruit, but we suspect the rumoured 5% growth target may not be met in full as fiscal constraints on local authorities bite and competition in traded goods from a buoyant Indian economy is strong.

The falling trend in inflation persists, now driven by core prices

Improved supply chains and falling vacancies look set to bring a sustained return to target inflation within sight, helped by indirect effects of cheaper energy on core prices

Policy rate cuts begin, but a little later and by less than priced in

Central banks likely want to proceed cautiously to begin with, absent an unforeseen crisis.

There looks to be some, but not much, scope for further falls in bond yields

Uncertainty about neutral rates and fiscal concerns could limit declines in yields.  

The USD dollar may move lower as global growth recovers and rates are cut

A potential wildcard are elections, chief among them the US Presidential election. Were Labour to win in the UK, the policy (and FX) impact may be limited.

Read the full commentaries

  • Global

    Although some economic surveys have strengthened recently, there are few indications that global economic activity is yet showing signs of a genuine pick-up. Lagged effects from higher interest rates on activity in advanced economies are becoming increasingly visible, seemingly including in the US. Despite Beijing’s attempts to boost the economy via infrastructure spending, we still judge that China will struggle to achieve 5% growth next year as it faces headwinds from the real estate sector, lacklustre demand for manufactures and more competition from India in the traded goods sector. Indeed Chart 1 shows that among G20 countries, manufacturing intensive economies have enjoyed shallower recoveries following the Covid-induced trough in mid-2020.

    Chart 1: Manufacturing economies have found the going tougher since Covid

    Chart 1: Manufacturing economies have found the going tougher since Covid

    Source: Macrobond, Investec Economics

    Our views on global growth for the coming year are largely intact from a month ago, although we have modestly upgraded our 2024 GDP forecasts for the US, China, India, the UK and Australia. These (and other changes) have resulted in an upward nudge to our world GDP projection to 2.9% from 2.7%. This though is still (slightly) below the likely outturn for 2023 of 3.1% (Chart 2). It is also worthwhile noting that this small stepdown in full-year growth occurs despite a rebound in activity in a number of major economies through the course of next year.

    Chart 2: Our global GDP forecasts are nudged up (but we still see a modest slowdown in 2024)

    Chart 2: Our global GDP forecasts are nudged up (but we still see a modest slowdown in 2024)

    Source: Macrobond, Investec Economics

    An improved inflation outlook has helped. As a result, interest rate expectations have fallen sharply across various jurisdictions over the past two months. In the US, for example, the yield curve has recently shifted to price in five 25bp reductions over 2024, actually in excess of our forecast of three. A number of senior central bankers at the Fed, ECB and BoE have attempted to rein in expectations, warning that core inflation may be sticky over the 'last mile' of the cycle and that the risk of further hikes has not yet passed. But the global rate landscape has already shifted as several central banks have begun to ease policy (Chart 3). These are mainly in EMs, perhaps because the authorities there began to raise rates earlier than in the DM space.

    Chart 3: More central banks globally are now cutting rates than raising them each month

    Chart 3: More central banks globally are now cutting rates than raising them each month

    Source: Macrobond, Investec Economics

    Scope to ease monetary policy is the cornerstone of our view that the major economies will regain forward momentum next year. Sharp declines in energy price inflation are currently helping headline rates fall by more than expected. ‘Flash’ November data for the eurozone, for example, show the headline HICP rate dropping to 2.4%, within reach of the 2% target. But a tangible risk is that the last mile proves difficult as core inflation is tortuously sticky and too high for headline rates to stay close to target consistently, as benign effects from energy prices fade. This could plainly occur if labour markets remain too tight and wage rigidities do not dissipate, worsening the trade-off between growth and inflation.

