Happiness, according to some psychologists, is a product of reality exceeding one’s expectations. If so, 2023 has been quite a cheery year — at least for economists. Citi’s Global Economic Surprise Index shows that this year’s projections have been consistently beaten by the actual data. The economic trends that have underpinned this reality also offer plenty of reasons to be optimistic for 2024.
First, the international economy has displayed remarkable resilience. Since 2020 it has endured a pandemic, war in Europe and supply chain chaos — which together triggered the highest inflation and most aggressive interest rate-raising cycle in decades. Yet economies have adapted better than expected, and that continued in 2023. In the third quarter the world’s gross domestic product was more than 9 per cent larger than pre-pandemic levels, according to Fitch Ratings’ global aggregate. Businesses rewired their logistics, Europe weaned itself further off Russian gas, and higher rates did not lead to a spike in unemployment. Such durability provides a strong foundation for the new year.
Second, the scourge of inflation is fading rapidly. Global price growth ended last year at 8.9 per cent, and is forecast to drop to 5.1 per cent by the end of 2024. Food price inflation — from wheat to cooking oils — has plummeted, and the surge in energy prices is unwinding. The concatenation of pandemic-era supply chain shocks has also eased. Services inflation remains sticky, but that is down to sturdy job markets and rapid wage growth.
Third, fears of a “table mountain”-type monetary policy cycle — where interest rates would stay at their peak for longer — are already waning. The major central banks may now cut rates earlier in 2024 than anticipated. That would be a relief for many households and businesses. And although three regional US banks and Credit Suisse foundered in March, the fallout from higher rates has been contained. In fact, this rate cycle has usefully exposed weaknesses, from zombie businesses to poorly capitalised banks.
Financial markets have boomed. Wall Street’s leading indices neared or surpassed record highs this month. Even bonds ended the year strongly. And, the chance of a soft landing for the US economy in 2024 — where the Fed gets inflation under control without causing a recession — has risen.
Not all economies are expected to perform well. Economic activity has sagged in Britain and Germany. China’s post-pandemic recovery has also disappointed. But others are showing promise. India, Mexico and Vietnam are benefiting from shifting trade patterns, and investors are keen to boost their exposures to them next year. Prudent economic management also made a comeback in places. Greece’s government debt returned to investment grade status after a decade-long hiatus. In Turkey and Argentina some unorthodox approaches were reined in too. Central banks across many developing countries were also on the front foot in keeping inflation under control.
Finally, it has been anything but the sober year for tech some had expected. ChatGPT became the fastest-growing app of all time, and the buzz over generative AI helped to propel the stock market. The adoption of generative AI by businesses in 2024 could help support productivity growth, which has shown signs of lift-off in the US this year. Other innovations this year also hold promise. The regulatory approval of weight-loss drugs — such as Novo Nordisk’s Wegovy — could help to lower healthcare burdens. And, Toyota’s progress on solid-state batteries may be a game-changer for the electric vehicle industry.
A bit of perspective is no excuse for complacency. The global economy faces several battles in 2024, from pivotal elections to mounting sovereign debt. But, after this year’s resilient showing, there is every chance that the reality next year will also be better than expected.