The more things change, the more they stay the same — or so the saying goes. But while 2024 will feature the same keywords for the global economy as 2023 — monetary policy, geopolitical and political risk, inflation, and recession — the way these themes are expected to play out will be very different.
Economists and senior leadership at some of the world's largest money management firms and institutional investors are split as to whether the much-signposted global recession will come this year.
There's a 70% chance of a recession among global developed markets — excluding Japan — in RBC Global Asset Management's cards, said Eric Lascelles, chief economist.
"Generally speaking, it is a developed world recession," although the firm is expecting emerging markets to grow at a slower pace than previously — just not with "quite the same magnitude of decline."
And while we're in "a time of higher-than-usual uncertainty" — something Lascelles dislikes saying since one "could say that every day of your career" — it's not the highest seen. "Nothing compares to 2020; I don't even think it's as high as a year ago when (we were) grappling with double-digit inflation and interest rates popping," he said.
That recession will most likely be "fairly mild — generally you need some other special sauce" to get a deep recession. He thinks it's a "vanilla" case of interest rates up, economy down. "We think it's fairly brief, a couple of quarters," and RBC GAM is also assuming the labor market is less damaged than it would usually be by a recession, given companies have had to fight hard to attract workers.
RBC GAM had $399 billion in assets under management as of Sept. 30.
Eastspring Investments also has a mild recession concentrated in the developed markets as its base-case scenario "in the second half of 2024 as the cumulative effects of the rate hikes kick in," CEO Bill Maldonado said.
Other economists warned of a lag effect of rate hikes on the U.S. economy. "Over the past year the euro area and the U.K. have stagnated, arguably they already (are) in a recession, while Chinese growth has disappointed," said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management, which had $1.47 trillion in AUM as of June 30. "Yet the U.S. economy has been remarkably resilient to the sharp rise in interest rates. We think the economic pain in the U.S. is delayed but not averted indefinitely," he said.
A recession is the most likely scenario for early this year, van den Heiligenberg said, with fiscal policy "set to turn more restrictive."
And Daniel McCormack, head of research at Macquarie Asset Management with A$892 billion ($586.3 billion) in AUM, said "the risk of a major slowdown in growth or even a recession remains high," with the "war chest of savings consumers built up during the pandemic and surprisingly loose fiscal policy — that either won't be present in 2024 or will be much less strong. At the same time, some key indicators with leading indicator properties — such as the yield curve, credit conditions and monetary aggregates — are all suggesting a slowdown in growth is coming."
However, others do not have a recession as the baseline forecast for this year, including State Street Global Advisors, which has $3.69 trillion in AUM.
"This view is predicated on the combination of strong starting point for household finances and still robust labor markets, plus expectations of a meaningful policy pivot by key (developed market) central banks (ex-Japan) towards lower interest rates," said Lori Heinel, global chief investment officer. "The combination extends the runway for the elusive yet achievable soft landing."
While Lazard Asset Management's Ronald Temple, chief market strategist, thinks the U.S. will avoid a recession, he questions "the optimism of what markets are saying," with a consensus GDP forecast of 1.2% in 2024.
He thinks market participants should be "a little more sober-minded" about how the U.S. consumer has largely depleted savings and some will be paying part of the collective $100 billion in student loan payments that restarted in October.
On the corporate side, leveraged lending is "most vulnerable. It's one thing to be able to pay the first six months, another for the next … I think there will be more default activity in 2024, more companies that try to make it through to those rate cuts but just can't get far enough along," Temple said. He also highlighted the U.S. fiscal deficit running at 6% or 7% of GDP — "pretty much unheard of," he added.
So it's positive in terms of probably avoiding a recession, "but we shouldn't be putting up the celebratory bunting yet," Temple said. Lazard has $193.6 billion in AUM.
The risk of a large leveraged player such as a bank, insurance firm, hedge fund or even a leveraged corporate player, getting "in trouble due to higher interest rates, which triggers a flight to quality," is also on Legal & General Investment Management's so-called gray swans list — known but unlikely-to-occur events — according to LGIM's van den Heiligenberg.
