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Macroeconomic review February 2024
13.02.2024
Global markets experienced a number of surprises and shocks in 2023, including elevated inflation, subdued economic growth, a sudden banking crisis and the continuation of the sharpest monetary tightening in decades. Looking to 2024, we expect that the path to a soft landing appears feasible, but the impact of negative effects from monetary tightening still remains in the system.
US market.
For more than 10 years, the stock market existed in an environment of persistently low interest rates. Stocks and bonds entered a bear market in 2022 as the Fed began raising interest rates to combat inflation at a four-decade high. 2023 has seen periods of sharp rises and falls in interest rates, with stocks posting a strong recovery. We believe that 2024 will usher in the next stage of the economic cycle. Inflation is expected to continue to decline amid a slowing economy. We also assume that the Federal Reserve will begin to gradually move away from its high interest rate policy, which will be a catalyst for new economic growth.
1.1 GDP
The U.S. economy remained remarkably resilient through much of 2023, with GDP growth exceeding 2% year over year during the first three quarters of last year. This was largely driven by healthy growth in consumer spending, with households continuing to spend despite rapidly rising interest rates and tightening credit conditions.
Most economists expect U.S. growth to slow in the first half of 2024, with growth rates falling to below 1.5% on an annualized basis. We agree with the view and believe that weaker consumer spending, as well as government spending cuts and a cooling labor market, will lead to slower growth.
Consumers face some challenges in 2024, including dwindling excess savings, rising credit card debt and still-high interest rates. In addition, we believe that some weakness in the labor market could put pressure on wage growth and overall consumer confidence.
Although the economy may avoid a classic recession, a sliding recession may occur. Certain sectors of the economy, such as manufacturing, housing, may bottom out in economic growth and then stabilize, while other sectors, such as services and consumption, may peak and decline.
Following the Fed's tightening cycle, we believe economic growth may finally see its lagged effects in 2024. Slower growth will potentially support lower inflation and reduce the need for further policy tightening. The economy is expected to gradually accelerate in the second half of 2024. Lower inflation and lower rates, as well as improved corporate financial performance, should help improve economic growth. Markets that set future trends may begin to rise ahead of economic improvements.
1.2 Inflation
Significant progress was made in the consumer price market, with core inflation (excluding food and energy) falling from a peak of 6.6% in 2022 to 3.9% in December 2023. We believe this downward trend could continue through 2024. The silver lining to slower economic growth is that lower demand will put further downward pressure on inflation.
We believe that the path to the 2% inflation target will be difficult. Some components of services inflation continue to persist. However, we think the situation will continue to slowly normalize over the course of the year. Some leading indicators of a decline in future inflation give us clues:
• Rent growth has slowed after jumping sharply in 2022, but that has not yet been fully reflected in the home price index, which lags more recent market data by several quarters.
• A decrease in the number of vacancies indicates a cooling of the labor market, which could lead to a decrease in wage growth and, therefore, a slowdown in inflation in the service sector.
• Consumer inflation expectations are declining, affecting actual inflation. The New York Fed's latest survey, released last week, points to the lowest annual inflation expectations in three years.
• In contrast to the consumer price index, the producer price index (PPI), released at the beginning of 2024, was lower than expected and unexpectedly decreased by 0.1% compared to the previous month. This pressure on wholesale prices should help reduce consumer price inflation. • Energy prices are unstable due to ongoing geopolitical risks. Current prices for WTI are around $73, and are close to the lower end of the two-year range. Cheaper oil is positive for lower inflation.
Also, a lot of attention in 2023 was paid to the reduction in monetary
