Global Key Themes for 2024 | Beyond the Headlines

It’s widely believed that global growth and inflation will slow in 2024 and that advanced economy central banks will begin to pivot in H2. We identify three key themes which will have an important bearing on the precise path the economy and financial markets next year. The first key theme centers around the likelihood that the global economy will underperform even the gloomy consensus view next year.

In particular, we expect the delayed impact of past monetary policy tightening and a switch to more restrictive fiscal policy to play key roles in a sustained weak patch for advanced economies. The second theme is that we expect greater inflation divergence to occur across the advanced economies. Despite being more pessimistic on the growth outlook, we expect inflation in most of these economies to remain sticky and to fail to deliver any positive downward surprises.

The key exception is the eurozone, there we think inflation will fall more sharply than others expect, driven mainly by weaker food and energy inflation. Other economists and markets are becoming more aligned with this view on the eurozone, but we think they underestimate the extent of the divergence with US inflation. As a result, we expect the ECB to cut rates more aggressively than markets anticipate.

Despite the gloom, some bright spots will emerge, which is our third key theme. High neutral rates and term premia should keep longer term bond yields above their pre-pandemic rates. But we believe that longer term forward rates have risen too far and may fall back, even without downside growth and inflation surprises. Finally, we expect Japan, which hasn’t implemented major policy tightening, to be one of the few advanced economies to better its pre-pandemic growth performance.