Outlook on the economy
Cooling of developed countries
With an expected growth rate of 3%, 2024 for the global economy as a whole does not seem very different from 2023. However, the outlook does vary by region. In the United States, interest rates have risen fast and steeply in recent years. The impact is not expected to become fully felt until 2024. In addition, the exhaustion of COVID-19 savings and limited scope for additional government spending may also hamper the growth of the US economy. For Europe, growth prospects are not particularly good either but after stagnation in 2022 and 2023, there is potential for some recovery. In China, the authorities appear to be maintaining the current 5% growth target. However, it cannot be ruled out either that they will settle for lower (and perhaps more realistic) growth. The outlook for emerging economies is relatively favourable. The central banks of Brazil and Chile began cutting base interest rates as early as 2023. In addition, the recent weakness of the US dollar favours emerging countries with foreign currency debt. But China's weak growth does have a strong impact on Asian countries (such as Thailand and South Korea) and elections this year in countries such as India and South Africa are creating uncertainty.
Geopolitical tensions remain decisive
Geopolitical risks continue to determine the development of the global economy in 2024. The impact of the war in Ukraine was already clear, including via the sharp rise in food and energy prices. But in the final quarter of 2023, a second war was added, between Israel and Hamas. The direct impact of this war on the global economy seems limited so far but indirectly it is being felt. For example, through the attacks by Iran-backed Houthi rebels from Yemen on shipping in the Red Sea and the response to this by the United States and Great Britain. The Red Sea is part of a connecting route vital to global trade. Climate change may also increasingly have specific implications for the global economy. A recent example of this is the extreme drought in Panama, which is hampering transit of the Panama Canal, thereby creating an additional obstacle to global trade. Finally in 2024, much attention will be focused on the US presidential election in November.
Interest rate markets are counting on cuts
Whereas interest rate markets initially expected the first interest rate cuts to take place in the summer of 2024, they now assume it might happen as early as March. Both in the eurozone and the US. Moreover, several interest rate cuts in succession are expected to be implemented. This would bring the base rate in the eurozone to around 2.5% (currently 4%) by the end of 2024 and in the United States to around 3.75% (currently 5.25%).
Jumping the gun? The question is, however, whether interest rate markets are not jumping the gun with the above expectation. Admittedly, Fed Chair Jerome Powell made little effort last December to change the mind of the interest rate market, but in its own forecasts, the US central bank is taking into account fewer rate cuts than the market expects. ECB President Christine Lagarde made it clear that although rate hikes no longer seem very likely, the European central bank is not ready to cut interest rates for the time being. With uncertainties surrounding inflation developments in the short term in mind, interest rate cuts from March may seem to be on the early side.
Our expectation
Financial markets seem to be rather strongly anticipating central bank interest rate cuts, which has been reflected in higher share prices. An expectation that can easily disappoint. We think gradually decreasing inflation combined with moderate economic growth is the most likely economic scenario. In this scenario, government and corporate bonds are less attractive. In 2024, previous interest rate hikes are still working their way into corporate profits and prospects for equities are mixed. The attractiveness of cash will decrease as central banks cut interest rates, but that is not the case for now. With a current ECB base rate of 4%, the risk-free return is still high in an historical perspective.