14 December 2023
Frances Donald, Global Chief Economist and Strategist
Alex Grassino, Head of Macroeconomic Strategy
In this 2024 Annual Outlook, Frances Donald, Global Chief Economist and Strategist, and Alex Grassino, Head of Macroeconomic Strategy, dive into the five major forces that will drive global economies and markets in 2024.
Technical recessions or not, 2024 will be a much more challenging year for growth globally compared with 2023. That economic hardship won't be felt equally across income groups or countries, with the United States more likely to withstand the tightening in the system relative to many other major economies as the country’s domestic focus, strong employment profile, and relative consumer health should all provide support.
Conversely, countries that are heavily exposed to international trade and constrained by their ability to borrow are likely to face significant headwinds during the first half of the year, with gradual improvement as central banks begin easing financial conditions. Indeed, 2024 won't feel anything close to the Roaring Twenties thesis that ran rampant from 2021 to 2023. While no cycles are equal, this environment prescribes late-cycle investing strategies, especially in the first half of the year. That said, for many economies, it's often darkest before dawn, and sometime in 2024, it will be time to think about the beginning of the next cycle. Jumping too prematurely on this eventual rebound, however, is dangerous, as troubled waters are still yet to be crossed.
A material and global disinflation took hold in 2023, but 2024 will likely show that the last leg of the inflation battle is more difficult—not just because year-over-year price growth will struggle to return to the post-global financial crisis/pre-COVID norm, but because central banks will, in our view, ultimately begin easing before inflation definitively returns to target, thereby risking a reacceleration in demand and a possible re-emergence of inflationary pressure.
Global rates are expected to fall in 2024 (%)
Source: National central banks, Macrobond, Manulife Investment Management, as of November 30, 2023. The gray area represents recession.
Central banks are faced with an uncomfortable predicament: Do they ease in the face of deteriorating growth despite the likelihood that inflation is still materially above target (and, in price level-terms, sizably higher than pre-COVID)? We expect that, ultimately, they'll either directly or indirectly concede that their blunt tools aren't the right ones to definitively address the current inflationary environment.
This realisation will likely be driven by the very nature of present-day inflation: Central bank tools are designed to cool demand-driven inflationary pressure but are less effective against supply shocks, regardless of whether these shocks are caused by enhanced pandemic-related protocols, climate change, or geopolitical tensions. Certain central bankers have already conceded the point, outlining their constrained ability to countermand external shocks.
The consequence of this dynamic is that provided inflationary pressures aren’t an acute point of concern, policymakers are likely to relent in the face of weaker growth and choose to reduce restrictive policies in order to counterbalance a softening economy.
This trend will be especially true for central banks with dual mandates, such as in the United States or New Zealand, or in economies that, because of high amounts of leverage, are particularly sensitive to higher rates; Canada, with its levered consumer and expensive home prices, would be one such example.
However, it's important to note that there's a difference between normalising policy toward more neutral levels (which would imply that monetary policy is neither restrictive nor stimulative) and switching to easing mode (which would create an environment in which low interest rates actually stimulated the economy). In this environment, we view this latter development as unlikely, especially with inflation still running above most central banks’ target.
Within this context, in which the limits of central bank policy become evident, we expect a growing dialogue around new non-traditional central banking tools such as central bank digital currencies and the use of targeted tools, such as those available during times of financial system stress. We also anticipate more focus on core central banking assumptions—from the appropriate neutral rate of respective economies to the concept of a 2% inflation target, which is used in many developed-market economies.
Inflation targets: Is 2% the right target?
As economies slow at a faster pace than inflation normalizes, the pressure to ease current monetary policy stances will intensify. If the last leg down in inflation back toward traditional targets proves difficult to achieve, a growing chorus of voices could potentially call for lowering the bar to cuts by raising the inflation target.
Terminal rates: The post-COVID economy looks different: have we moved to a persistently higher interest-rate environment?
We suspect the answer to this question is yes, but admittedly, the bar to being in a higher-rate environment is extremely low, given that central banks kept policy rates at essentially zero for the better part of a decade, which we wouldn't expect to see again for some time, barring an acute crisis.
New tools: Are quantitative easing and tightening things of the past?
We doubt it. Quantitative tightening is still ongoing in many economies, including the United States. We tend to think of policies like this as akin to putting more tools in the toolbox, to be used as the situation warrants. That said, just because they’re available doesn’t mean they'd need to be used.
Labor shortages—An ageing workforce could continue to affect employment dynamics in two ways: First, as the 55+ cohort approaches retirement the pool of available labour is affected; Second, the departure of more experienced workers could leave institutions with knowledge gaps.
Artificial intelligence—Expanded use of artificial intelligence (AI) could potentially lead to a productivity miracle similar to what was seen during the earlier days of the internet, where seemingly above-trend growth and modest inflationary pressure combine.
The weather—An increasingly important part of supply chain disruptions and corresponding price shocks are climate events.
Strategic commodities—Raw materials that are either nondiscretionary (e.g., agricultural assets) or strategically important will be an area of focus.
Fixed income—Our base case is that while central banks ease, they don't lower policy rates to the point where they’re stimulative to the economy. This is at least partly because of incremental modest pressures caused by the realignment of supply chains. Consequently, with higher base-level yields, the return profile around fixed income is likely to be fundamentally different relative to other asset classes than it was in a zero-rate world.
Relative beneficiaries of supply chain realignments—With onshoring and friend-shoring becoming more pervasive structural factors in supply chains, countries that are deemed more secure are likely to benefit from continued foreign investment. Similarly, companies responsible for supporting onshoring initiatives are likely to benefit.
The divergence between goods and services—The manufacturing sector has already experienced a slowdown as a shift from goods to services has occurred. This is in part due to a shift away from using discretionary income on items back toward services such as vacations and dining out.
Timing around exiting lockdowns—Countries that took longer to emerge from restrictive lockdowns are still to varying degrees enjoying that post-opening surge, while regions that exited earlier are closer to normalising. For example, even though it ultimately proved short-lived, China’s exit from lockdown conditions was the impetus for a short-term risk-on rally late in 2022 and in early 2023.
Long(er) and more variable lags—Market participants understand and expect that the global monetary policy tightening experienced over 2022 and 2023 should lead to a lower growth environment. What’s less clear is how quickly the full impact of those moves will be felt.
Labor market dynamics—Because of recent employer trauma around scarcity of labor, it’s possible that companies will go to greater lengths to retain workers even against a backdrop of slowing growth, which could in turn support the economy and extend the cycle.
What happens when policy eases? Several themes that dominated 2023, such as cash as an asset class and the bifurcation between U.S. new and existing home sales, were due to high policy rates. As central banks ease, the opportunity cost of certain decisions (refinancing a mortgage, flows into money market funds) will diminish, possibly reversing certain trends.
2024 Outlook Series: Global Healthcare Equities
2023 was a tumultuous year for equity markets and the healthcare sector. For 2024, we maintain a sense of considerable optimism for the performance of healthcare equities and the underlying key subsector themes.
2024 Market outlook for U.S. regional banks
With interest rates appearing to have peaked and lenders’ deposit costs easing, 2024 could turn out to be a far more hospitable year for U.S. regional banks than 2023.
2024 Market outlook on Asia REITs
Asia REITs offer investors a unique income opportunity in the new year as rates have likely peaked with the possibility of declining borrowing costs in 2024.