December 18, 2023/Cordros Report
Although the global economy is still on course to grow modestly in 2023FY relative to 2022FY levels, we highlight that growth performance in 9M-23 outperformed consensus expectations amid (1) relatively robust consumer spending despite higher interest rates, (2) faster resolution of the US and Swiss regional banking crisis, and (3) wide-ranging recovery in tourism. Notably, at the start of 2023FY, consensus expectations were that the US would slip into a mild recession during the year. However, resilient consumer spending, underpinned by a strong labour market, has ensured the world’s largest economy shows remarkable resilience despite the unprecedented interest rate hiking cycle – the most significant since the 1980s.
However, global economic activities may have tapered in the last quarter of the year, accounting for the synchronous slowdown in global manufacturing activity and diminished pandemic-era savings. Indeed, the global manufacturing PMI started Q4-23 on a weak footing, contracting for the fifth consecutive month to 48.8 points in October (September: 49.2 points). According to S&P Global, Europe remained the major drag on global factory output, with the eight fastest contracting manufacturing nations (Germany, France, the Netherlands, Poland, Czechia, Austria, the UK, and Italy) all located on the continent.
On the monetary policy side, global central banks remain resolute in their inflation fight, maintaining synchronous monetary policies. For one, the Federal Open Market Committee (FOMC) has increased the target range for the federal funds rate by 100bps year-to-date to 5.25% – 5.50%. Elsewhere, as of November, the Bank of England (BOE) and European Central Bank (ECB) increased their key policy rates by 175bps and 200bps, respectively. Nonetheless, these key global central banks started adopting ‘HOLD’ stances from September (ECB paused its rate hiking cycle in October), noting the (1) slowdown in inflationary pressures, albeit still higher than their medium-term targets, (2) weakness in growth, and (3) moderation in job gains. However, the MPC members do not rule out further interest rate increases if actual economic outcomes deviate from their respective expectations.
For 2024FY, we expect global growth to slow further relative to 2023FY levels due to various reasons, including (1) the anticipated full impact of higher interest rates, given their lagging effects, (2) sustained property sector weakness in China and (3) unprecedented debt accumulations and structurally weak growth particularly in the US. On (1), we expect the transmission effects of tight monetary policy of the last two years to be felt more in 2024FY, as households continue to draw down their savings. Indeed, the International Monetary Fund (IMF) projects global growth to moderate to 2.9% y/y in 2024FY, (2023FY: 3.0% y/y). Advanced economies (1.4% y/y vs 2023FY: 1.5% y/y) are expected to drive a major part of the growth slowdown amid stable growth in the emerging economies (4.0% y/y vs 2023FY: 4.0% y/y) as an expected weakness in manufacturing activity may likely counterbalance stronger service activity.
That said, the Israel-Hamas conflict is increasing geopolitical risk, posing a major risk to the 2024FY growth outlook. However, our baseline view is that the conflict will remain contained within the two countries involved, having a minimal impact on the global growth outlook. However, if the conflict extends beyond Israel and Gaza and allies join in the war, we expect it to have a significant negative impact on the global growth. Other risks include (1) possibility of the real estate issues in China deepening further, (2) volatile commodity prices amid renewed geopolitical tensions and extreme weather conditions, and (3) sticky headline inflation, even as consumer prices have declined significantly relative to 2022 levels.
While global interest rates are expected to moderate in 2024FY, we expect the rates to remain significantly higher than pre-pandemic levels as inflation is likely to stay above central banks’ targets. Notably, the US monetary policy stance is expected to remain slightly restrictive over the medium term, with the Federal Open Market Committee (FOMC) members pointing to a key policy rate of 2.9% in 2026 – above the Fed’s 2.5% neutral rate that is neither stimulative nor restrictive for growth. The preceding, in conjunction with deteriorating credit quality, will likely ensure that emerging economies still find it hard in accessing the Eurobond market in 2024FY.
Meanwhile, the oil market remained volatile, as the re-emergence of conflict in the Middle East, impact of global economic conditions, financial instability in US and Europe, tight monetary policy stances across most nations and sustained OPEC+ cuts stoked varying levels of pressure on prices. In 2024FY, market balance is expected to favour supply following increased output from both OPEC+ and non-OPEC producers. Also, oil demand growth is expected to temper in 2024, as the substantial demand from China flattens. We highlight that our views for the oil market in 2024 is based on our expectations of no escalation of the Middle East conflict. On a balance of factors, we forecast Brent crude price will average USD84.00/bbl. in 2024.
