Economic Challenges Loom as 2024 Unfolds
As we near the second half of 2024, the global economy finds itself at a crossroads, balancing optimism for a soft landing with persistent challenges. The World Bank's upgrade to its global growth forecast to 2.6% for 2024 reflects a cautiously optimistic outlook, with the United States remaining a key driver of global economic resilience.
However, the US economy is showing signs of deceleration. Real GDP growth is projected to slow to 1.5% in 2024, down from 3.1% in 2023. Consumer spending, which has been a cornerstone of economic strength, is weakening as households deplete savings and face rising loan delinquencies. The labour market is also expected to soften, with unemployment potentially rising to 4.5% by year-end.
Inflation remains a central concern. The Fed anticipates core PCE inflation at ~2.8% for 2024, above its 2% target. This persistent inflation has led to a more hawkish stance, with the central bank projecting a higher funds rate of 5.1% for 2024. Despite this, markets still expect two 25bps rate cuts in 2024, priced in from September.
The political landscape adds another layer of complexity. The upcoming US election in November could significantly impact trade, tax, defence, and immigration policies. With the US government already spending as if the nation is in deep depression (clearly underpinning inflation), the US is facing a severe debt crisis as national debt nears USD 35tn and is increasing rapidly. Interest payments alone now consume around USD 1tn annually, surpassing many crucial programme budgets. Despite acknowledgment from past and present politicians, effective action remains absent. The only viable path forward is to curb government spending, limiting increases to below average economic growth. However, political will for such measures is lacking, risking severe future economic consequences.
Financial markets appear to be pricing in a near-perfect scenario. The S&P500 has reached multiple new highs in 2024, and volatility remains low. The 10-year US Treasury yield, while fluctuating, appears to be stabilising given reduced expectations for Fed rate cuts. The US dollar maintains its strength, underpinned by the Fed's cautious approach and its safe-haven status.
However, risks loom on the horizon. The full impact of previous interest rate hikes may still be unfolding. The persistence of above-target inflation continues to challenge policymakers. Market volatility could increase as the US election approaches, with potential implications for global trade and economic policies.
As we move through the latter half of 2024, the global economy walks a tightrope. Central banks’ abilities to navigate the delicate balance between stabilising inflation and supporting economic growth will be crucial. While a global soft landing remains possible, the path forward is fraught with uncertainties. Policymakers, businesses, and investors will therefore need to remain vigilant, adapting to a rapidly evolving economic landscape. As always, flexibility and careful risk management will be key to navigating these uncertain economic waters.
If you would like to receive The Daily Update to your inbox, please email markets@epicip.com or click the link below.