    Chart 4: Headline inflation rates are close to target, but core rates are generally stickier…

    Chart 4: Headline inflation rates are close to target, but core rates are generally stickier…

    *Italy, Germany, France are HICP,
    **Japan core CPI is ex fresh food and energy
    Source: Macrobond, Investec Economics

    Lower rates next year should help to reinforce the loosening in financing conditions which is already taking place (Chart 5) as policy rate expectations soften. But a continued reduction in medium-term borrowing costs is far from guaranteed even if monetary policy is eased as we expect. Investor concerns over government financing is one possible wildcard. Indeed the volatility of US Treasury yields has been nothing less than staggering over 2023. Note that Moody’s, the only one of the three large ratings agencies to rate the US as ‘AAA’, recently put it on a negative outlook. In itself this may not be pivotal, but a deterioration in public finances metrics in various countries poses risks to the cost of household and corporate financing.

    Chart 5: US corporate bonds spreads have tightened alongside a fall in Treasury yields (bps)

    Chart 5: US corporate bonds spreads have tightened alongside a fall in Treasury yields (bps)

    Source: Macrobond, Investec Economics, Bloomberg USD corporate option adjusted spreads

    Protectionism and re-shoring have been issues affecting supply chains and inflation for a while. Recently though the tide looks to have turned for the better (Chart 6). Improved relations with China help too: President Xi recently made a statement about ‘not wanting a cold or a hot war with anyone’ and a recent trip to the US appeared to be cordial and productive. Beijing’s motivation may be that it feels the headwinds its economy faces require overseas flows of capital to overcome. Even so, ‘Panda-based diplomacy’ may help the world disinflationary process. That said, we remain alert to the possibility of a Trump victory in November’s US elections and of adverse repercussions for world trade.

    Chart 6: Supply chain pressures eased again in 2023 – better US-Sino relations would also help

    Chart 6: Supply chain pressures eased again in 2023 – better US-Sino relations would also help

    Source: Macrobond, Investec Economics

  • United States

    There are two main themes that are likely to dominate the US outlook next year: how the Fed approaches a likely policy easing and the outcome of the Presidential election, set for November 5. On the latter, as it stands the polls are overwhelmingly implying another Trump vs Biden match up. Both candidates are far ahead of their respective challengers. A recent NYT poll suggested that in such a head-to-head, Donald Trump would win five of the six key battle states, sparking concern for the Democrats. But this also ignores the potential for third ‘spoiler’ candidates. The bipartisan group ‘No Labels’ is considering a run, possibly led by Democratic Senator Joe Manchin.

    Chart 7: Opinion polls swinging to the tune of Trump

    Chart 7: Opinion polls swinging to the tune of Trump

    Source: New York Times / Siena, Investec Economics

    With the election still a long way off, we have conditioned our forecasts (set out below) on a period of status quo, until the picture becomes clearer. But that does not mean we have not considered the potential implications of another Trump presidency. Back in 2016, the USD firmed by 6% in trade weighted terms from the results to end-year following Trump’s win, only to then reverse and lose those gains in 2017, despite the Fed hiking rates. Equities also rallied in the immediate aftermath of the results. The market reaction this time will depend on the policies that the candidates campaign on – still a big unknown – but also which party wins the House and the Senate, which will determine the policies that actually make it through Congress to the President’s desk.

    Chart 8: The immediate reaction to a Trump presidency was dollar positive, only to reverse

    Chart 8: The immediate reaction to a Trump presidency was dollar positive, only to reverse

    Source: Macrobond, Federal Reserve, Investec Economics

    Aside from the looming Presidential election, the other key question is how long the Fed funds target range will remain at current levels (5.25-5.50%). Over the past month we have become more confident that rates have peaked. As inflation has declined, FOMC speakers, even the more hawkish, have started to discuss potential rate cuts. And now gasoline prices have eased, headline inflation seems back on its path to 2%. Labour market data too have been softer. The most recent payroll print of +150k has contributed to a downward trend (although is still above the 100k needed to purely sustain population growth) and continuing jobless claims have picked up.

