Briefly about the Main Thing
Welcome to 2024, and we’re kicking off the first short holiday week. This year is all about elections, and it’s going to be a big one. Around 64 countries, including the EU, are gearing up for national elections, involving roughly half of the world’s population. The results are bound to have implications for years to come. Now, let’s dive into the economic matters.
• When can we expect interest rates to take a dip? In many developed countries, inflation is on the decline, though not completely in check. Yet, there’s a widespread belief that central banks are set to make more accommodating decisions. The latest report from the Fed suggests the possibility of a 0.75 percentage point rate cut in 2024, bringing the range to 4.5% to 4.75%, all without sparking a resurgence in inflation. As for the eurozone, where economic indicators have been lackluster and inflation has dropped more than anticipated, the situation is a bit different. The general expectation is that ECB interest rates, currently perceived as fairly restrictive, will stay that way for as long as needed. But market sentiment leans toward a significant drop this year, from 4% to 2.5%.
• The US budget deficit for 2023 nearly doubled, surging from $950 billion in 2022 to $1.84 trillion, accounting for 7.4% of the GDP. JP Morgan projects a future reduction in the federal budget deficit, expecting it to decline to a still substantial 5.9% of the GDP. This anticipated decrease is attributed to some spending cutbacks, although they may be partially offset by increased interest payments on government debt.
• Anticipated growth rates in North America and Western Europe are expected to fall below their potential, aligning with the objective to restore inflation to target levels. Projections show that all major regions will experience reduced annual real GDP growth rates, contributing to a global slowdown with a forecasted rate of 2.3% in 2024, down from 2.7% in 2023. Nevertheless, the growth in certain regions, notably Asia-Pacific, is anticipated to prevent a global hard landing.
• Mainland China’s economy is expected to undergo a gradual recovery facilitated by soft policies. This approach aims to build confidence within the private sector while alleviating the downturn in the housing market over time.
• In the last 18 months, the US housing sector has experienced a notable decline of 30–40% in activity, primarily due to the surge in mortgage rates. The market is effectively frozen due to home affordability rates hitting a 40-year low, and approximately 75% of mortgages carrying rates of 4% or below. Real investment in residential property has seen a year-on-year decline of 12% over the past six quarters. Despite these challenges, home values boast a 6% increase in 2023, reaching near-historic peaks due to limited supply and historically low vacancy rates. Given the substantial decline in recent years, there’s optimism that the housing market may perform better in 2024, even if trends remain relatively soft in the short term.
• The restructuring of global supply chains will take time. In the last year, with dwindling inventories and reduced transportation costs, the emphasis on supply chains has transitioned from short-term tactics to long-term strategies aimed at minimizing costs while prioritizing sustainability. US laws enacted in 2022, such as the CHIPS and Science Act and the Inflation Reduction Act, are incentivizing strategic industries, including semiconductors and renewable energy, to relocate production domestically. This shift is reflected in the increased business investment in high-tech production structures over the past year.
• The US unemployment rate may rise while still maintaining a low position in historical terms. The labor market is displaying signs of weakening, including a slowdown in wage growth, a slight uptick in the unemployment rate, and declining rates of layoffs and temporary aid. An increase in the labor force and higher immigration in the past year has resulted in an expanded labor supply, while a reduction in the workweek suggests a decrease in labor demand. Despite the challenges of attracting and retaining workers post-Covid, businesses may be more hesitant than usual to implement layoffs amid slowing economic growth. But the deceleration in hiring activity could contribute to an estimated median unemployment rate of 4% by the end of 2024, driven by worker outflows. Additionally, the already slowing wage growth is expected to further decelerate in a softer labor market.
• The commercial real estate sector is poised to face increased pressure as a result of an environment characterized by higher interest rates over longer terms and challenges among small and regional banks. This scenario is contributing to tighter lending standards and a deceleration in slow growth, affecting various types of loans but particularly impacting the commercial real estate sector, where small and regional banks have substantial exposure. The imminent maturity of nearly $550 billion in commercial real estate debt next year is anticipated to lead to elevated losses for lenders and investors.
• Housing prices in Western Europe are expected to keep declining. The combination of tight credit conditions and increasing borrowing costs is projected to put continued downward pressure on prices throughout 2024. The pace and magnitude of this correction will vary among countries, influenced by the imbalances that have accrued in each housing market over the past decade, as well as the timing of fixed mortgage rate periods.
• We’re getting ready for a packed election calendar. Election campaigns are set to shape the course of several crucial countries, including the US, Russia, India, Mexico, and the EU. In the US, there’s a notable risk of a sudden drop in the supply of key commodities or products, such as energy, food, or semiconductors, potentially leading to widespread market disruptions. This presidential election is poised to have a much weightier impact on geopolitics compared to recent cycles.
• AI issues. In 2023, the surge in the US stock market is credited to “the magnificent seven”: Microsoft, Alphabet, Apple, Amazon, Meta, Nvidia, and Tesla. Now, the big question is: which among them will be the game-changer in monetizing AI and kick off the next wave of stock price growth?
• Upcoming changes on the global minimum tax front. In 2024, laws expediting its implementation will kick in across the UK, EU, Japan, and other nations. While many of these countries already tax companies at rates exceeding 15%, they’ll now also start imposing extra taxes on big corporations exploiting legal loopholes to funnel profits to lower-tax destinations like Caribbean tax havens. The goal is to put the brakes on the “race to the bottom,” where governments have been slashing corporate tax rates for years to attract investments. Initially, only a handful of major countries will roll out the minimum tax, but more are expected to join.