In a new Citi Research report, a team led by Global Chief Economist Nathan Sheets sees 2024 ushering in a broad-based retreat in global growth, with most major economies logging softer performance. The team expects global growth to slow to just below 2% from a near-trend 2.7% pace in 2023.
The authors highlight several powerful forces behind the anticipated deceleration:
First, headwinds from central banks’ recent hiking cycle remain in play. Countries where mortgage rates rapidly adjust have already felt a significant pinch, with Sweden a prominent example; others such as the United States will be increasingly impacted as higher rates and tighter lending conditions continue to take hold.
Second, the global consumer looks likely to take a breather in the coming year. Post-pandemic household spending has been robust as consumers have sought to make up for lost services experiences. This spending has supported tight labor markets and wage growth, which in turn has fueled further consumption. But the authors believe that this “make up” services spending has basically run its course and see the pace of services expenditures easing off in the coming year. This should also bring some loosening in labor markets and cooling in wage growth.
Third, the flip side of the post-pandemic rotation to services has been a sustained weakening of the global manufacturing sector. Citi economists’ baseline forecast incorporates a rebound in the demand for memory chips, but the outlook for manufacturing more broadly remains cloudy. The team notes that if the slowing of services spending also brings some broad substitution back toward goods spending, its forecast for the global economy may be too pessimistic—adding that these issues are particularly pivotal in shaping the outlook for large manufacturing-intensive countries like Germany and China.
Inflation coming down
Citi’s team sees inflation continuing to moderate this year, as services spending eases and the effects of tight monetary policy persist. Global headline inflation should fall to 3.2%, just slightly above its long-term average of 3.0%. Core inflation should continue to decline as well, with the most rapid moves in the euro area and the UK, in line with the weakness in their economies. The team also points out that U.S. core PCE (personal consumer expenditures) inflation—which the Federal Reserve watches closely—has declined sharply of late. In contrast, core inflation in Australia looks relatively sticky.
Recessionary pressures mounting
The authors continue to embed in their forecast a U.S. recession beginning in the middle of the year, and they’re now seeing increasing effects of the Fed’s aggressive hiking cycle: tightening bank lending conditions, emerging signs of strain in lower-income households, and a labor market that—while still tight—may be starting to loosen. Also, significant quantities of commercial real estate and high-yield debt will need to be rolled over at higher rates during the next few years. All of this points to recessionary pressures gradually mounting.
Two early surprises
Against this backdrop, the authors highlight two surprises that have emerged since early December.
First, U.S. core PCE inflation has come in much softer than they had anticipated, falling from 4.2% in July to an estimated 3.0% in December. This has paved the way for the Fed to shift its rhetoric and (it seems) the future path of policy in a more dovish direction. An easier policy would lessen the risk of U.S. recession, albeit perhaps at the cost of inflation remaining in the 2%–3% range for some time.
In response to the soft U.S. inflation data and Fed Chairman Powell’s dovish rhetoric at the December press conference, Citi economists now expect the Fed’s first cut to come in June, one month sooner than before, and they expect 125 basis points (bp) of easing this year versus 100 bp previously. Even with this revision, the team remains somewhat more hawkish than the markets, which are expecting a cut by March and over 150 bp of total easing in 2024.
Second, geopolitical risks have heightened. The tensions in the Middle East are disrupting global shipping routes, which has brought longer transit times and higher shipping costs. This means increased pressures on goods prices and global supply chains. The oil market has absorbed the stress surprisingly well so far, but the risks there look to be rising as well, the authors note.
Separately, the questions that have emerged from Taiwan’s recent presidential election about the future tone of its relationship with China highlight the uncertainties that are in play as dozens of other countries hold national elections in the coming year—with the one in the United States in November looming especially large.
The authors conclude that these two risks are likely to push their global forecast in differing directions. To the extent that the good news on U.S. inflation and the more dovish Fed means that U.S. recession risk is less pronounced, the overall outlook for global growth brightens appreciably. In contrast, the amplified geopolitical challenges that are now in play in the Middle East and elsewhere threaten to push up inflation, disrupt economic activity, and increase the overall level of global uncertainty. The result would be weaker spending, softer sentiment, and more restrained market conditions.
Unprecedented and unpredictable
The above factors underscore Citi Research’s conviction that this year, similar to last year, is likely to see many twists and turns. In some deep sense, the global economy is still exiting the pandemic and finding its way toward a “new normal.” The path being traveled is both unprecedented and unpredictable. The message to investors? Stay nimble and be prepared for surprises.
Existing Citi Research clients can access the full report here.