    Chart 9: The labour market is loosening, adding to the justification not to raise rates further…

    Chart 9: The labour market is loosening, adding to the justification not to raise rates further…

    Source: Macrobond, BLS, Investec Economics

    Wage growth is also falling, but is still elevated by historical standards, adding to fears that the last step to the Fed’s 2% inflation target may be more difficult. But we would note that the US can sustain higher wage growth relative to the likes of the UK and Europe, thanks to higher productivity growth. A UK ONS paper found that on a comparable basis in 2021, US productivity levels were the highest in the G7, with output per hour 5.5% above second best, Germany. Rising productivity helped the US economy grow by an annualised 5.2% in Q3 this year. Various indicators point towards this bumper pace of growth not being repeated. Indeed we have pencilled in a slowdown in Q4, but due to a stronger Q3 than we had envisaged, our 2023 growth forecast is 2.4% (prior: 2.2%) and 2024 is 1.4% (prior: 1.1%).

    Chart 10: … whilst faster pay trends might be sustainable thanks to productivity growth

    Chart 10: … whilst faster pay trends might be sustainable thanks to productivity growth

    Source: Macrobond, Investec Economics

    Within this, we are expecting subdued growth in H1 of next year, before rate cuts from June help revitalise economic momentum. The evidence for the near-term slowdown has been broad based, with a variety of economic indicators losing steam. One such example is credit card delinquencies, which continue to rise from historic lows. The NY Fed has found that these are disproportionately driven by those with relatively higher credit card balances, millennials (1980-1994) and those with auto or student loans. All three groups are likely the most exposed to rising interest rates.

    Chart 11: And cracks are appearing in the US economy with loan delinquencies rising

    Chart 11: And cracks are appearing in the US economy with loan delinquencies rising

    Source: Macrobond, Investec Economics 

    To summarise our market forecasts, we maintain our view that the Fed will cut rates in June of next year, and opt for a gradual start to policy loosening, resulting in a 75bp reduction in rates in 2024 (25bp cut every projection meeting from June). Thereafter we expect the Fed to pick up the pace to get to neutral once the FOMC is more comfortable that inflation will not resurge. Given the vast moves in bond yields, we have also reflected on our UST forecasts. As rate reductions become a reality, we see 10y UST yields falling by 50bps next year, ending the year at 3.75%. Considering that in November alone 10y yields fell by over 50bps, this is a relatively small shift in this new world. We expect USD to lose some ground next year but with risks to that view (Chart 12).

    Chart 12: As the global economy rebounds, USD should depreciate, but watch the event risks

    Chart 12: As the global economy rebounds, USD should depreciate, but watch the event risks

    Source: Investec Economics

  • Eurozone

    Recent economic developments in the Euro area continue to point to subdued levels of activity in H2. Q3 GDP contracted by 0.1%, whilst an assessment of monthly indicators suggest it is touchand-go whether Q4 is also negative. Our baseline view is that a contraction and therefore a recession is avoided, but risks are to the downside. What is evident is that monetary policy is weighing on the economy. This can be seen in tighter lending conditions and softer loan demand contributing to a near standstill in monthly net lending flows. As such it is becoming more apparent that these tighter financial conditions are filtering through to the real economy (Chart 13).

    Chart 13: Policy tightening is filtering through to the real economy

    Chart 13: Policy tightening is filtering through to the real economy

    Source: Macrobond, Investec Economics, Bloomberg, Goldman Sachs Financial Conditions Index

    Whilst we acknowledge the lacklustre performance in the near term, our outlook for 2024 does envisage a recovery in Euro area activity across H2. This we expect to be driven by a pick-up in real household income growth given the moderation in inflation, an easing in interest rates, as well as a recovery in manufacturing – a sector which especially in Germany has felt the effects of softer demand from China. In terms of our forecasts, we continue to expect Germany to see a H2 '23 recession, but a better-than-expected Q3 outturn pushes up 2023 GDP growth to -0.2%. As such EU20 2023 GDP sees a small upgrade to 0.5%, whilst 2024 is unchanged at 0.9%.

    Chart 14: EU20 GDP: A weak H2 2023 before some recovery through 2024

    Chart 14: EU20 GDP: A weak H2 2023 before some recovery through 2024

    Source: Eurostat, Macrobond, Investec Economics

    With 2023 characterised by high inflation and central bank tightening, the key question is how these dynamics evolve in 2024. On inflation the disinflationary process is clearly underway: November’s HICP outturn was within touching distance of the 2% target at 2.4%, 8.2%pts below the Oct-22 peak. But much of this fall has been driven by favourable energy base effects which have run their course. In fact, HICP will likely see a small uptick in the coming months. Nonetheless, stripping out the effects of volatile items such as energy, developments in core inflation, which now stands at 3.6%, have been encouraging. Services inflation too, which through much of this year proved sticky around 5%, is also now falling, standing at 4.0% in November.