While a U.S. recession is not at the forefront of all sources' minds, one thing they all will be keeping a close eye on is central bank policy — and who blinks first in terms of cutting interest rates. And while they said they would never forecast that central banks were "definitely" done in terms of rate hikes, they were pretty sure that the cycle has ended — in the U.S. and eurozone, at least. The Federal Open Market Committee has already indicated there will be three rate cuts this year.
As for which will be the first and when, it's not that clear-cut.
"In theory, downside drift of the European economy could lead to the (European Central Bank) moving first," potentially as early as in the first quarter of the year, said Jens Foehrenbach, CIO of Man Solutions, Man Group's customized solutions unit. However, market pricing indicates that there's a higher chance of the Federal Reserve moving first, he said.
"So, I expect the Fed to go first, but not until Q2" unless something dramatic happens or there's an exogenous shock, he added. "However, (that) may be pulled forward if data softens as (the) Fed likely doesn't want to get too close" to the presidential election in November. Man Group had $161.2 billion in AUM as of Sept. 30.
SSGA thinks that, with the exception of the Bank of Japan, key developed markets central banks are done hiking "and that the main 2024 debate will be around the extent of the coming cuts," Heinel said. "Timewise, there are good enough arguments for both the Fed and the ECB to deliver the first cut if not in March, then very soon thereafter," adding that these moves should not be seen as monetary easing per se, "but rather as a calibration of nominal policy interest rates in line with quickly retreating inflation. The policy stance remains restrictive even with these cuts," she said.
Some sources expect rate cuts to come later in the year, with Emile Gagna, economist at Candriam, looking at the "very end of the second quarter or, more likely in Q3." Gagna expects the Fed to lead this easing cycle, unless activity weakens further in the eurozone — which is not the scenario the firm is expecting to see. Candriam has about €144 billion ($154.9 billion) in AUM.
Others think another market will be the first to cut, with two sources highlighting Canada.
Tessa Mann, director of macro strategy at Willis Towers Watson, said the firm thinks "current bond market expectations of a number of policy rate cuts, starting early in 2024, is optimistic, absent a material softening of economic data … this appears more likely for Europe and Canada than the U.S."
And RBC GAM's Lascelles said while it's not obvious who makes the first move, the timing is "pretty similar" for the eurozone, U.S. and Canada. "I wouldn't be surprised if Canada was the first — it's very rate-sensitive. I guess (I would) pick the eurozone over the U.S., with the clear caveat that it's not at all clear," he added.
The wild card is the U.K., which is at the "biggest risk of (a) further rate hike, since inflation is much higher than elsewhere, labor markets softening only slowly and real rates are still relatively low," said Shamik Dhar, chief economist at BNY Mellon Investment Management, which has $1.8 trillion in AUM.
Fiscal policy is also an area to watch, said Eastspring's Maldonado. "Governments, particularly in Asia, tend to give more fiscal handouts in an election year. This could make inflation sticky and reduce the space for rate cuts," he said. Sources cited elections in India, Indonesia and Taiwan as ones to watch in Asia. Eastspring had $216 billion in AUM as of Sept. 30.
While central bank moves and recession risk are expected to take different courses this year vs. in 2023, geopolitical risk remains high — and political risk is also back on the agenda thanks to a busy election year across the globe, with "the potential for some abrupt change," RBC GAM's Lascelles said.
SSGA's Heinel agreed, saying "the election calendar is crowded with several geopolitically relevant elections," with most of them only carrying downside risks.
On the elections front, more than 2 billion people across 50 counties will go to the polls around the world this year, according to the Center for American Progress — with the U.S. and the U.K. leading the pack in terms of potential global relevance and reverberations.
"With populism, partisanship and pushback on climate policies and inequality, the political center is likely to be weakened," Man's Foehrenbach said. "This is another risk to the outlook which isn't priced in."
In terms of presidential elections, the year kicks off in January in Taiwan — "the warm-up act for a blockbuster U.S. election at the end of the year," said Kate El-Hillow, president and CIO at Russell Investments, which has $291.9 billion in AUM. "China/U.S. relations are thawing so a (Democratic Progressive Party) win in Taiwan may be less consequential than feared a few months ago."
