A security guard at the New York Stock Exchange (NYSE) in New York, USA, on Tuesday, March 28, 2023.

Victor J. Blue | Bloomberg | Getty Images

Given that central banks have been raising interest rates at a breakneck pace, and those rates are likely to remain higher for longer while the lagged effects kick in, the macroeconomic outlook for 2024 is far from clear.

The International Monetary Fund’s baseline forecast is for it to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024, well below the historical average of 3.8% between 2000 and 2019, reflecting a significant slowdown in advanced economies.

The Washington-based institute expects U.S. GDP growth, which has remained surprisingly robust despite interest rate hikes of over 500 basis points since March 2022, to continue increasing at 2.1% this year and 1.5% next year will belong to the best-performing developed markets.

The resilience of the U.S. economy has led to a growing consensus that the Federal Reserve will achieve its desired “soft landing” and slow inflation without plunging the economy into recession.

The market now largely expects interest rates to peak in the Fed Funds’ current target range of 5.25% to 5.5%, with rate cuts expected next year.

Nevertheless, in a forecast report for 2024 published on Monday, Deutsche Bank economists were quick to point out that monetary policy was operating with delays, the “timing and impact of which are extremely uncertain.”

“Given the lagged impact of rate hikes, we can already see clear signs of data weakening. In the U.S., the latest jobs report showed the highest unemployment rate since January 2022, credit card defaults are at their highest level in 12 years and…” “High yield bond defaults are well below lows,” said Jim Reid, head of global economics and thematic Research at Deutsche Bank, and David Folkerts-Landau, the group’s chief economist, in the report.

“There is obviously stress at the outer edges of the economy, which is likely to spread in 2024 with interest rates at these levels. The euro area experienced a -0.1% decline in GDP in the third quarter, with the economy in a period of stagnation since autumn 2022, which is expected to extend until mid-summer 2024.”

The German lender has a much gloomier forecast than market consensus, predicting that Canada will have the highest GDP growth among the G7 in 2024 at just 0.8%.

“While this is still positive and the profile improves over the course of the year, it does mean that major economies will be more vulnerable to a shock as they need to overcome the lag of this most aggressive rate hike cycle in at least four decades,” Reid and Folkerts say -Landau said, pointing out that potential “macro accidents” are more likely after such a rapid tightening.

“We’ve had 10 to 15 years of zero/negative interest rates and global central bank balance sheets rising from about $5 trillion to $30 trillion at the recent peak, and just a few years ago most expected ultra-loose policies.” So it’s easy to recognize how poorly leveraged investments could be made that would be vulnerable to this higher interest rate regime.”

U.S. regional banks sparked global market panic earlier this year when Silicon Valley Bank and several others collapsed, and Deutsche Bank pointed out that some vulnerabilities remain in that sector, along with commercial real estate and private markets, which “a “Race against time”. “

“Higher for longer” and regional divergence

The prospect of “longer-term higher” interest rates has dominated the market outlook in recent months, and economists at Goldman Sachs Asset Management believe the Fed is unlikely to consider cutting rates next year unless growth slows significantly more than currently forecast.

In the euro zone, weaker growth momentum and a heavy burden from tighter fiscal policy and lending conditions increase the likelihood that the European Central Bank will pause its monetary tightening and potentially switch to cuts in the second half of 2024.

“While the Fed and ECB appear to have deviated from a hard landing path during the tightening cycle, exogenous shocks or a premature turn to monetary easing can reignite inflation in a way that requires a recession to push it down,” said GSAM economists.

“Conversely, further tightening of monetary policy could trigger a downturn once the effects of previous tightening become noticeable.”

GSAM also noted regional divergences in the evolution of growth prospects and inflation patterns, with Japan’s economy surprising on the upside as resurgent domestic demand after many years of stagnation boosted wage growth and inflation, while China’s real estate market leverage and demographic headwinds skew the risks to the downside.

Meanwhile, Brazil, Chile, Hungary, Mexico, Peru and Poland were among the first to raise interest rates in emerging markets and were among the first countries where inflation slowed sharply, meaning their central banks have either started or are about to cut rates .

“In a desynchronized global cycle with long-term higher interest rates and slower growth in most advanced economies, the path forward remains uncertain,” GSAM said, adding that this requires a “diversified and risk-aware investment approach across public and private markets.”

Recession risk “delayed rather than reduced”

In a panel on Tuesday, JPMorgan Asset Management strategists reiterated that caution, claiming that the risk of a U.S. recession will be “delayed rather than reduced” as the impact of higher interest rates ripple through the economy.

Karen Ward, chief market strategist at JPMAM, noted that many US households were using 30-year fixed-rate mortgages while interest rates were still around 2.7%, while in the UK many were using them during the Covid-19 pandemic Five-year fixed-rate mortgages switched “Interest rate pass-through is much slower” than in previous cycles.

However, she highlighted that the UK’s exposure to higher interest rates will rise from around 38% at the end of 2023 to 60% at the end of 2024, while first-time buyers in the US will face significantly higher interest rates and higher costs. Other consumer debt, such as car loans, is also strong gone up.

“I think the key conclusion here is that interest rates are still persistent, it’s just taking longer this time,” she said.

The U.S. consumer has also been spending their pent-up savings faster than their European counterparts, Ward emphasized, suggesting that this, along with “incredibly supportive” fiscal policy in this form, is “one of the reasons the U.S. has performed better so far.” major infrastructure programs and post-pandemic support programs.

“All of that fades into next year as well, so the environment for the consumer just doesn’t look as strong for us until we go into 2024, which will look a little biting,” she said.

Meanwhile, companies will need to start refinancing at higher interest rates in the next few years, particularly high-yield companies.

“So growth is slowing in 2024 and we still believe the risks of recession are significant and so we are still quite cautious about the idea that we have been through the worst and will see an upturn from now on “” Ward said.

Source : www.cnbc.com

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