21 November 2023
We are operating in a highly complex and dynamic world, underlined with fragilities in the global economy. Investors need to respond with clarity and agility.
2023 will likely go down in economic history books as the year of economic resilience. Indeed, despite numerous growth headwinds created by high interest rates, tighter bank lending standards and a slowdown in the manufacturing sector, the global economy continued to expand at a reasonable pace.
Consumption was supported by strong income growth, the drawdown of pent-up savings and a roll-over in inflation. In some regions we also saw a pick-up in private sector investment as well as large fiscal stimulus measures. While the global manufacturing sector struggled, the services sector boomed as it benefited from post-pandemic demand shift from goods to services.
Global growth was in no way uniform, with the US a standout outperformer while the Chinese economy struggled to gather pace. As we move into 2024, we expect the US and other overheated economies to cool as recent supporting factors fade or roll off completely:
The Economic and market outlook 2024 examines the above perspective on growth along with other key considerations around inflation, central bank policies, systemic risks and the state of individual markets as indicators of the year ahead.
Download the report to see the full outlook from our macroeconomic and dynamic asset allocation team.
What should investors consider in 2024?
2023 consumption was supported by the use of savings that people accumulated during the Covid-19 pandemic. Faced with higher cost of living, higher cost of refinancing a mortgage or even a jump in prices for going on a sunny vacation, consumers were able to tap into the excess savings.
In the US, that figure reached $2.7 trillion at its peak and now sits close to $1.1 trillion as at the end of September 2023. However, the savings pot is not infinite and at the current pace of dissaving, consumers will likely run out of their spending reserves over the coming quarters.
The supportive fiscal policy of 2023 is unlikely to persist. One of the less talked about yet powerful drivers of economic activity in 2023 has been fiscal stimulus.
In the US, numerous policy measures such as the Inflation Reduction Act and the CHIPS Act have led to increased spending at a time when tax receipts were low (low corporate tax collection because of falling profits in 2022 and low capital gains tax collection because of poor asset performance in 2022).
This has meant the US government was running a large fiscal deficit in 2023, much larger than in 2022. We expect 2024 fiscal deficit to be smaller than 2023 which means fiscal policy will become contractionary, weighing on economic activity.
The services sector was very strong in 2023 driven by a return to normality. Instead of buying gym equipment, people returned to gyms. Instead of renovating the kitchen, people returned to eating in restaurants and going on holidays.
As we approach the end of 2023, the services sector is appearing to lose some steam as the post pandemic boom for service consumption fades and as service prices have become somewhat stretched. We expect that to continue in 2024.
In the mid-summer of 2022, European natural gas prices were at €339 and oil prices were at $120. One-year later, these prices have dropped significantly, creating an assist to consumers’ budgets.
A roll-over in supply chain constrained goods categories such a secondhand cars had a similar effect. While powerful, we believe these assists won’t repeat in 2024.
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