Economic and financial risk insights: New Year's resolutions are being tested early

• Economic slowdown is on the way this year as the US slows and Europe faces stagnation, albeit with upside risk to our US real GDP forecast.

• Further disinflation in the first half of 2024 will likely stall in the second half given geopolitical stress and still-tight labour market conditions.
• Markets are eager for rate cuts but we see central banks proceeding cautiously into the easing cycle to avoid an inflation resurgence.

Investors hoping for a more predictable macro environment this year will likely be disappointed, as economic growth continues to diverge and market volatility persists. US resilience is carrying into the start of this new year, but we expect a more acute slowdown in mid-2024. US Q4 GDP growth is tracking at 2.2% in the latest Atlanta Fed nowcast (Figure 1) and the economy added a better-than-expected 216 000 jobs in December 2023 as the unemployment rate remained historically low at just 3.7%.

Figure 1: US GDP growth, Atlanta Fed Q4 nowcast

We see some upside risk to our US growth outlook (1.1% US real GDP growth in 2024) given robust real wage growth and a still-tight labor market in the near-term. The euro area likely experienced a mild recession in the second half of 2023 (as did Canada, primarily due to weaker exports and investment), and we see stagnation likely in Europe in 2024. China's outlook is also still weak, with manufacturing PMI in contraction at the end of 2023, and the property sector downturn ongoing.¹

The Fed's favoured gauge, core PCE inflation, slowed to the Fed's 2% target on a six-month annualised basis in late 2023. We expect further supply side normalisation and US shelter disinflation in the first half of 2024.

Figure 2: US shelter inflation and real-time house prices

However, we see limited downside for CPI-measured shelter disinflation later this year. Real-time rental inflation has stabilised after easing for nearly two years, while the Case-Shiller home price index is increasing again (see Figure 2). Conflict in the Red Sea has also reignited logistics prices and, if sustained, may cause inflation resurgence in commodity and shipping markets (see Figure 3).

Figure 3: Global Supply Chain Pressures Index

US economic resilience and upside risks to inflation are likely to delay the start of the Fed easing cycle until Q2 2024 (see Figure 4).

Figure 4: Fed fund futures and latest Fed projections

Bond market volatility is likely to persist meanwhile as eager investors seek to predict the timing of cuts. Lower rates will offset weakness in interest-sensitive sectors like housing and commercial real estate, but we disagree with current market pricing of 150bps of cuts. Instead, we anticipate gradual easing barring a recessionary environment. In Europe, we see a chance of the ECB and BoE beginning to cut in April and May respectively, after key wage negotiations are finalised (see Figure 5). The BoJ is also awaiting the outcome of wage negotiations and we see an exit from yield curve control at its January meeting as unlikely.

Figure 5: Euro area real negotiated wages

We forecast a global growth slowdown this year, with upside risk to our US growth forecast, given a strong start to 2024.

Table 1: Key forecasts in %