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Global Outlook

February 2024

A more favourable outlook in 2024

The economic outlook is set to be more favourable for financial markets this year compared to 2023.

Eli Lee
Managing Director
Chief Investment Strategist
Chief Investment Office
Bank of Singapore Limited

The economic outlook is set to be more favourable for financial markets in 2024.

First, inflation is falling fast. The global surge in goods prices from the pandemic has eased as supply disruptions diminish. Similarly, the reopening boom in services is abating after central banks hiked interest rates rapidly in 2022 and 2023.

Second, the Federal Reserve (Fed) and its peers are preparing to reduce interest rates as inflation falls back to their 2% targets. We expect the Fed will start cutting its fed funds rate from 23-year highs of 5.25-5.50% in June. We also expect the European Central Bank (ECB) and the Bank of England (BoE) to begin easing from the summer. The People’s Bank of China (PBOC) has already lowered banks’ reserve requirements in January. And while the Bank of Japan (BOJ) is set to lift rates for the first time in nearly two decades, dovish officials are only likely to raise the BOJ’s deposit rate from -0.10% to 0% this year.

Third, easing inflation and interest rate cuts will support the outlook for bonds. We forecast 10Y US Treasury (UST) yields to fall back to last year’s lows of 3.25%. But faster declines in inflation will allow fixed income assets to provide positive real returns still.

Last, we expect the expansion of artificial intelligence (AI), and the prospects of more rapid productivity growth to buoy equity markets in 2024.

There are still risks to the outlook this year. The US, UK, Eurozone, China and Japan are all likely to suffer slower growth or even recession – as our table of GDP forecasts shows – as reopening tailwinds fade and interest rate hikes from 2022-2023 curb activity. The elections in 2024, above all else in the US, will also increase uncertainty. But falling inflation, central bank rate cuts, positive real returns for fixed income assets and enthusiasm about AI in equity markets are all likely to outweigh such concerns.

Investors should thus start 2024 with a moderate Overweight stance towards risk assets.

US – Fed to dominate 1H2024, election in 2H2024

The Fed’s interest rate decisions are set to dominate the outlook for financial markets in the first half of the year, before attention turns to the November presidential election in the second half.

The Fed is almost certain to start reducing its fed funds rate from 23-year highs of 5.25-5.50% sometime in the coming months as inflation is falling fast back towards its 2% target. The central bank’s target measure of inflation – changes in core personal consumption expenditure (PCE) prices – has declined from four-decade highs of 5.6% in 2022 to 2.9% now after the Fed’s aggressive interest rate rises over the last two years.

Despite the decline in inflation, we think that Fed officials will be more cautious and wait for further evidence that inflationary pressures are fully abating before starting to gradually lower the fed funds rate from June by 25bps and again in September and December. We thus forecast the fed funds rate to fall to 4.50-4.75% by the end of 2024.

The decline in the Fed’s key interest rates is likely to benefit financial markets this year. We see 10Y US Treasury yields falling back to 3.25% as the table of forecasts shows. We also expect the Fed’s easing will support risk assets even if the US economy suffers a mild recession which remains our base case for 2024.

The outlook in the first half of this year is thus likely to be buoyed by the Fed.

In the second half, however, financial markets may be adversely affected if the polls show that former President Donald Trump is well ahead of President Joe Biden. We see four key risks here.

First, Trump is considering a 10% tariff for all goods imports. This would spark inflation, stop the Fed cutting rates and make the US Dollar surge. Second, a replay of his first term’s corporate tax cuts may spur equities but a larger budget deficit and spiking US Treasury yields could be a worse risk. Third, Fed independence may be threatened and, finally, uncertainty about the rule of law – if Trump targets opponents at home – and the global order if the US pulls out of NATO, may also hurt risk assets. Investors are thus likely to track US politics closely as November’s election draws closer.

China – Subdued growth

China’s growth continues to be subdued. The latest data shows the economy expanded by 5.2% in 2023. This was up from 3.0% in 2022 when lockdowns were still enforced. But even with last year’s tailwinds from reopening, GDP growth was still well below its 6.0% rate in 2019 before the pandemic emerged in 2020.

China’s outlook remains challenging after the shocks of 2020-2022: strict lockdowns, regulatory hits, property weakness, recessions abroad and geopolitical risks. Of the economy’s four engines for growth, consumers are cautious after three years of lockdowns, higher unemployment and falling property prices; investment is also being held back as business sentiment continues to be lacklustre; exports are constrained by weak demand abroad and government leaders are wary of taking on more debt.

This year, we forecast GDP growth to stay subdued at 5.0%. Officials have stepped up efforts to aid growth in recent months including more government spending, easier liquidity conditions from the PBOC and support for loans to property developers. But given the weakness of consumer confidence and real estate, fresh monetary and fiscal easing will be needed to stop growth sliding further and to revive the economy’s “animal spirits” this year.

Europe – Only slowly emerging from recession

Both the Eurozone and the UK suffered weak growth of only 0.5% last year. This year, we expect GDP to just expand by the same modest rates again. The energy shock from the war in Ukraine and the rapid increases in interest rates by the ECB to a record high of 4.00% last year and the BOE to 5.25%, caused Europe’s two largest economies to come close to a recession in 2023. This year, we expect the ECB and the BOE to start cutting interest rates from June and August respectively, providing support to financial markets. But with unemployment still very low after the pandemic and wage growth strong, we expect both central banks will only reduce interest rates in 25bps steps this year.

Japan – Dovish official bolster the outlook

Japanese stocks rallied in January 2024 as the return of inflation after three “lost decades”, corporate governance reforms and the weak Yen pushed the Nikkei 225 Index closer to its all-time high from 1989.

Financial markets are likely to stay supported by the BOJ. In January, the dovish BOJ left its deposit rate at -0.10% as widely expected. Following the shocks of the pandemic and the war in Ukraine, inflation has reached four-decade highs with core inflation around 4%. But the BOJ is keeping interest rates negative until it feels confident inflation will settle at its 2% target.

If Japan’s upcoming annual spring wage round is firm, we expect the BOJ to increase its deposit rate back to 0% from April. But officials are unlikely to make any further rate hikes this year while they wait to see if inflation will be able to stay around its 2% target in future. Thus, the BOJ is set to remain dovish throughout 2024 and keep supporting Japan’s financial markets despite it being the only major central bank likely to raise interest rates this year.

Source: Bank of Singapore

Source: Bank of Singapore

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