2024 is the year of a soft landing for the economy, and also the year of interest rate cuts that should support economic growth and global markets. This is the case with conventional optimistic analysis.
So where is the risk? It goes without saying that the risks are many, given the wars, the coronavirus pandemic and the bank failures that have occurred in recent years. Examples are shown below, but are not limited to these.
The Middle East is on the brink of escalating conflict
Clashes between Israel and the Islamic group Hamas in Gaza, which began more than three months ago, are now on the verge of degenerating into a regional conflict. If the conflict escalates, there is a risk that oil shipments will be disrupted, global economic growth will slow and inflation will rise again. We have not yet reached a situation where that energy supply will be interrupted, and we do not expect the market to do so. But the risks are increasing.
Gaza residents seeking rationed food (January 9, 2024)
Photographer: Hatem Ali/AP
Tensions in the region have risen since US and British forces conducted airstrikes against Houthi rebel strongholds in Yemen, which attacked commercial ships sailing through the Red Sea, a major shipping route linking Asia and Europe.
The pro-Iranian Lebanese paramilitaries Hezbollah and the Israeli army have been fighting on the border for days and with the killing of a Hamas official on the outskirts of the Lebanese capital Beirut there are fears that Hezbollah is increasingly involved in the war. The fighting.
Iraq and Syria are also increasingly likely to spark conflict.
What’s driving oil since war broke out in the Middle East
The supply has held down prices. The opposite could happen in 2024 if the conflict spreads
Our baseline scenario is that a direct war between Iran and Israel is unlikely. However, if such a situation were to occur, vital trade routes could be disrupted, a fifth of the world’s oil supply could be lost and oil prices could rise as high as $150 a barrel. Global gross domestic product (GDP) growth is expected to be reduced by 1 percentage point, while inflation is expected to increase by 1.2 percentage points.
This also has implications for US financial authorities.
This is bad news for the US Federal Reserve and for investors hoping for quick and aggressive interest rate cuts.
In the 1970s, then-Federal Reserve Chairman Burns accelerated the move toward lower interest rates. As a result, inflation flared up again and his successor, Paul Volcker, had to take extreme measures to contain prices. There are two scenarios where the same thing could happen again in 2024, albeit on a smaller scale. The first is a supply-side shock, which could realistically occur if the escalation of conflict in the Middle East had a direct impact on oil prices and shipping lanes. The other reason is the easing of financial conditions. The five-year U.S. Treasury yield has fallen more than 1 percentage point from the high level reached in October last year.
Inserting a 1 percentage point drop in yields into Bloomberg Economics’ U.S. economic model would push inflation 0.5 percentage points higher a year later, closer to 3% than the authorities’ 2% target. If this actually happens, financial authorities will be forced to suspend policy changes and may not be able to meet market expectations of easing.
Our latest natural language processing model for understanding the feelings of speakers at the US Federal Reserve shows that officials have a lot of room to change their positions. The model, developed based on headlines from 59,000 articles from official speeches and press conferences, finds that while officials are accommodative, they are still far from committing to cutting rates.
Accommodative tendency
Bloomberg Economics Fedspeak Index
Europe risks cooling
The European economy is contrasted with the US one, which risks overheating.
The European Central Bank (ECB) and the Bank of England (BoE) are emerging from the most aggressive tightening cycle in almost 30 years. Any macroeconomic model that analyzes this tightening will clearly predict a “deep recession.”
BE’s model predicts an impact of 2.5% on Eurozone gross domestic product (GDP) and 4.7% on UK GDP. However, while growth has indeed slowed in both economies so far, it has not turned negative.
Rate increases that haven’t taken effect – yet
Of course the model could be wrong. With the pandemic and the war in Ukraine it has always been difficult to make predictions. But there is another possibility. Monetary policy is known to have long lags, and the European economy may not be hit hard yet.
Related article
Original title: A pessimistic guide to global economic risks in 2024 (excerpt)
2024-01-16 23:08:00
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