Slowing growth in 2024 but global recession is unlikely

The global economy is losing momentum as the impact of higher interest rates begins to bite. While slowing, the global economy is unlikely to enter a recession, and a soft landing is the most likely scenario. The IMF predicts that the global economy will grow by a below average 2.9% in 2024, only marginally lower than the 3.0% estimated for this year, while advanced economy growth is expected to slow slightly from 1.5% in 2023 to 1.4% next year.

Australia to remain in expansion boosted by population growth

The Australian economy is also set to remain in expansionary territory but grow at a below average pace, with the consensus forecast from FocusEconomics projecting the economy will grow by 1.4% in 2024. Strong population growth will continue to boost consumer demand, cushioning the economy from the impact of higher interest rates, but GDP per capita will likely continue to go backwards.

Slowing inflation but elevated services price growth    

Inflation is slowing globally, with several major economies recording weaker than expected growth in consumer prices in recent weeks.

• In the US, headline inflation slowed to 3.2% growth over the year to October, down from 3.7% the previous month. 
• Euro area inflation declined from 2.9% y/y in October to 2.4% y/y in November, the slowest annual pace since July 2021. 
• In the UK, which had one the strongest inflation rates among advanced economies, annual CPI growth fell to 4.6% y/y in October from 6.7% y/y the previous month, the smallest increase in two years, and more than half its October 2022 peak of 11.1% growth. 
• Inflation in Australia is also moderating, with price growth of 4.9% over the year to October, down from 5.4% in September.

Despite the slowdown in inflation, services price growth remains elevated and central banks have warned that the “last mile” in getting inflation back to target will be tougher than the achieving the moderation in price growth to date.

In Australia, strong population growth will continue to add to consumer demand and hamper the slowdown in services price inflation, as well as driving further strong growth in housing costs.

Central banks to pivot to cuts in 2024

In line with slower growth and moderating inflation, financial markets have increased bets on interest rate cuts in 2024. According to current market pricing, the Federal Reserve will cut interest rates by over 100bps in 2024, with the first cut occurring mid-year. FOMC officials project 75bps of cuts in next year, with the median official envisaging the federal funds rate at 4.6% by end 2024 (although there is a wide distribution in the individual FOMC member projections).

A sharper growth slowdown in the Euro area has led market participants to price in around 115bps of cuts from ECB, while the Bank of England is expected to deliver around 85bps of cuts.

Central bank policy rates
Percent

Source: Savills Research, Macrobond

RBA will cut rates later

The RBA will ease later, reflecting the typical lag between monetary policy changes in Australia compared to major overseas economies, persistent services inflation pressure domestically, and the RBA’s lower policy rate compared to many of its peers.

Economists generally expect several cuts towards the end of next year, with a median expectation that the cash rate will be 3.85% by the end of 2024. Current market pricing suggests the RBA will cut the cash rate by 25bps by late next year (compared with previous pricing that indicated the RBA would remain on hold throughout next year).        

Market volatility highlights potential for rapid changes to the outlook 

While market pricing has shifted towards more rate cuts in 2024, the exceptional volatility in bond markets this year points to the inherent uncertainty around the inflation and interest rate outlook.

The Australian 10-year government bond yield has risen by 24bps over the year to date but recorded an absolute change of more than 25bps in eight of the 12 months. The equivalent for US Treasuries has increased by 16bps over the same period, with seven +25-basis-point monthly moves, including a 33bps decline in December to date.

Monthly change in Australia and US 10-year government bond yields
Percentage points

Source: Savills Research, Macrobond

The peak in the interest rate cycle and the potential for looser monetary policy next year will be welcomed by investors grappling with how to price assets amid the heightened uncertainty we have seen this year. The prospect of lower interest rates will help facilitate a recovery in investment activity in 2024, which we expect will gradually gain momentum throughout the year. A forthcoming blog will delve into the implications for capital markets of the shift back to lower interest rates.