These two elections "stand out given they both impact great power relations and the epicenter of global fragmentation," said SSGA's Heinel.
The U.S. elections in November "will be a source of significant uncertainty, particularly if Donald Trump can pull off a red wave where Republicans solidify control of the presidency, House and Senate," El-Hillow said. "There will be difficult questions about the outlook for monetary and fiscal policy" if Donald J. Trump were to make it for a second presidential term, she said. Will he go for growth with unfunded tax cuts and what would that mean for the Fed and its keeping inflation near 2%, she added.
This is also a significant year given it's the first time in 60 years that both the U.S. and U.K. have elections, Dambisa Moyo, author and economist, said. "And numerous other elections — Taiwan, India and Russia are bound to be telling," she said.
However, Moyo offered a "contrarian view; stressing the need to strip out noise from the signal — in the case of the U.S. and U.K. ... there may not be a lot of daylight between the incumbent policies and the opposition," she said. In the U.S., for example, "policy towards China has remained the same under Biden as it was under Trump." While there could be differences in how each deals with public spending, climate priorities and immigration, "the differences will not be as great as political commentary may suggest," she said.
And Thijs Knaap, chief economist at APG Asset Management, said the firm recognizes "the political calendar will be heavy in 2024. Election years usually see plenty of government spending, but this may be offset by the private sector's reluctance to invest when policy uncertainty is high. We reckon with somewhat higher volatility but otherwise do not let it influence our decisions much," he said. APG is the in-house manager for the €474 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands.
In regards to geopolitical risks, the "best case is depressing," Foehrenbach said. "Some truce in Gaza with some form of governance being established; ongoing but not escalating conflict in Ukraine; Iran — status quo; no provocation from (the) Taiwanese election," he said. But the "downside risks are large."
LGIM's list of six gray swan events includes five geopolitical risks — the escalation of the Ukraine war with the mobilization of NATO; a Chinese naval blockade of Taiwan; increased tensions on the Korean peninsula; more election wins for the "extreme right" in Europe — following a win in the Netherlands last year, "eroding the EU, trade and the confidence to do business in Europe"; and "a cyberattack (that) causes loss of life and a significant build-up of geopolitical tensions between the West and Russia or China."
But it's not all risk and doom for 2024.
In terms of region, the U.S. is the greatest potential bright spot, said Macquarie's McCormack. "Election years are not often recession years in the U.S. and if the economy was able to maintain its resilience" — which he said is unlikely in Macquarie's view but is possible — "from an investment perspective it would be like a shining star on a dark night."
When it comes to asset classes, absolute yields on credit, including alternative credit, "are becoming appealing from a starting yield perspective as they provide a nice cushion against further yield increases or spread widening," LGIM's van den Heiligenberg said.
Artificial intelligence was highlighted by several sources as a bright spot for investors, with Russell's El-Hillow noting Google's latest language model Gemini "being the latest impressive breakthrough. Tech enthusiasm could propel markets higher, and forecasts for a productivity boost from the adoption of AI tools could start to shift from hope to reality," she said.
Van den Heiligenberg said there is "hopeful progress" in many areas of technology, be it AI, machine learning, robotics or medical science.
"There is an optimistic scenario possible that this significantly increases productivity, economic growth and lowers inflation, poverty and increases life expectancy. There could even be an optimistic scenario where technological breakthroughs in for instance carbon capturing making a Paris-aligned scenario or better much more likely," he added.
And the transition to a low-carbon economy was cited by APG's Knaap as one of several themes for the coming years.
"Rather than a matter of monetary economics it will be a question of real changes: investment, building physical structures to replace old (energy) infrastructure, replacing fleets, reorganizing the economy," he said. "If there are not too many unexpected events, next year might be the year we can get down to the business of readying the economy for future, by investing in the structures we'll need. As usual there are many ways to be distracted — financial crises, geopolitical events, the economic cycle in China — but the starting position is reasonably good," Knaap added.
