Global economic growth to fall sharply but recession is avoided

Rayhan Ahmed Topader :

The economy faces potential risks of a recession in 2024, indicated by negative economic trends, reduced investment in real estate and non-residential sectors, and potential weaknesses in global trade and labour market conditions.

Core inflation has remained above the Federal Reserve’s target, prompting a more hawkish stance and increased attention to tackling inflationary pressures.

Global growth has so far remained relatively resilient through an extreme surge in inflation paired with one of the sharpest monetary tightening cycles in generations.

This suggests that both contracting supply and expanding demand contributed to rising prices and raises a key question for the coming 12 months: have central banks really managed a soft landing of the global economy in such a complex situation?

Or is the world facing a hard landing because central banks overreacted to mostly supply-driven inflation, or because they still underestimate the shift in inflation dynamics and will have to go even further to break them?

Multinationals should revisit scenario planning to account for the geopolitical, climate, and supply-chain risks that will remain heightened throughout the year.

Food inflation is likely to peak before summer, with mild disinflation to follow thereafter, mostly driven by the high base effect of 2022.

Multinationals should stay vigilant on implementation of government price controls, as risk of civil unrest increases. Business to business and business to consumer companies may benefit from reassessing marketing strategies to appeal to increasingly value-oriented consumers.

The European market is going to encounter significant challenges well into 2024, with diminishing household purchasing power alongside sticky-high food prices placing downward pressure on consumer demand.

Real wages across Europe declined between 1.1% and 9% over the past year, with Eastern European economies experiencing the most significant decline.

Staples such as milk, bread, eggs, and butter have been hit particularly hard, with prices almost doubling in Hungary.

This is likely to continue to have a very material impact on consumer shopping behavior, particularly among lower-income consumers.

As of April 2023, food inflation in the euro area has hit a record high of 13.6%, and we expect it to remain significantly elevated well into 2024.

Peak food inflation has likely not yet been reached and will only peak this summer before tapering closer to second half of 2023, suggesting further risk to the base case.

While agro commodity prices have eased compared to second half of 2022 and are trading at levels similar to 2021, food prices remain elevated, particularly for processed foods, whereby costs of inputs such as energy, transportation, and labor remain high.

The prices are further likely to be exacerbated throughout the year due to food companies profit-taking to make up for revenue shortfalls in 2022.

The risk to the base case has further been heightened due to the increased likelihood of negative external events, such as a sudden departure from the Black Sea Grain Initiative, further spread of avian flu, and climate-induced crop failure.

Each of these events has the potential to accelerate food inflation with little warning. Further risks pertaining to the devaluation of the euro may place even further strain on food imports, particularly fruit, vegetables, and fish, which make up over fifty four percent of EU food imports. Recession, stagflation, a cost of living crisis, damaged public finances and higher interest rates.

The four years since a new deadly virus spread around the world from the Chinese city of Wuhan has been a catalogue of woe for the global economy. 2023 has been the first year since 2019 to be relatively shock-free, in the sense that there has been no repeat of the pandemic of 2020, the supply-chain bottlenecks of 2021 or the Russian invasion of Ukraine in 2022.

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Attention is now focused on when borrowing costs will be cut and which central bank will be the first to move. Neil Shearing, the chief economist at Capital Economics, thinks the Fed might act more quickly than the European Central Bank even though the growth outlook in the eurozone is significantly worse.

Problems have been mounting for the world’s poorest countries since the start of the pandemic, with many trapped by a double whammy of weaker growth and rising interest rates.

Countries that borrowed heavily in US dollars during the 2010s have seen their repayments soar to record levels in recent years and, according to the World Bank, in the past three years there have been 18 sovereign defaults more than in the previous two decades combined.

The list of countries struggling with their debts includes Egypt, Ethiopia, Kenya, Lebanon and Pakistan. A debt relief scheme established by the G20 in 2020 has far offered only modest help to a small number of countries.

If anything, the cold war between the two biggest economies is likely to get frostier in 2024 as both the US and China turn inwards.

The biggest risk is that the cold war turns hot with a Chinese invasion of Taiwan, something that would dwarf the war between Russia and Ukraine in terms of its economic impact. A disruptive oil shock was the dog that didn’t bark in 2023.

When Hamas chose the 50th anniversary of the Yom Kippur war to launch its attack on Israel, there were fears of a surge in the price of crude to match that seen in late 1973, but it didn’t happen.

But in recent weeks there have been signs of a broader Middle East conflict developing. BP has suspended shipments of oil through the Red Sea after attacks on ships by Houthi rebels from Yemen.

Excluding China, we are now forecasting world GDP growth of less than 1% in 2024, fulfilling some definitions of a global recession.

And for China we are not optimistic either. China’s economy is struggling to gain momentum as the global manufacturing cycle weighs and structural weaknesses such as demographics and high debt combine with hesitant stimulus.

As long as inflation rates have not fully returned to target with a prospect of remaining there, uncertainty remains about whether central banks have really done enough.

Underlying inflation rates remain far above targets in most major advanced economies, labour markets are still tight and growth is resilient in many parts of the world, especially in the US.

Is it really enough to wait for fading supply shocks and demand distortions, in combination with the monetary tightening already done, to return inflation to target? And is this happening quickly enough to avoid a further rise in inflation expectations to uncomfortable, de-anchored levels?

Or is it premature to call the end of the rate hike cycles and a soft landing of the global economy? In summary, there are some worrying indicators of recession. However, a combination of resilient consumers with low levels of personal debt and Governments willing to step in when necessary might keep a full-blown recession at bay.

While these trends have reinforced expectations of a relatively benign outlook for global growth in 2024, historical evidence shows that soft landings remain elusive. As in 2023, forecasts may well fall wide of the mark again.

(The writer is a researcher. )