Global economy shines rays of hope

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

• It seems reasonable to expect that the developed world will find growth more difficult to achieve
• Higher interest rates and tighter credit conditions should take their toll, eventually
• Furthermore, the US Federal Reserve, the European Central Bank and the Bank of England have all been clear that they want to slow their respective economies in order to tame inflation
• While it’s difficult to get excited about the macroeconomic outlook for 2024, it is important not to underestimate the private sector’s ability to adjust and navigate uncertain times
• Corporate balance sheets are, for the most part, still healthy. Innovation continues unabated. In particular, the exponential adoption of artificial intelligence (AI) could pave the way for one of the fastest technological revolutions. And depressed investor sentiment leaves plenty of room for positive surprises if the data turn out to be better than expected, even if only marginally.

A year ago, the consensus pointed to a median global growth forecast of around 2% for 2023. Fast forward to today, and this number has nudged up to 2.8%. While this may seem negligible, it also means that the world’s economy has grown almost 50% faster than was expected a year ago. 

This unexpected resilience can be explained by many factors. First and foremost, consumers have been able to rely on excess savings and wage growth to offset the challenges caused by elevated inflation. Second, businesses have been able to maintain profitability levels thanks to strong pricing power and appropriate balance sheet management. Finally, governments have often taken the baton from central banks, providing fiscal support when monetary conditions were tightening quickly. 

The only significant disappointment came from China, where the anticipated post-lockdown boom quickly gave way to investors wondering if the economy could actually achieve just 5% growth this year.

Lower growth ahead 

With a stronger base to start from, 2024 is likely to be a year of lower economic growth. The current median forecast is for global gross domestic product (GDP) to expand by 2.6%. That said, we forecast that expansion will be a more conservative 2.4% (see table).

Economic forecasts, year on year (%, F = forecast)

Source: Barclays Investment Bank, Barclays Private Bank, November 2023

However, this number masks significant disparities. Advanced economies are expected to struggle more (with 0.8% growth, less than half the pace seen in 2023) while the momentum in emerging markets could remain largely unchanged (3.6% versus 4.0% in 2023). This is the result of India’s strong contribution, where GDP expansion is forecast to accelerate next year (6.4% versus 6.3%), likely the result of ongoing reforms, companies reallocating capital from China to the country and access to lower-priced energy (especially oil).  

It seems reasonable to expect that the developed world will find growth more difficult to achieve. Higher interest rates and tighter credit conditions should take their toll, eventually. Furthermore, the US Federal Reserve, the European Central Bank and the Bank of England have all been clear that they want to slow their respective economies in order to tame inflation. 

Weaker inflation too 

The base case is for central banks to succeed in reining in price pressures. Indeed, inflation in most large economies is forecast to dip below3% by the end of 2024. Even emerging markets, excluding China, should see their aggregate inflation rate drop from 5.1% to 3.9%. 

However, deflationary forces won’t be the same everywhere, or for everybody. Some services prices should fall significantly in the coming twelve months. In particular, it seems that the post-pandemic ‘revenge’ travel boom is now over, as consumers turn more cautious. On the other hand, strong wage pressures might keep other parts of the services inflation basket higher for longer. Meanwhile, goods prices are likely to remain subdued as demand wanes, inventories are full and, in many cases, pricing power fades. That said, commodity prices remain a wild card.

Supply-demand dynamics and geopolitical risk premium should underpin fuel prices, which will also remain vulnerable to the threat of a weaker macroeconomic backdrop. Meanwhile, the cost of agricultural commodities remains hostage to an ever more capricious climate. 

Politics to keep markets guessing

In addition to an uncertain growth-inflation mix, investors may have to contend with several other risks. Among the knowns for 2024 are two major elections in the US and the UK. At this stage, it is too early to speculate as to which party will be elected and on what platform. One thing is clear though, the political uncertainty in these countries will ramp up as we close in on the final quarter of the year. 

Turning to Asia, investors will also have to account for a potentially contentious presidential vote in Taiwan.

Irrespective of their political inclinations, governments around the world will come under more pressure to address ballooning debt burdens and excessive deficits. Financial markets could morph into fiscal referees, arbitrating the appropriateness of any new spending plans. 

Reasons for hope

While it’s difficult to get excited about the macroeconomic outlook for 2024, it is important not to underestimate the private sector’s ability to adjust and navigate uncertain times. On that front, there appear to be rays of hope. First, corporate balance sheets are, for the most part, still healthy. Indeed, firms took advantage of the pandemic-related decline in interest rates to extend the lower cost of their debt while increasing average maturity. 

Second, innovation continues unabated. In particular, the exponential adoption of artificial intelligence (AI) could pave the way for one of the fastest technological revolutions. Indeed, the tangible first impacts of AI could be felt next year already, be it on employment (negative), productivity or profitability (both potentially positive).

Finally, and unlike twelve months ago, many investors and forecasters are somewhat downbeat about what lies ahead. While this in itself is not enough to prevent a slowdown, it leaves plenty of room for positive surprises if the data turn out to be better than expected, even if only marginally.