Two thousand and twenty-three was an eventful year characterised by recession, political instability and interest rate hikes. For investors, however, it ended up being an unexpectedly good year. In the final quarter, expectations dominated that inflation would fall further without deep recessions and that central banks would start cutting their key interest rates again. As a result, almost all asset classes ended in positive territory, with US equities leading the way. What does this mean for the returns of our investment profiles? And what are the prospects for 2024? This investment update reviews the past quarter and looks ahead.
US economy driving global growth
Against all odds, the global economy grew 3% in 2023. This was mainly due to the US economy, which performed significantly better than expected at least up to and including the third quarter. In the US, consumer spending remained at a high level due, for instance, to historically low unemployment. In addition, high government spending – in part due to the Inflation Reduction Act (IRA) – provided an additional growth impetus. The IRA includes a stimulus package to make the US economy and infrastructure more sustainable, cuts in health care premiums and drug prices, and new tax rules for very large corporations. In contrast, the eurozone economy balanced on the edge of recession throughout the year. Europe continued to be hampered by ailing industry (particularly unfavourable to Germany, for example), disappointing world trade (particularly unfavourable to the Netherlands, for example) and the war in Ukraine. The Chinese economy also experienced a difficult year. Here, the faltering real estate sector continued to put pressure on the economy.
Positive inflation news
There was mostly good news regarding inflation. The 2022 inflation surge largely disappeared during 2023. Whereas in 2022 inflation in the eurozone still exceeded 10%, in 2023 it fell to 2.4%. A similar but slightly less extreme situation applies to the United States: from 9% in 2022 to 3.1% today. Low inflation is good news for the economy and hence for financial markets. The rapidly waning inflationary pressures have not gone unnoticed by interest rate markets either. Here, during the fourth quarter, expectations arose that central banks were not only finished with rate hikes, but that they would be cutting base rates again in the near future.