Momentum’s 2024 outlook predicts a mild recession throughout the UK, US, and Europe in 2024, following a “highly unusual year” in 2023. And while the report claims that risks are in ‘better balance’ than 18 months ago, it has outlined seven factors which could lead to economic uncertainty in the upcoming year.
“We do not regard any of these cautionary or risk factors as likely to tip markets into a sustained and substantial drop, but each runs the possibility of triggering meaningful setbacks,” the report said.
“Taken together with the sharp run-up in markets ahead of year-end they call for some caution in portfolio construction in the shorter term.”
Inflation
Momentum calls core inflation ‘uncomfortably high’ across the US, Eurozone, and UK, where rates sit at 4%, 3.6%, and 5.1% respectively. While it said a recession has become less likely in the US, there could be periods of stagnation for the UK and EU.
“The resilience of these economies, especially the US, and the continuing tightness of labour markets, with wages now rising at above-inflation rates, are likely to mean policy will have to stay tight enough to trigger a sharp slowdown in economies,” the report said.
“Keeping rates close to current levels as inflation falls means higher real rates and tighter financial conditions, while the long lags and cumulative effects of monetary policy will be a headwind through much of 2024.”
See also: Should we still be worried about inflation?
Consumer resilience
While consumer resilience prevailed in 2023, Momentum believes this could take a downturn in 2024 as unemployment seems likely to rise and money saved during COVID-19 diminishes from personal funds, causing pockets to tighten.
“The extended period of higher interest rates will push interest payments on consumer debt to a higher proportion of disposable income and will likely result in rising delinquencies on debt repayments, including mortgages, auto-loans, and credit cards,” the report said.
China
China struggled to bounce back post-Covid and has faced fiscal troubles including regulatory clampdown, US trade sanctions, and over-leverage within the property development industry.
The report added: “China is again imparting a deflationary impulse to the global economy, and although it has gradually eased policy, its high debt levels provide limited room for stimulus.”
See also: Big trouble in China
Public debt levels
Following the Inflation Reduction Act in the US, federal deficits are expected to stay near 6% of GDP until 2030. Momentum said this stretched debt creates little fiscal flexibility and in the face of an election year, has a ‘near-zero prospect’ of being reined in.
“With the dysfunctional Congress facing a debt ceiling limit resolution in January, this is a problem that is likely to stalk markets and potentially damage confidence at times during 2024,” the report said.
Geopolitics
Momentum states Russia’s ongoing war with Ukraine presents unclear consequences for Ukraine and other former Soviet areas over time, while the Israel-Hamas war is moving closer to a proxy war with Iran and bringing in additional allies.
Momentum said: “Perhaps most important of all, the great power rivalry between the US and China has the potential to be the defining issue of our age, with little prospect of a material thawing in the relationship in a US election year and in the face of President Xi’s tough line and domestic political dominance.”
Elections
At least 50 countries will hold elections in 2024, including seven of the 10 most populous countries. Momentum also noted Taiwan’s election, taking place during a tenuous period with China.
“The US Presidential election in November is by far the most important, and although we would not normally regard an election as a significant event for markets, in this case there could be more meaningful repercussions than usual given the choice which is likely to be presented to Americans, namely Biden v Trump,” the report added.
Tightening cycle
The tightening cycle is under watch especially given the mini-banking crisis in March 2023, however Momentum said households, companies, and banks come in with “generally strong balance sheets”.
“We do not envisage systemic risks, but some damage on a narrower basis in over-leveraged parts of the economy facing structural problems, such as commercial real estate, and idiosyncratic events such as the SVB collapse, cannot be ruled out,” Momentum said.
This article was written for our sister title Portfolio Adviser
