Deutsche Bank has a much more pessimistic outlook than what the markets expect, with their prediction that Canada will have the highest GDP increase among the G7 in 2024 at a mere 0.8%. Goldman Sachs Asset Management economists asserted that the Federal Reserve was unlikely to think about reducing interest rates in the following year unless economic expansion decelerates more than what currently is being projected. JPMorgan Asset Management strategists also warned that the risk of a U.S. recession was "postponed rather than lessened" as the influence of higher rates flows into the economy.
Central banks having hiked interest rates at a rapid pace, with expected prolonged effects, renders the macroeconomic situation of 2024 rather vague. The International Monetary Fund's median forecast suggests a descent from 3.5% in 2022 to 2.9% in 2024, below the 3.8% average from 2000 to 2019, mainly due to a notable decrease in advanced economies. The U.S. is expected to be one of the strongest developed markets with a GDP growth of 2.1% this year and 1.5% next year, despite the 5.25-5.5% increase in Fed funds target range. It is widely assumed that the Federal Reserve will succeed in achieving their sought-after "soft landing," moderating inflation without leading to a recession. Market speculation indicates a peak at the current federal funds target range, followed by a cut in interest rates next year. However, analysts at Deutsche Bank have warned that the timing and effect of these lagged hikes are difficult to anticipate. Data pointing to a potential weakening of the economy include the highest unemployment rate since January 2022, elevated credit card delinquency rates and heightened high-yield defaults.
The economy at the outer edges of the system has been under strain, and this is predicted to worsen in 2024 with present rates. The Euro Area has experienced a -0.1% contraction in GDP since the third quarter of 2022, and the economy has been in a state of stagnation since Autumn of 2022 with a likely continuation until mid-Summer 2024. The German lender predicts that Canada will have the highest GDP growth among the G7 in 2024, however, at a meager 0.8%. This still positive outlook comes with the caveat that major economies will be more exposed to the risks of the most extreme interest rate hike in recent decades. Earlier this year, financial alarm was raised in response to the collapse of Silicon Valley Bank and other regional U.S. banks, prompting Deutsche Bank to express concern about possibilities for the sector, commercial real estate, and private markets to suffer, creating a "race against time" for mitigating the damages. Goldman Sachs Asset Management economists have indicated that it is unlikely the Fed will reduce rates in 2025 if growth fails to drop more drastically than currently predicted. Similarly, the European Central Bank is likely to suspend its monetary policy tightening during the second half of 2024 due to weaker economic momentum, high fiscal restraints, and stringent lending conditions. GSAM economists point out that further tightening might be enough to trigger a recession when the effects of the existing policies begin to take hold.
GSAM noted varying growth prospects and inflation rates in different regions, with Japan's surging domestic demand uplifting wages and inflation after a period of stagnation and China's property market debt and aging population posing threats. Meanwhile, nations such as Brazil, Chile, Hungary, Mexico, Peru, and Poland increased their rates of interest in EM and soon saw inflation slow, leading their central banks to cut or consider cutting rates. GSAM said all this suggests the need for a diversified approach to investment in public and private markets, given the uncertain future path, and JPMAM strategists echoed this at their Tuesday roundtable discussion. They mentioned that US recession risk was "delayed rather than diminished" as the impact of higher rates is absorbed, and UK exposure to higher rates will rise over the next three years, especially amongst first-time buyers. Karen Ward concluded that interest rates will have an effect, just that it is taking longer this time.
The U.S. consumer has been splurging from their accumulated savings at a more rapid pace than European customers, according to Ward, implying this is "one of the components why the U.S. has been doing so well", coupled with "enormously supportive" monetary policy including expansive infrastructure projects and post-pandemic assistance schemes."All that will dissipate in the following year, thus the outlook for the consumer is not as optimistic as we approach 2024," she explained.On the other hand, businesses will have to start refinancing at higher rates of interest, particularly for high-yield corporations."Thus, growth tends to decelerate in 2024, and we remain quite concerned concerning the probability of a recession, which is why we remain rather unwilling to believe that the worst has already taken place and a comeback will begin from here," Ward said.
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