We expect 2024 to outperform the current pessimistic economic forecasts but struggle to beat the optimism priced into equity markets.
...but forecasts for 2024 look too low for everyone
Source: Columbia Threadneedle and Atlanta federal reserve, as at 22 December 2023
US rate cuts will be official recognition that ‘immaculate disinflation’ has occurred.
The US saw the surge of inflation first, but also its peak. We expect the Fed to be the first to acknowledge the success of the ‘immaculate disinflation’ by cutting interest rates early in 2024.
Growth in 2023 was sustained by consumers spending their ‘covid piggybanks’. US consumers won’t be able to dip into their savings in 2024 to the same extent, but their real incomes are recovering so they won’t have to.
US firms no longer losing staff to higher paying rivals
UK is set to surprise on all fronts
US saving less, UK saving more
Europe remains a laggard, but even it will see ‘immaculate disinflation’.
Almost everyone, myself included, expected aggressive monetary tightening to lead to significantly higher unemployment. But unemployment has remained very low and that is especially true in Europe by comparison with its historically high levels.
Wage growth accelerating in euro area
Estimates and forecasts are provided for illustrative purposes only.
They are not a guarantee of future performance and should not be relied upon for any investment decision. Estimates are based on assumptions and subject to change without notice.
Markets, especially equities, have discounted some of the expected improvements.
We like bonds, as inflation falls and interest rates are cut. Though fiscal imbalances are wide, we think that this is an issue for another cycle. Credit spreads for corporate bonds have tightened, but they could become more expensive still in a benign environment and will still benefit from the positive interest rate backdrop.
Gold should shine as interest rates fall. It has outperformed expectations since a significant chunk of Russia’s foreign currency reserves were locked up. If this prompts other central banks to build up the proportion of gold in their reserves, this could potentially be a significant long-term driver.