Global Economic Outlook, Q4 2023. Central banks' dovish action and geopolitical risks are set to take center stage in 2024

Looking back, inflation eased more swiftly, interest rates climbed at a faster pace and growth surprised on the upside in 2023.

Intelligence Unit

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October 4, 2023

With peak interest rates seemingly at our doorstep, the next pressing question on our minds will revolve around which major central banks will be the first to cut rates. We're not betting on major central banks cutting rates anytime soon. 

HolonIQ's Q4 2023 Global Economic Outlook outlines our latest expectations for the global economy and more specifically the G20, for our customers at the world's largest and leading governments, institutions, firms and investors. This month we reflect on how nine months of data for 2023 are shaping short-term expectations, and look over the horizon at the mega trends shaping the bookends of our long term outlook. Request a Demo for more information on how HolonIQ can help power decisions that matter at your organization.

Higher for longer is the resounding message from Central banks. Australia, Russia and Turkey appear to be the remaining hawks this year.

With peak interest rates seemingly at our doorstep, the next pressing question on our minds will revolve around which major central banks will be the first to cut rates. We're not betting on central banks cutting rates anytime soon, thanks to persistent inflation uncertainties. The market consensus seems to agree, with markets bracing for a prolonged period of "higher for longer" interest rates, just as the major central banks have been hinting. Among the Western and European advanced economies, the earliest rate cuts could come from the Federal Reserve, but most cuts are more likely to happen in the latter half of the year. However, weaker-than-expected growth in the first quarter of 2024 or a recession in the U.S. could expedite rate cuts to early 2024. Looking at current signaling from policymakers, Brazil has already kick-started its rate-cutting spree, with more reductions expected this year, while Mexico may soon follow suit. China is also expected to reduce rates to stimulate consumer spending and support growth. Emerging markets like Indonesia, benefiting from cooling inflation, are poised to follow similar paths. Among advanced economies, the Bank of England appears to be the clearest in asserting the end of rate hikes. While the Federal Reserve and the European Central Bank maintain a hawkish stance, further rate hikes this year appear unlikely. Conversely, Australia, Russia, and Turkey remain on the hawkish side, with further tightening likely.

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Growth in Europe is expected to bounce back in 2024. Emerging markets are also set to have a good year

The first two quarters of this year brought some pleasant surprises on the growth front, but now we're spotting signs of a slowdown. August data in the U.S. lifted hopes for a consumer-driven revival, but September data indicates a softening economy. In the Euro Area, a robust recovery is on the horizon as inflation takes a back seat, with Germany likely to rebound next year from its 2023 recession. Singapore and South Korea are also gearing up for better growth in 2024, driven by the expected increase in global demand for semiconductors. Meanwhile, North America might experience a slowdown compared to 2023 levels. Emerging markets such as India, Indonesia, and China will continue to lead growth in 2024, though China's growth is projected to taper in the long term, falling below its potential rate. Fed policy easing could bolster emerging market currencies in the latter half of 2024, drawing more capital inflows as western central banks continue to lower rates. Nonetheless, the "higher for longer" interest rates imply that pre-Covid growth levels may remain elusive, even for countries with improving growth prospects in 2024.

Geopolitical and local political uncertainties dominate the risk landscape in 2024

As we look to 2024, major risks persist; Geopolitical tensions between the U.S. and China cast a long shadow, as does the risk of the Russia-Ukraine conflict escalating, potentially spilling over to affect other economies. Domestic political risks are also on the rise, with presidential and general elections slated for 2024 in various G20 nations, including the crucial US election in November. Additionally, Indonesia, Russia, Mexico, and India's elections will be some of the important events to watch. In terms of commodities, the arrival of El Niño adds uncertainty to agricultural commodity prices, while OPEC+ production cuts are driving oil prices higher.

Unpacking the year so far: The decline in  inflation came faster than expected. As did the rise in interest rates

Headline inflation in all G20 nations have peaked (except in Argentina and Turkey, countries that have unique economic circumstances), while Germany’s core inflation remains the slowest to recede among the major economies. However, Indonesia stands as the sole G20 economy that has successfully brought down inflation within the central bank's specified target range. Russia and South Africa, on the other hand, are currently maintaining inflation levels close to their targets; however, they are expected to experience inflationary pressures in the coming months. Conversely, the UK, Australia, Italy, and India are grappling with inflation rates significantly divergent from their desired targets. Looking back, inflation eased faster than expected in 2023 in most countries (except in Turkey and Argentina). This is mostly attributed to central banks taking a tougher stance than anticipated at the start of the year.

Unpacking the year so far: Latin America, Russia and North America have seen better growth than was expected at the start of the year

In terms of economic growth, the UK, US, and most Southeast Asian economies have seen improvements in GDP growth as we progressed from the first to the second quarter (in Year-on-Year terms) . Germany, however, stands out in the G20 as it grapples with a recession. When it comes to our 2023 GDP forecast track record, Russia and Latin America stand out with the largest upward revisions to forecasts. Russia has demonstrated strong growth despite Western sanctions, Mexico is benefiting from increased optimism about nearshoring, and Brazil experiencing a record harvest. In contrast, Saudi Arabia and Argentina have witnessed substantial downward revisions, with the former being affected by oil production cuts and the latter facing challenges driven by debt and drought. North America is also worth mentioning for upward revisions, mainly due to consumer demand conditions surpassing initial expectations.

Bottomline: Plan for uncertainty in 2024

Overall, the global economic outlook is marked by uncertainty surrounding the timing of central bank interest rate policies, a cautiously optimistic growth outlook for 2024, and a litany of geopolitical and economic risks that may shape the path ahead. Vigilance and adaptability will be key for investors and policymakers as they navigate the economy in 2024.

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