By Mohamed A. El-Erian
El Erian: Stocks, bonds and other investments face a difficult 2024
Consensus forecasts, after proving far too dire for 2023, have moved too far in the opposite direction.
Ahead of 2023, the outlook for the global economy appeared bleak. Analysts predicted that Russia's invasion of Ukraine and the subsequent rise in energy prices would trigger a significant economic downturn in Europe. Bloomberg Economics announced that there was a 100% chance that the United States would suffer a recession. Few believed that most developing countries could withstand the combination of rising energy prices, rising interest rates and a downturn in developed countries.
Had forecasters foreseen the war between Israel and Hamas and its potential for regional escalation, the intensification of the Russia-Ukraine war, and political turmoil in some Western countries, their pessimism would have been even more pronounced. In addition, extraordinary volatility in the U.S. Treasury market, a key benchmark for many domestic and international markets, would have fueled fears of an impending global recession, as would the failure of U.S. banks.
But while last year's unforeseen political, geopolitical and market turmoil continued to cloud the world's growth prospects, the global economy surprised on the upside. The vast majority of developed economies defied expectations and successfully avoided an economic downturn. Developing countries as a whole were able to avoid financial difficulties. Even China showed the resilience of its economy despite its disappointing growth towards the end of the year.
Encouraging trends have led analysts to adopt an optimistic outlook.
These encouraging trends have led analysts to offer an optimistic outlook for 2024. Instead of a recession, the consensus forecast now suggests that the US economy is heading for a “soft landing” and disinflation will pave the way for interest rate cuts. Europe is also expected to avoid recession after bolstering its energy reserves and restructuring its supply chains, although the German economy may continue to lag. In China, a comprehensive economic stimulus package is intended to boost GDP growth. And the combination of lower interest rates and falling energy prices should protect most developing countries from economic and financial dislocation.
Since I was more optimistic than the consensus forecasts for 2023, I would like to support the optimistic forecasts for the coming year. Ultimately, the global economy can hardly afford further setbacks. However, despite my desire to be optimistic, I worry that consensus forecasts, after proving far too dire for 2023, have swung too far in the opposite direction for 2024.
Too many policymakers appear to be more focused on revitalizing inefficient growth engines than on addressing long-term threats.
The main concern is that global growth momentum is weakening as rising geopolitical and domestic tensions exacerbate unfortunate economic and financial developments. Too many policymakers appear to be more focused on revitalizing inefficient growth engines than on addressing long-term threats such as the climate crisis and transitioning to more sustainable, forward-looking models. This is evident in China, Europe and many developing countries where governments have failed to implement the structural reforms needed to increase productivity and growth potential.
Although the U.S. is in a relatively better position thanks to major economic legislation passed by President Joe Biden's administration, dwindling household savings and higher debt are casting a shadow over its growth prospects for the coming year.
The global economy is still struggling with the effects of significantly increased borrowing costs. In an environment where interest rates are expected to remain high for an extended period of time, refinancing certain debt contracts – particularly in the commercial real estate sector – will become increasingly difficult. Moving away from a decade of artificially low interest rates and generous liquidity injections by central banks is a gradual process that could be painful for some, especially as we approach the “maturity wall” that the corporate sector faces in 2025.
These uncertainties threaten to destabilize a market that is already struggling with unusually high volatility at its core. In the absence of sound economic, political and technical fundamentals, US Treasury yields remained highly volatile. The longer this instability persists, the higher the likelihood that interest rate risks could trigger credit, equity and liquidity shortages.
Key elections in 2024 in polarized countries like the US could pose further obstacles to timely global action.
Geopolitical and domestic changes could also exacerbate economic, financial and market vulnerabilities, as the enormous and horrific toll of ongoing conflicts, particularly in Gaza, increase the risk of escalation and undermine global stability. Furthermore, there is a risk that the US stance in the Middle East conflict will accelerate the fragmentation of the international economic order and further weaken America's global standing and influence.
This, coupled with the growing confidence of the world's middle powers swing states, could hamper international policy coordination that is crucial to addressing global challenges such as climate change, inadequate growth, excessive debt, rising inequality, supply chain vulnerabilities, etc the need to reduce the risk of certain economic relationships without causing a painful decoupling. Key elections in 2024 in polarized countries like the US could pose further obstacles to timely global action.
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Despite a more difficult political and geopolitical situation than most expected, the global economy exceeded expectations in 2023. Although it is tempting to extrapolate from this experience and predict strong performance in 2024, such predictions must be approached with a healthy dose of caution. It's entirely possible that consensus forecasts will miss target again, and the consequences could be even worse this time.
Mohamed A. El-Erian, president of Queens' College, University of Cambridge, 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 Reid Lidow) of Permacrisis: A Plan to”. Fix a Broken World (Simon & Schuster, 2023).
This commentary was published with permission from Project Syndicate – Beware the New Consensus on the Global Economy
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-Mohamed A. El-Erian
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02/23/12 1206ET
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