The U.S. economy was on a roll in the final quarter of 2023.
Economic data cemented hopes of a soft landing. Inflation continued to slow and the Federal Reserve began to talk about rate cuts for 2024. Markets were exuberant, perhaps not irrationally. After all, preliminary data – just released in January – showed GDP growth came in strong again in Q4, at a healthy 3.3% annual rate, with continued moderation in inflation. This growth performance came despite continued tight money and heightened geopolitical tensions in the final quarter of last year, leading many to declare that the soft landing was here.
The economy is likely to slow in 2024, both in the U.S. and globally. But the solid U.S. performance in Q4 rounded out a year that showed the resilience of the American economy – and consumers – in the face of multiple shocks. In contrast, most other major economies – with the interesting exception of Japan –underperformed in Q4. Europe’s major economy (Germany) slid into recession and China’s persistent property overhang, as well as a declining population and increasing youth unemployment. reinforced consumer caution and weak domestic demand. Although the government has reported narrowly exceeding its GDP target, with 5.2% growth in 2023, this was coming off depressed output in 2022. Japan notched up growth of an estimated 2 % in real terms.
Some of the good cheer evaporated early this year, although markets were then cheered by the upside surprise on Q4 growth coupled with good inflation data. Federal Reserve comments after the end-January meeting will be scrutinized particularly carefully. In a now-familiar pattern, markets got ahead of the Fed in late December with the anticipation of six rate cuts in 2024 rather than the three penciled in by central bankers at their mid-month meeting. Uncertainty remains high about the timing of likely rate cuts – and the 2024 outlook more broadly – after forecasters got economic developments so wrong in 2023. The Fed is likely to remain patient until some 2024 data comes through.
Against this backdrop, RockCreek sees three major themes for investors to watch in 2024:
Geopolitical risk: wars and elections. Markets have difficulty pricing geopolitical shocks –particularly the near-term impact. But with dangerous wars continuing in both the Middle East and Europe, and elections in countries that contain more than half the world’s population, 2024 holds unusual geopolitical risks.
Timing and extent of monetary easing in the U.S. and Europe (and tightening in Japan). Chair Powell noted that if the central bank waited for inflation to hit the 2% target before cutting rates, it would have waited too long. Across the Atlantic, the European Central Bank (ECB)is more hawkish, with its single inflation objective for monetary policy. Japan is the outlier, welcoming inflation above 2% and likely to wait longer than markets expect before allowing rates to rise.
Global growth trends as the world moves beyond the pandemic era. The forecasting record since the pandemic was badly flawed in the case of both of the world’s two largest economies. Fundamental relationships embedded in economic models appear to have shifted. Can the U.S. continue to exceed expectations in this new era? Will Japan finally move out of the deflation that has dogged its economy for nearly 35 years? Will China regain its footing?