Behavioral economists have popularized the term “recency bias” to describe our tendency to be disproportionately influenced by recent events compared to earlier events. Could this cognitive phenomenon explain why many analysts are optimistic for the world economy in 2024? Or are the positive trends actually counterbalancing the obvious and growing challenges to global growth?Thank you for reading this post, don't forget to subscribe!
recently financial Times The editorial reflected the prevailing optimism, declaring that “After this year’s resilient performance, it is quite likely that the reality next year will also be better than expected.” The trends supporting the unprecedented resilience of the global economy in 2023 “also provide many reasons to be optimistic for 2024.”
This upbeat mood has extended to financial markets. A growing number of commentators have predicted that the stock market will finish 2023 above already high levels, buoyed by a notable rally at the end of the year.
Today’s optimistic sentiment is a sharp contrast to the dire predictions that dominated by 2023, when Bloomberg Economics claimed there was a 100% chance the United States would fall into recession. It also varies across a range of economic, financial, geopolitical and political developments. Notably, it appears to be driven primarily by a single factor: central banks aggressively cutting interest rates amid all the soft landings for the US economy.
To be sure, central banks have an enormous influence on financial-market sentiment. Since the 2008 global financial crisis, central bankers have acted as the world’s leading policymakers – lowering interest rates, flooding economies with liquidity, fueling huge gains across nearly all asset classes, and distributing wealth. Facilitating a remarkable shift in wealth that benefited the richest. But this trend reversed in 2022 when central banks, led by the US Federal Reserve, belatedly responded to rising inflation by launching one of the most aggressive cycles of interest rate hikes ever. It appears that subsequent losses in both high-risk and low-risk assets will continue through 2023, unless the consensus forecast shifts toward significant rate cuts and talk of a “Fed put” again. Doesn’t start.
While central banks have had a significant impact on market confidence, their impact on real economic outcomes has been limited. His highly accommodative policies during the 2010s helped keep the global economy running, yet overall growth remained disappointingly low, uneven, and still disconnected from climate realities. A change in tight monetary policies in 2022 was expected to increase unemployment and slow growth; Instead, the US unemployment rate ended 2023 at a remarkably low 3.7%, and the third-quarter annual increase increased to 4.9%. Furthermore, the extent to which aggressive interest rate hikes contributed to reducing inflation has become a matter of debate among economists.
These developments suggest that central bank policies alone – investors are currently expecting the Fed to cut interest rates by about 1.5 percentage points – will not generate the growth momentum needed to withstand the headwinds facing the global economy. There may not be enough to do.
In fact, it will be hard to find a systemically significant economy poised for breakout growth in 2024. As China grapples with an economic model that delivers low returns, officials there have acknowledged that its growth rate is hampered by domestic inefficiencies, pockets of excessive debt, increasing global fragmentation and the weaponization of trade and investment by the West. . Europe, for its part, is unlikely to repeat last year’s unexpectedly strong performance, especially given the sluggishness of global manufacturing and Germany’s economic stagnation.
Once again, commentators are pinning their hopes on American economic exceptionalism. But things have evolved in the last year. Low Covid pandemic-era household savings and high debt act as a hindrance to America’s remarkably agile and resilient economy. Additionally, recent interest rate hikes are likely to hamper new home mortgages, companies looking to navigate the mountain of corporate debt expected to mature in 2025, and highly leveraged non-bank institutions dealing with their losses. Is.
The current geopolitical environment is also not conducive to strong growth. The devastating consequences of Hamas’ brutal attack against Israel on October 7, in which Israel has destroyed much of Gaza and is reported to have killed more than 23,000 Palestinians – including thousands of women and children, mostly civilians – has challenged hopes of overcoming the crisis. Israel and the Iran-backed Lebanese militia Hezbollah appear to be moving toward more hostilities, and attacks against commercial vessels in the Red Sea by the Yemeni Houthis are already disrupting global trade in a way that could have an inflationary impact on the global economy. The pressure has increased again.
Beyond the Middle East, Western democracies and many developing countries will face crucial elections in 2024.
Given these circumstances, strong global growth in 2024 appears unlikely. Nevertheless, there are two ways to mitigate the threats posed by an increasingly fragile economic and geopolitical environment. First, policymakers need to initiate a major economic-policy overhaul, focusing on structural reforms aimed at developing future growth and productivity engines. Second, the international community needs to do better to end atrocities in the Middle East before the conflict spreads further across the region and leads to geopolitical turmoil beyond it. Without these interventions, today’s optimists will be deeply disappointed by the end of the year.
President of Queens’ College at the University of Cambridge, Mohammed A. El-Erian is a professor at the Wharton School of the University of Pennsylvania. He is the author of The Only Game in Town: Central Banks, Instability, and Recovering from Another Collapse (Random House, 2016) and co-author (with Gordon Brown, Michael Spence, and Reed Lidow) of Permacrisis: A Plan to Resolve Permacrisis. Fix a Broken World (Simon & Schuster, 2023).
This commentary was published with permission from Project Syndicate – Do not extrapolate last year’s trends to the global economy
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