    Chart 15: Recent inflation trends have been encouraging: HICP and ‘core’

    Chart 15: Recent inflation trends have been encouraging: HICP and ‘core’

    Source: ECB, Macrobond, Investec Economics

    These outturns are tracking lower than the ECB’s estimates for Q4, but is this progress sufficient to trigger an April cut, as is priced into the curve? We believe not. Whilst we predict the disinflationary process will continue through 2024, April to our mind would be too early. Crucially, with a still tight labour market the ECB remains attentive to the risk of elevated wage growth fostering a period of more persistent inflation. In assessing this, the earnings figures at the start of 2024 will be key and whilst data such as Indeed’s wage tracker do point to some slowdown, the ECB is likely to want to wait for the official Q1 negotiated wage data which will not be available by April. Ultimately, we believe that June’s meeting will be more apt for a cut given realised core HICP should have shown further progress to target (our May-24 forecast is 2.2%), the latest wage data will be at hand and the ECB will have an updated set of forecasts.

    Chart 16: Markets may be too aggressive in ECB cut pricing

    Chart 16: Markets may be too aggressive in ECB cut pricing

    Source: Macrobond, Investec Economics

    This we suspect will no longer show inflation above target in 2025. Our base case is for a 25bp cut in June, with the Deposit rate falling to 3.25% by the end of 2024. In terms of market implications we see €:$ firming: our end24 forecast stands at $1.14, given our view of broad dollar weakness and less aggressive ECB cuts over 2024 than is currently implied (125bps). Bunds we would expect to rally alongside global fixed income markets, but see 10yr yields ending 2024 at 2.25%, anchored by what we view as a 2% neutral policy rate.

    Chart 17: Short-term interest rate pricing may support EUR should easing be less aggressive

    Chart 17: Short-term interest rate pricing may support EUR should easing be less aggressive

    Source: Macrobond, Investec Economics

    Risks to the 2024 outlook are however tilted to the downside, this month’s ECB Financial Stability Report sounding more dovish citing ‘substantial risks’ and consequently a fragile financial stability outlook. A concern is the risk of undue damage to the economy as a result of the tightening in financial conditions, given only half of the ECB’s tightening has been felt. At the same time fiscal policy, which has been supportive in recent years, risks turning.  In Germany a shock decision by the Constitutional Court over the ‘debt brake’ could potentially trigger an unplanned tightening in policy. The same could be said for countries such as Italy, as it risks facing the EU’s Excessive Deficit Procedure, given its fiscal metrics.

    Chart 18: Downside risks to growth: weak credit conditions have coincided with recessions

    Chart 18: Downside risks to growth: weak credit conditions have coincided with recessions

    #Net balance of banks reporting tighter lending conditions/ loan demand
    Source: ECB, Macrobond, Investec Economics

  • United Kingdom

    After a weak run – a prime example of which were retail sales volumes, down 0.3% in October after average monthly falls of 0.6% in Q3 – some more recent UK data have pointed in a less negative direction. The November manufacturing PMI was the least contractionary since April, and its ‘flash’ services equivalent rose back above the neutral level of 50 for the first time since August. Revisions may yet change the latter but have tended to be to the upside in the past year. The gloom in housing market metrics has lifted a tad too. Mortgage approvals nudged up in October, as did price and transactions indicators within the RICS survey (Chart 19). House prices themselves also moved up in each of the past three months.

    Chart 19: Are these the first glimmers that housing market indicators have turned the corner?

    Chart 19: Are these the first glimmers that housing market indicators have turned the corner?

