Market Outlook 2024
Last year saw mixed reactions with the economy and markets. Contrary to widespread expectations, markets defied projections, setting aside elevated inflation and increasing interest rates. Surprisingly, most major equity markets demonstrated robust performance, posting strong returns for 2023.
After experiencing a consumer-led recovery that surpassed initial concerns following COVID lockdowns, major global economies have encountered a new challenge in recent years: a significant rise in inflation. This inflationary pressure primarily stems from stronger-than-anticipated demand outpacing a slower-than-expected supply response. Consequently, central banks worldwide have been compelled to adopt an assertive approach, increasing interest rates from their emergency lows during the COVID period to curb both demand and pricing pressures.
Despite a slowdown in economic growth, Australian and most major global economies have displayed greater resilience than initially anticipated. Global unemployment rates remain low and the feared hard-landing recession scenario has, at least for the time being, been averted. Inflation, while still elevated, is showing signs of moving in a favourable direction. Notably, many central banks are now slowing down the pace of interest rate hikes and are beginning to consider the prospect of lowering interest rates later this year.
Three risks that could make for a bumpy landing
Nevertheless, we remain cautious, particularly these early days. We have identified three primary risks that have the potential to disrupt our current perspective and lead us in an alternative direction
1. Inflation and interest rates - There remains a possibility that the delayed repercussions of previous interest rate hikes might catch up with the economy, particularly as an increasing number of households and businesses find themselves compelled to refinance previously affordable COVID loans at higher rates. Additionally, the persistence of a sluggish growth environment could potentially instigate a more profound downturn. However, if inflation continues to trend downward, either of these scenarios might result in central banks implementing swifter and more substantial rate cuts, thereby mitigating the extent of the economic downturn.
2. Labour and unemployment - A more concerning risk arises if the deceleration in inflation begins to lose momentum, particularly if wages and inflation in the service sector remain elevated despite tight labour markets. This risk can be mitigated if the overall economic growth continues to ease, leading to a gradual increase in the unemployment rates in countries like Australia and the US, aiming for around 4.5%—hopefully, without precipitating a more profound downturn. If the demand for labour subsides or the labour supply continues to recover, there is a possibility that wages and inflation in the service sector could further decelerate without a substantial increase in unemployment.
3. Geopolitics - A last factor of concern pertains to geopolitical risks—any intensification in the ongoing conflicts in the Middle East and Europe could elevate inflation by disrupting vital global food and energy supplies. Persistent tensions between China and Taiwan also contribute to uncertainty, and the potential re-election of Donald Trump as the US President later this year adds a new unpredictable element to the scenario.
In summary, based on our research, it seems that the most probable scenario for 2024 involves a continued, albeit modest, deceleration in economic growth—avoiding a severe recession. This outlook creates room for additional decreases in inflation and subsequent central bank interest rate cuts by the end of the year.
