Here are my predictions for 2024 – it will be an unusually uncertain year
It is that time of year again when we begin to make predictions for the year ahead. Perhaps the most difficult thing for forecasters trying to peer into the future is having to put numbers and probabilities on things that are inherently uncertain.
In most years, it seems that uncertainty is greater than normal. In practice, I suspect that things are always extremely uncertain.
Nevertheless, I am starting this year’s missive by saying that in 2024 things are unusually uncertain.
On the geopolitical scene, there are clearly key risks associated with the Russia-Ukraine war, conflict in the Middle East and continued rumblings over Taiwan, where the coming election could intensify tensions.
On the economic front, China remains a big worry and there is the risk of a renewed downturn there, mainly associated with weakness in the construction sector.
If this happens, the Chinese authorities will have limited scope to relax policy to counter the effects.
Elsewhere, there are still serious financial risks deriving from the large and extremely rapid increase in interest rates last year which, so far, has had very little adverse financial effect. That may yet change.
A second major risk concerns public debt and how the markets will react to it. In just about all countries, public debt ratios have been rising relentlessly into what would normally be regarded as dangerous territory.
That didn’t prevent a major bond rally late last year, driven by the view that interest rate cuts were not far away. But there is no telling whether and when the markets will decide that the risks from public debt are unbearable.
Within Europe, the most exposed country is Italy, with its combination of high debt and weak growth.
What’s more, the above list of concerns refers only to what Donald Rumsfeld famously referred to as the “known unknowns”.
Economies and financial markets are arguably more at risk from what he referred to as the “unknown unknowns”. For reasons that I hope you will understand, there is nothing that I can say about those.
Turning to more tractable territory, there are some brighter things on the horizon.
Enthusiasm about AI is likely to build across the world over 2024. It is possible that there could even be some positive productivity surprises from this source and that this could boost corporate investment.
One of the major negative global themes of this year is going to be the continued drag on economic activity from last year’s sharp rise in interest rates. The result is going to be that GDP growth is likely to disappoint across the world.
In this regard, Europe and the UK are likely to underperform the US which, although still facing some sort of recession risk, is likely to carry on growing reasonably.
After all, it is an election year. It is rare for the US economy to contract in an election year – although it did in 2020, because of Covid-19.
The second major global theme should be sharp falls in inflation. Indeed, the period of the Great Inflation Spike, caused by overly lax fiscal and monetary policy in the wake of the pandemic, and worsened by post-Covid global supply shocks and the Russia-Ukraine war, is now over.
This should permit significant cuts in interest rates before too long. Again, the US should lead the way with the Fed being able to cut interest rates as early as March. The eurozone is likely to come next, and then the UK.
The key problem in Britain continues to be the stubbornness of pay inflation, which this year will not be helped by another large increase in the National Living Wage in April.
Even so, by the end of the year, CPI inflation should be down to about 1.2pc, but with the core rate considerably higher, at about 2.5pc.
There is a good chance that UK interest rates will be falling in the last few months of the year, if not much earlier.
Of course, it will probably be an election year here as well. The improving fiscal scene is likely to permit some attractive tax cuts in the budget.
Mind you, this is unlikely to amount to a significant loosening of fiscal policy, nor indeed to give much of a boost to consumer spending, because the scope for tax reductions is derived from the effects of fiscal drag, which is pushing millions of people into higher tax brackets.
It is tempting to think that the election will be a major driver of the economic outcome. In practice, I doubt that it will.
And this is not just because, despite speculation that the election may happen in the spring, the most likely date is still October. The fact of the matter is that, with few exceptions, changes of government are usually not the main drivers of big economic developments in the UK or, indeed, in most other countries.
The recent election in Argentina is an exception. So too was the defeat of Jeremy Corbyn’s Labour here four years ago, as well as Mrs Thatcher’s victory in 1979.
As the markets anticipate a Labour victory this year, there is a risk of serious financial weakness, including a much lower pound, not least because wealthy individuals and companies decide to take capital out of the country.
In practice, though, I do not think this is likely. For a start, the financial markets, private individuals and companies have surely already discounted the likelihood of a Labour victory and, accordingly, such a result should already be largely priced into current market values.
Moreover, the Labour leadership has so far done a good job of convincing both the markets and corporate Britain that they would not do anything significant to rock the boat.
It should be remembered that when Labour won in 1997, the pound was steady, equities rose and bond yields fell.
Sir Keir Starmer may not be Sir Tony Blair, but he is doing his damnedest to make it appear that he is.
Roger Bootle is senior independent adviser to Capital Economics.
roger.bootle@capitaleconomics.com
