Global economic activity continues on a downward trend. . Current surveys indicate that we can expect moderate global growth until 2024. The monetary tightening of recent years is beginning to impact Western economies with the expected delay. The gap between the manufacturing and services sectors is narrowing. Although the manufacturing sector shows signs of improvement, it continues to contract, while the pace of expansion in the services sector is beginning to slow.
Growth differences between regions remain significant. The US economy, while slowing, continues to exhibit solid data, and the prospects for a “soft landing” in 2024 are improving. In contrast, the Eurozone faces a challenging environment with rapid growth deceleration. China’s economic outlook is improving thanks to strong policy incentives, but the real estate sector will continue to weigh on the economy in 2024.
Inflation saw a rapid decline in the second half of 2023. However, it is far too early to expect a smooth disinflationary path towards the central banks’ 2% target. Despite the absence of supply shocks related to the pandemic, geopolitical tensions, protectionism, and persistent fiscal policy measures continue to generate inflationary pressures. Faced with falling prices, central banks find confirmation in their cautious and wait-and-see stance of the last two quarters.
There is no doubt that the reference interest rates of major Western central banks have reached the peak of the cycle. However, the number of expected rate cuts by 2024 seems exaggerated, considering the inflation target has yet to be met and the significant possibility that the neutral interest rate level may be higher than in the pre-pandemic period. Chinese monetary policy will remain expansive to support fiscal stimuli. Only the Japanese central bank may tighten next year.
After a very strong third quarter, the US economy lost momentum in the fourth quarter. Although recent US data indicate weaker growth and falling inflation due to restrictive monetary policy, there are no signs of an imminent recession. For the fourth quarter of 2023, healthy GDP growth of 2.3% is still expected.
The labor market presents a mixed picture, but there are no signs of collapse. While the number of jobs created continues to decrease, the unemployment rate has dropped to a four-month low of 3.7%. Consumers remain confident and continue to support economic expansion. Retail sales have increased thanks to more relaxed financial conditions and solid personal incomes.
The disinflationary trend continued: total inflation fell to 3.1% due to lower energy prices, while core inflation remained at 4% due to persistent price pressure in the services sector and rents.
Although the slowdown in inflation is positive, we doubt a rapid return to the 2% inflation target given the strength of the labor market, consumer resilience, and expansive fiscal policy in an election year. The Fed confirmed its policy in December as expected, but surprised markets by announcing the start of discussions on rate cuts. Given the upcoming US presidential elections, there is suspicion that central bankers have prioritized preventing a recession over controlling inflation. Given the current growth forecast and the three announced rate cuts, of which the market expects up to six by 2024, it is clear to us that inflation will not reach 2%.
Despite a slight improvement in November, growth in the Eurozone in the fourth quarter remained disappointing. The private sector contracted for the seventh consecutive month in December, increasing the risk of a technical recession in the second half of the year.
Weak global demand has affected the entire Eurozone, and industrial production has fallen to its lowest level since 2020. Germany is particularly affected by a further decline in industrial orders and production. Overall, the data indicates more of an economic stagnation than a cyclical collapse. Even in the first half of 2024, growth will continue to slow and remain at low levels. Unemployment stabilizes at 6.5%, and consumer confidence consolidates at very low levels. Although retail sales and foreign demand weaken, the manufacturing sector shows the first signs of improvement.
Price pressure dropped significantly in November to 2.4% year-on-year, but remained high in the services sector at 4%. Core inflation also decreased significantly from 4.2% to 3.6% year-on-year. Since this is still well above the desired target and PMI indices continue to signal steady cost pressure and wage growth across the Eurozone, the disinflation process is far from complete. The ECB’s tightening cycle has concluded.
However, the central bank president signaled that, unlike the Fed, the ECB is not yet ready to discuss rate reductions. The market significantly overestimates future rate cut actions, expecting up to six steps. Much is at stake for European policymakers: a premature rate cut in a context of rigid inflation and continuous fiscal stimuli would be mistaken. Maintaining restrictive policy for too long could lead to further economic slowdown. The question is how much patience and determination the ECB can show in the face of uncertainty and a potentially less restrictive Fed. It is a fact that the last step towards the 2% inflation target will be the most complicated and may require further economic pain.
China’s economic recovery continued at a moderate pace in the fourth quarter. Exports slightly increased in November, while imports decreased due to the persistent weakness of the real estate sector. However, the economy remains in a deflationary context: both overall inflation and producer prices are negative year-on-year (-0.5% and -3%, respectively). The credit situation improved in the last quarter thanks to extended state measures to promote credit growth.
At the last meeting of the year in December, the Politburo committed to “effectively promoting economic recovery and achieving adequate qualitative growth”. There is no doubt that fiscal policy will be the engine to stimulate economic growth until 2024. However, there are no signs of extended fiscal incentives, but rather further targeted measures. Monetary policy will provide flexible and effective support, albeit cautious. Prospects for China appear slightly more positive than in previous months, but the recovery will remain gradual, and the real estate sector will continue to be a problem, clouding economic prospects until 2024.
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018983 Singapore
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