Global finances: what does 2024 hold in store for major economies and markets?

If the past few years have taught us anything, it’s to expect the unexpected. Nevertheless it seems reasonable to predict that certain familiar themes will dominate the international financial picture in 2024.

Here we unpack what the next 12 months are likely to hold in store for major economies, interest rates and markets.

Political dangers

With fears of widening turmoil in the Middle East, and the Russia-Ukraine war on track to enter its third year, geopolitical issues could again rock markets.

Disruption to shipping in the Red Sea from Houthi rebel attacks is already pushing up transport costs, adding to inflation pressures, with shipping companies adding thousands of miles to their routes to avoid the region.

Vincent Chaigneau, head of research at Generali Investments, says other risks to the 2024 outlook include the possibility of the Opec+ oil cartel rationing production further to push prices up, further weakening electoral support for mainstream parties and increasing tensions between Beijing and Washington during the US election campaign, expected to be fought between the incumbent, Joe Biden, and former president Donald Trump.

ABN Amro predict that falling rates should help drive a recovery later in 2024, but warn that risks loom “from a possible Trump 2.0, to a potential EU-China trade spat, and more broadly, the tail risk of a more disorderly decoupling between the west and China”.

Elections are taking place this year in countries that represent 60% of global GDP – including India, the European Union and the UK (unless Rishi Sunak holds out to January 2025) – but it is the White House race that markets care most about.

AJ Bell investment director Russ Mould says research suggests “the US stock market traditionally gets a mild attack of the nerves in the final year of a presidency”, but the Bank of America argues the opposite, pointing to a 75% rise in the US S&P 500 index in election years.

Allianz Research cautions that overall “the packed election calendar in 2024 will add to economic uncertainty … In this context, governments, households and companies are likely to adopt a wait-and-see approach, postponing key economic decisions.”

If Labour wins a UK general election, as polling has consistently predicted, RBC Wealth Management do not expect a strong negative reaction in financial markets. “The party seems to have transitioned towards the centre and has markedly improved ties with the corporate sector,” it says.

Shares: a new ‘roaring 20s’?

Last year ended with a strong rally across risk assets, with shares and bond prices both strengthening sharply in November and December. The S&P 500 ended 2023 just short of an all-time high, at almost 4,770 points, and many analysts expect it to climb in 2024. Edward Yardeni, president of Yardeni Research, predicts the index will end this year at 5,400 points, and climb further to 6,000 by the end of 2025.

Yardeni argues that the markets could see a “roaring 20s” rally like the one 100 years ago, with consumers continuing to spend while they enjoy job security, as “the awesome ability of US corporations to generate cash flow” supports the US economy.

However, Mark Haefele, chief investment officer at UBS Global Wealth Management, predicts the S&P 500 would end 2024 roughly where it started, although he sees “particular opportunity in quality stocks” including the US tech sector.

Britain’s FTSE 100 index lagged behind other major indices last year, only rising by less than 4% to finish 2023 at 7733 points, while global markets gained 20%.

But the blue-chip index could make up ground. In a poll of interactive investor customers, one in four predicted the FTSE 100 would end 2024 at over 8,000 points.

Simon French, chief economist at Panmure Gordon, calculates that UK companies are undervalued by around 19% compared with international rivals, partly due to Brexit and the UK’s sluggish economic outlook.

The UK: recession fears grow

Employment is expected to fall, lifting the jobless rate to 5% next year and 5.2% in 2025. UK inflation is also expected to continue downward, with Morgan Stanley predicting it will average 2.8% over the year, down from 3.9% in November but still over the Bank of England (BoE) target of 2%.

Meanwhile, fears of a UK recession rose at the end of 2023 after updated GDP data showed a small contraction in July to September. Morgan Stanley forecasts that the UK will contract by 0.1% during 2024, falling into a technical recession of at least two consecutive quarters of contraction.

Morgan Stanley told clients: “The UK economy is stuck in a fragile equilibrium, with a challenging policy mix. Exit is unlikely to be painless – we see a technical recession at the turn of the year and a weak economy over 2024.”

With the economy weak and price rises slowing, investors are expecting the BoE to slash interest rates in 2024 from the current 5.25% – pricing in a drop to 3.75% by December. The BoE has pushed back against such expectations, repeatedly insisting it is too early to consider cuts.

Homeowners looking to remortgage are already benefiting from the improved forecasts, with major lenders cutting the cost of their fixed-rate deals this week to lower than 4% in some cases.

Rates at other central banks

The market is generally betting against the “higher-for-longer” theory – the idea that central banks will keep borrowing costs restrictive for some time to fight inflation. Both the US Federal Reserve and the European Central Bank are expected to cut interest rates several times in 2024. The Fed is forecast to cut rates to a 3.75%-4% range by the end of the year, down from 5.25%-5.5% today.

“The central thesis is that with absolute conviction inflation is heading towards target, labour markets cooling sufficiently and growth at far more subdued levels” interest rates should be lowered, explains Chris Weston, head of research at Pepperstone.

In the eurozone, inflation fell closer to the European Central Bank’s 2% target last autumn. In early December, ECB board member Isabel Schnabel said this “remarkable” fall in inflation meant further interest rate hikes were now off the table.

The global outlook: ‘resilient but sluggish’

Oxford Economics believes the global economy will pull off a soft landing, but adds that growth in 2024 “will likely be lacklustre” by post-2008 standards. It is likely to slow because of factors including high interest rates and government spending squeezes.

Morgan Stanley predicts global growth will slow in 2024 to 2.8%, down from an estimated 3% in 2023. In Europe, they expect barely positive growth of 0.5% in 2024 and 1% in 2025, reflecting “the continued effects of energy supply shocks, especially on Germany, and lagged effects of tight monetary policy”.

It predicts China will weigh on growth in emerging markets, while its “global downside scenario” imagines a protracted debt-deflation cycle in China, triggered by widespread defaults in the housing sector, that spills over to other economies.

Société Générale captures the mood with a 2024 Global Economic Outlook titled “Resilient but sluggish” and accompanied by an image of a sloth.

Jim Reid, strategist at Deutsche Bank, predicts the world economy will “flirt with recession in 2024” and the US will suffer a mild recession in the first six months, with the economy only growing 0.6% over the year, while the eurozone is only seen expanding by 0.2% in its second year of effective stagnation.

Ian Stewart, chief economist at Deloitte, says it is more likely than not that the US and Europe will get through their major inflationary episodes without suffering deep recessions.

“By postwar standards that would be remarkable. We are not out of the woods, but business and consumers have proved resilient in the face of high inflation and high rates. If central banks can engineer a soft landing, we would be looking at the start of a new upswing in the economic cycle in 2024,” Stewart predicts.