Why a global recession is not coming in 2024

Will the US remain recession-proof?

The strength in the US economy in 2023 despite the tightening of interest rates since early 2022 was surprising. GDP growth in the December quarter of 2023 was at 3.3% annualised and current expectations for the March quarter this year are tracking at 3.4%. Consumer spending has been the strongest component of growth, with positive contributions from government spending and private business investment while net exports and inventories have detracted from growth.

The labour market is weakening, with job advertisements falling and the unemployment rate ticking up (although it is still low compared to history).

Eurozone economy to struggle without rate cuts

Eurozone growth has suffered from the slowing in global manufacturing and lower Chinese imports which has weighed on Eurozone net exports. Inflation has dropped down to 2.8% over the year to January (according to the headline CPI), down from its cyclical high of 10.6% in October 2022. We think the poor growth environment and progress in inflation will see the European Central Bank start to cut interest rates around mid-year, or slightly earlier. An improvement in global manufacturing conditions in 2024 (according to the PMI) and rate cuts should see Eurozone growth at 0.9% in 2024, an improvement from last year.

China needs more stimulus... but it may not get it

Reflecting soft growth conditions, China’s consumer prices are in deflation at -0.8% over the year to January (see the chart below) which weighs on corporate earnings, household wages and depresses sentiment.

But, without further monetary and fiscal easing (particularly for households to increase confidence and encourage spending rather than saving), Chinese growth will remain subdued. We expect GDP growth of around 4.6% in 2024 and 3% next decade. This is a much lower rate than the world has been used to given that China was growing at ~10% between 2006-10, although given the Chinese economy is now more than twice the size it was back then, there is still a positive and sizeable contribution to global growth and demand for commodities (which is important for Australia).

When will Japan start to tighten its monetary policy?

The Bank of Japan already loosened its yield curve control target on bond yields and the next step will be to fully remove yield control before eventually increasing interest rates. Headline consumer price inflation is running at 2.6% over the year to December 2023 and 2.8% for core inflation (which excludes food and energy). 

However, Japan’s historical difficulty in lifting and sustaining inflation and inflation expectations and recent poor GDP growth outcomes (which have seen GDP growth fall over September and December quarters in 2023 meaning a technical recession) means the Bank of Japan will tread carefully in hiking rates and only 10-20 basis points of rate hikes likely this year.

Implications for investors

Geopolitics always matter for investors, but in 2024 this could matter more as around 50% of the global population will have an election. Elections cause uncertainty and potential change which is likely to see additional volatility in share markets. The US Presidential election in November is a major risk event for both the US and the world, especially because of the potential impacts of the election on US fiscal policy (and how that translates to bond yields) and US trade policy (especially as it relates to China). 

Geopolitical issues often also cause disruptions to commodity prices and global transport costs, which impact inflation. A second-round lift in inflation or persistent elevated inflation is also a risk for the developed economies in 2024 which would delay the start of central bank interest rate cuts.