Outlook 2024: Is the global economy on borrowed time?
Signs of fragility are emerging in the global economy, particularly developed countries, which could prompt central banks to be less hawkish, say Ariel Bezalel and Harry Richards.
Various reasons might have supported the global economy in 2023, helping GDP to beat expectations:
- Strength in consumer spending patterns. COVID distortions and previously accumulated excess savings supported abnormal spending. Increase in consumer credit (e.g., credit card debt) might be another factor.
- For years corporates and household had the opportunity to lock in fairly low rates. This might perhaps make the “long and variable lags” of monetary policy even longer in this cycle.
- Governments continued to spend in 2023 with still fairly elevated deficit levels.
Three factors affecting economic growth
When we look at the current state of global economies, we think a slowdown at this stage might be even more likely. There at least three key factors to support such thesis, especially in the US:
- The aforementioned long and variable lags in monetary policy
- The contraction in lending activity and the tightening in lending standards
- Less support for consumption.
With regard to long and variable lags, history has always shown that monetary policy takes time to affect economies. We do not see any structural change that should make things different this time.
Long and variable lags
Increases in unemployment rate tend to arrive well after the last rate hike
Source: Bloomberg. As of 31.10.23
In the lending space we have been noticing worrying trends in recent quarters. In the US as well as in the Eurozone, not only have banks been tightening lending standards, but have also started to reduce lending activity. Contractions in variables such as commercial & industrial loans are not that common in history. Similar patterns characterized the GFC period for example. Tighter or more expensive lending historically has always had some kind of consequence in the long run on the job market.
Bank assets have now started shrinking
Source: Bloomberg. As of 31.10.23
As mentioned, consumption has been a key driver for recent strength in the US economy. The extraordinary accumulation of excess savings in the COVID period helped. In the last 12 months households have been able to artificially inflate their spending patterns by reducing these savings and using more consumer debt. Various estimates see a strong drop in excess savings in the US, especially in the lower percentiles of the income distribution. At the same time the cost of consumer debt has reached a worrying level.
We continue to expect further disinflation when looking at YoY numbers for headline and especially core inflation. The gradual catch-up of shelter inflation with trends seen in the past quarters in the new rental market will clearly be supportive in this sense.
Excess savings in the US are almost depleted
US excess savings depleted for bottom 80% of households
Source: Federal Reserves, Bloomberg calculations, as at September 2023.
Note: March 2020 = 100
Outside the US
We see material value in government bonds in developed markets (US and Australia in particular) and in some emerging markets (S. Korea, Brazil) and appreciate the advantage of a high duration stance in the current conditions. We see meaningful value along the curve and advocate a fairly diversified stance in terms of maturities. Corporate credit markets look complacent with mounting recessionary risks, with global high yield spreads around long-term averages and well below recessionary averages. We continue to see value however in more defensive sectors such as telecommunications, healthcare, consumer staples and selectively across financials. We see weakness ahead in more cyclical sectors (e.g. chemicals) or in areas more exposed to consumer behaviour (e.g. automotive, retail).
Outlook 2024: A pivotal year?
Periods of transition often raise interesting questions, and this year investors are faced with plenty as they look ahead to what 2024 may bring. Will Western central banks finally start cutting interest rates? Will geopolitical tensions calm or further escalate? And what might a fraught US Presidential election mean for the world?
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The value of active minds: independent thinking
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