    Source: RICS, Bank of England, Macrobond, Investec Economics

    Further supportive news has come in the Chancellor’s Autumn Statement. Mr Hunt has loosened the fiscal stance, using up virtually all the extra revenue expected to flow from much higher wage growth assumptions than in March. Amid a plethora of measures, the two key ones were making permanent ‘full expensing’ of qualifying business investment and cutting employee National Insurance Contributions by 2%pts (costing c.£10bn p.a., or 0.3% of GDP, each), the latter already from January 2024 (Chart 20). The government argues that this boosts incentives to invest and work, thereby lifting growth potential. Directionally the OBR agrees but sees the impact as only minor (0.3% of GDP in five years’ time).

    Chart 20: The Chancellor has spent the fiscal spoils in a pre-election Autumn Statement

    Chart 20: The Chancellor has spent the fiscal spoils in a pre-election Autumn Statement

    Source: OBR, Investec Economics

    Another undoubted, if not explicit, aim of the changes is to boost the Tories’ electoral chances. The party has been trailing well behind in the polls (Chart 21). Legally, an election must be held at a time of the government’s choosing but by 28 January 2025. That pension and benefit rises were not adjusted downwards despite this seemingly having been considered, and that the National Living Wage was raised by more than companies anecdotally seem to have expected (9.8%), also needs to be viewed in that light. Speculation has mounted that an election could be called in the spring. But a likely prerequisite for that is a bounce in Tory polling – which as yet is elusive. Our baseline case is a Labour majority come next winter.

    Chart 21: The Conservatives will want to see the poll gap narrowing before calling an election

    Chart 21: The Conservatives will want to see the poll gap narrowing before calling an election

    Source: Europe Elects, Macrobond, Investec Economics

    From a GDP perspective, we expect a modest but perceptible impact of the measures in the Autumn Statement: we have upgraded our growth forecasts. But on balance we remain of the view that the economy is on track to contract in Q4 and may do so again in Q1, largely on the lagged impact of higher interest rates. In other words, we still expect a technical recession, although only by a whisker (Chart 22). For 2023 and 2024, we now forecast GDP growth of 0.5% and 0.4%, representing upgrades of 0.1%pt and 0.4%pts, respectively, relative to our last Global. Given this, we have lowered our estimate of the expected peak in the unemployment rate too, which we now see at 4.8% rather than 5.3%.

    Chart 22: We expect a technical recession in the UK, but only by a whisker

    Chart 22: We expect a technical recession in the UK, but only by a whisker

    Source: ONS, Macrobond, Investec Economics

    Our baseline inflation forecast is little changed: we still predict 4.3% for Q4 ’23 and we have lifted our Q4 ’24 forecast only slightly, by 0.2%pts to 2.2%. But we consider that the MPC may be somewhat more concerned about the risk of inflation persistence than pre-Autumn Statement. Its latest forecasts envisaged subdued potential supply growth. Although the Chancellor’s measures also aim to raise supply, we suspect the MPC will judge the lift to demand to be greater. We hence pushed out the timing of a likely first Bank cut from May to August ’24, anticipating the policy rate to reach 4.75% by end-‘24. If so, this would equate to slightly less policy loosening next year than now priced in (Chart 23).

    Chart 23: Markets are increasingly convinced that rate cuts are on their way in 2024

    Chart 23: Markets are increasingly convinced that rate cuts are on their way in 2024

    Source: Macrobond, Investec Economics

    A sharp bond rally since Oct has cut 10y gilt yields to levels last sustained in Q2. Our base case sees some, but not much, scope for more falls, forecasting end-’23 and end-’24 yields of 4.00% & 3.75%, respectively. In FX markets, GBP could firm further against USD in 2024 as it becomes clearer that the US economy is slowing and as a turn in the global rate cycle begins. Improved risk sentiment, aided by thawing relations between the US and China, may also help. That said, we see current market expectations of US rate cuts as more overdone than in the UK, which may constrain the scope for GBPUSD rises, to perhaps $1.30 by end- ’24. For EURGBP we predict 88p as EUR benefits more from turning global manufacturing and trade (Chart 24).

    Chart 24: Sterling could strengthen further against the US dollar over 2024

    Chart 24: Sterling could strengthen further against the US dollar over 2024

    Source: Macrobond, Investec Economics

Global Economic Overview - December 2023 PDF 1.54 MB

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