Higher interest rates, economic downturn, the cost of living crisis, depleted public funds, and deceleration. The forty years following the emergence of a novel perilous virus from Wuhan, China, have been characterized by global economic distress. Barring the crises of 2020, the supply chain disruptions of 2021, or the Russian incursion into Ukraine in 2022, 2023 marks a relatively tranquil period compared to the turbulence since 2019. While the financial repercussions of the conflict in Israel have been localized thus far, there is a possibility of a broader impact. As we approach 2024, the global market outlook remains unfavorable. Here are some key aspects to monitor in the upcoming period.
1. Commencement of Interest Rate Reduction by Central Bankers
The intended objectives of elevated interest rates set by major central banks worldwide (excluding the Bank of Japan) have been met. In developed economies, inflation is receding, and the side effects of the remedy have not been as harsh as initially feared. Attention is now shifting towards the timing of interest rate cuts and the proactive measures of central banks, with the US already undergoing a reduction and the specter of a recession looming over the UK and the eurozone. Despite the significantly bleaker economic prospects in the eurozone, Neil Shearing, the chief economist at Capital Economics, anticipates a more expedited response from the Federal Reserve compared to the European Central Bank.
Traditionally and presently, the ECB exhibits a more conservative stance than the Fed. The Bank of England may find it challenging to sustain its overly optimistic stance on rate cuts as inflation in the UK is declining faster than expected. By the end of the year, markets could witness up to six interest rate cuts, potentially driving the base rate down from 5.25 percent to 3.75 percent.
2. Debt Challenges in Developing Countries
Since the onset of the pandemic, the challenges facing the poorest nations have exacerbated, ensnaring many in a cycle of sluggish growth and escalating debt burdens. Over the past three years, there have been 18 sovereign defaults, surpassing the combined total of the preceding two decades. Countries that heavily borrowed in US dollars during the 2010s have witnessed a surge in debt servicing costs in recent times.
Nations such as Egypt, Ethiopia, Kenya, Lebanon, and Pakistan are grappling with unsustainable debt levels. The G20’s debt relief initiative established in 2020 has offered limited assistance to a select few countries. Record debt levels and soaring interest rates have placed numerous nations on a perilous trajectory, as noted by Indermit Gill, the lead economist at the World Bank. Argentina, led by the newly elected right-wing nationalist Javier Milei and plagued by inflation rates exceeding 140%, warrants close monitoring.
3. Pre-Election Tax Incentives
Given the substantial lag in opinion polls for the Republicans, implementing measures to garner support for the government ahead of elections is inevitable. In his autumn address in November, Jeremy Hunt reduced national insurance contributions and is poised to slash income taxes in the upcoming budget. The UK is slated for a general election by January 2025 at the latest, with the Conservatives and Labour priming their platforms for a potential snap election. Hunt’s ability to justify tax cuts stems from the conducive environment of lower inflation and diminishing market interest rates, which alleviate the government’s fiscal strain by reducing debt interest payments. However, post-election austerity measures, deemed implausible by the Institute for Fiscal Studies, may cast a shadow over the budget figures. The upcoming administration will face tough choices at the outset of the forthcoming parliamentary session.
4. Escalating US-China Geopolitical Tensions
In 2024, elections are scheduled in several developed nations, including the US. The US presidential election in November is anticipated to mirror the 2020 contest between Joe Biden and Donald Trump. Amidst the global realignment into rival camps and spheres of influence, prospects for improved US-China relations appear dim regardless of the election outcome. With persistent upward pressure on interest rates and China’s post-pandemic recovery losing steam, US economic growth is poised to falter in the first quarter of 2024.
Beijing faces challenges including a troubled real estate market, surging youth poverty, waning European demand for its exports, and an increasingly protectionist US stance. As both nations turn inward, the cold war dynamics between the two economic powerhouses are likely to intensify in 2024. The looming specter of a Chinese incursion into Taiwan could further escalate tensions, overshadowing the economic repercussions of the Russia-Ukraine conflict.
5. Unstoppable Advancements in Artificial Intelligence
The race to develop advanced AI capable of generating text, videos, and diverse content rapidly represents a focal point of US-China competition. Many experts view generative AI as a transformative technology akin to steam power and electricity, poised to revolutionize societies and economies.
The momentum behind generative AI gained traction in 2023 and is set to accelerate in 2024. While AI holds promise in aiding nations rebound from prolonged productivity slumps, concerns loom regarding its unchecked ramifications. The advent of “smart systems” powered by AI could disrupt labor markets, sway electoral outcomes, and pose existential threats, necessitating astute governance to navigate the challenges posed by these technologies in the coming year.
6. Escalating Crude Oil Prices
The anticipated disruptive oil shock failed to materialize in 2023. Fears of a crude oil price surge akin to the late 1973 crisis following Hamas’ actions in Israel were allayed as the conflict remained confined to Gaza. However, signs of a broader Middle East conflict have emerged in subsequent months. Following attacks on vessels by Yemeni Houthi rebels, BP suspended fuel shipments via the Red Sea. Subsequently, major shipping companies such as AP Moller-Maersk and Hapag-Lloyd rerouted vessels around Africa in response to threats from Iran-backed militants.
The risks are evident. The Red Sea accounted for approximately 10% of global oil trade in the first quarter of 2023, while a closure of the Strait of Hormuz could disrupt 20% of global supply. Although the global economy has reduced its oil dependence compared to five decades ago, a prolonged supply disruption could propel crude prices above $100 per barrel, reigniting inflationary pressures.
