Recession, stagflation, a cost of living crisis, damaged public finances and higher interest rates. The four years since a new deadly virus spread around the world from the Chinese city of Wuhan has been a catalogue of woe for the global economy. 2023 has been the first year since 2019 to be relatively shock-free, in the sense that there has been no repeat of the pandemic of 2020, the supply-chain bottlenecks of 2021 or the Russian invasion of Ukraine in 2022. The financial repercussions of conflict in Israel have, until this point, been limited to the region. But that may change. The global economy is still not in a good place as 2024 dawns. Here are a few things to look out for in the year ahead.
1. Central banks start to cut interest rates
Higher interest rates from all the world’s big central banks (other than the Bank of Japan) have had the desired effect. Inflation is on its way down across developed economies and, so far, the side-effects of the medicine have not been as bad as feared this time last year. But with a slowdown under way in the US and recession a looming threat in the UK and the eurozone, attention is now focused on when borrowing costs will be cut and which central bank will be the first to move. Neil Shearing, the chief economist at Capital Economics, thinks the Fed might act more quickly than the European Central Bank even though the growth outlook in the eurozone is “significantly worse”.
History and recent experience suggest the ECB is institutionally more hawkish than the Fed, he says. With UK inflation coming down faster than expected, the Bank of England will struggle to maintain its ultra-cautious approach to rate cuts for much longer. Markets are now pricing in as many as six interest rate cuts by December, forecasting a possible base rate drop from 5.25% to 3.75%.
2. A developing-country debt crisis
Problems have been mounting for the world’s poorest countries since the start of the pandemic, with many trapped by a double whammy of weaker growth and rising interest rates. Countries that borrowed heavily in US dollars during the 2010s have seen their repayments soar to record levels in recent years and, according to the World Bank, in the past three years there have been 18 sovereign defaults – more than in the previous two decades combined.
The list of countries struggling with their debts includes Egypt, Ethiopia, Kenya, Lebanon and Pakistan. A debt relief scheme established by the G20 in 2020 has far offered only modest help to a small number of countries. The World Bank chief economist, Indermit Gill, said: “Record debt levels and high interest rates have set many countries on a path to crisis.” Argentina, led by the newly elected right-wing populist Javier Milei and with inflation above 140%, is a country to keep an eye on.
3. Pre-election tax cuts
A budget aimed at garnering support for the government is a stone-cold certainty given how far behind the Conservatives are in the opinion polls. After cutting national insurance contributions in November’s autumn statement, Jeremy Hunt will follow up with a reduction in income tax in the budget. A general election must take place in the UK by January 2025 at the latest, but the Conservatives and Labour are already working on their manifestos in readiness for a possible snap poll in the spring. Hunt will be able to justify cutting tax because the government’s financial position is benefiting from falling market interest rates and lower inflation, which reduce debt interest payments. Even so, the budget sums will only add up on the assumption that there will be post-election cuts in public spending that the Institute for Fiscal Studies thinktank believes are unrealistic. Tough decisions loom early in the next parliament for whoever is chancellor.
4. A deepening US-China cold war
Britain is not the only developed country on election watch in 2024. The US chooses its president in November and, as things stand, the race looks like being a rerun of the Joe Biden versus Donald Trump contest in 2020. Relations between the US and China are unlikely to improve whoever wins, because the world is splintering into rival blocs and spheres of influence. US growth is likely to disappoint in the first half of 2024 as past interest rate increases feed through, while China’s post-lockdown recovery is flagging.
Beijing is grappling with some big problems: a troubled property sector, rising youth unemployment, weak European demand for its exports, and an increasingly protectionist US. If anything, the cold war between the two biggest economies is likely to get frostier in 2024 as both the US and China turn inwards. The biggest risk is that the cold war turns hot with a Chinese invasion of Taiwan,– something that would dwarf the war between Russia and Ukraine in terms of its economic impact.
5. The unstoppable rise of generative AI
One of the areas where competition between the US and China is fiercest is the race to develop generative AI – technology that can produce text, videos and other forms of content almost instantaneously. Many experts see generative AI as the successor to steam power, electricity and the internet: a general purpose technology that will transform economies and societies.
Generative AI arrived with a bang in 2023 and its rapid growth will continue in 2024. On the plus side, AI has the potential to lift countries out of a prolonged period of lowproductivity, with the biggest gains to those that move fastest. On the debit side, there are concerns that the implications of AI have not been thought through, with “smart machines” potentially leading to a concentration of wealth and power, disrupting labour markets, influencing elections and even posing an existential threat to humans.
A feature of the year ahead will be policymakers grappling with the regulatory challenges posed by the new technology. These include ensuring that the benefits are not concentrated in the hands of a few big tech companies; reskilling workforces; and the use of generative AI to create fake content.
6. Rising oil prices
A disruptive oil shock was the dog that didn’t bark in 2023. When Hamas chose the 50th anniversary of the Yom Kippur war to launch its attack on Israel, there were fears of a surge in the price of crude to match that seen in late 1973, but it didn’t happen.
The price of a barrel of benchmark Brent crude rose initially – from $84.58 to a peak of just under $94 – before falling back amid hopes that the war will be confined to Gaza. But in recent weeks there have been signs of a broader Middle East conflict developing. BP has suspended shipments of oil through the Red Sea after attacks on ships by Houthi rebels from Yemen. Two of the world’s biggest container operators, AP Møller-Mærsk and Hapag-Lloyd, have sent ships on a longer route around Africa after the action by the Iran-backed militants.
The risks are clear. About 10% of crude passed through the Red Sea in the first half of 2023, while closure of the Strait of Hormuz would choke off about 20% of global supply. The global economy is less dependent on oil than it was five decades ago but a prolonged disruption to supply would push crude prices up above $100 a barrel and lead to a fresh rise in inflation.
