By Mohamed A. El-Erian
The probability of a soft landing in 2024 is 55% – and the probability of the US slipping into a recession is 30%
Optimism is fine, but be aware of the economic headwinds and risks.
What happens in the United States doesn't stay in the United States. The global economy relies on America to serve as the primary engine of growth, and global financial markets rely on the outsized risk appetite of U.S. investors. This became particularly evident in 2023, as major economies such as Japan and the United Kingdom slipped into recession, Germany narrowly avoided recession, and China struggled with growth barriers and high levels of debt.
But whether the U.S. economy can drive global growth in 2024 depends on the answers to three current questions:
First, can the US economy maintain its current growth momentum and achieve a soft landing? Second, can it remain resilient in the face of domestic divisions and geopolitical uncertainties around the world? Finally, in times of artificially low interest rates and exceptionally high liquidity injections by central banks, will investors be able to secure sufficient liquidity to refinance debt they have accumulated?
Based on current market prices, investors believe the answer to all three questions is clearly “yes.” Likewise, many economists are optimistic about the US economy, although with slightly less enthusiasm than the capital markets.
I find myself taking a more nuanced view. Consider the three main themes:
The U.S. economy undoubtedly has two key advantages over other major economies: its current growth engines are more dynamic, and it has taken significant steps to promote and invest in future growth drivers. This helps explain why the US exceeded expectations in 2023, with GDP growing 4.9% and 3.3% in the third and fourth quarters, respectively. In contrast, the economies of Germany, Japan and Britain contracted, while China, struggling with cyclical problems, risked falling into the dreaded middle-income trap.
There is a greater risk that the Federal Reserve's over-reliance on historical data will lead to another monetary policy error.
These enormous advantages distinguish the United States from other developed economies. Furthermore, its comparative advantages will continue to increase unless other countries quickly and decisively shift to policies that support growth and increase productivity.
But the American economy also faces strong headwinds. The US entered 2024 with weaker household balance sheets, characterized by lower savings and higher debt levels. This reduces the future effectiveness of consumer spending as a direct and indirect driver of growth. Additionally, as inflation falls, there is a greater risk that the Federal Reserve's over-reliance on historical data will lead to another monetary policy error.
These challenges are compounded by domestic and geopolitical uncertainties that have not been adequately reflected in market risk premia and economic assessments. The possibility of escalation in the Middle East is significant as the already worrying number of civilian deaths and human suffering in Gaza continues to rise. The war in Ukraine threatens to develop in a way that could lead to a larger conflict over time. Meanwhile, ongoing tensions between China and the US show little sign of abating. This year's elections in dozens of developed and developing countries add uncertainty as political shifts could trigger new supply shocks and further weaponization of trade and finance.
The third question is whether markets can handle the refinancing burden of excessive risk-taking fueled by years of artificially low interest rates, massive liquidity injections and an unhealthy interdependence between the Fed and financial markets. A prime example is the commercial real estate sector, where around $1.5 trillion in debt is due by the end of 2025. But there are other areas of concern, particularly within the poorly regulated and poorly understood non-bank sector.
It's important to note that these refinancing issues typically develop gradually. This has both advantages and disadvantages: while the slow pace reduces the risk of massive contagion and sudden stops, it also undermines resilience and agility.
Taken together, all of these factors call into question the automaticity of the consensus forecast of a very soft landing for the US economy and its ability to drive global growth. In fact, I would estimate a 55% chance of a soft landing for the rest of the year. There is also a 30 percent chance that the U.S. will slip into a recession and a 15 percent chance that continued transformative innovation – particularly in generative artificial intelligence, life sciences and green technologies – will lead to positive surprises.
Even if the consensus at the beginning of 2024 looked significantly more optimistic than a year ago, it must be more nuanced than is currently reflected in market prices and economic forecasts. Imagine a “yes, but” perspective that requires paying timely attention to the two ends of the distribution of potential outcomes.
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 – Will the US economy drive global growth this year?
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Also read: The big engine that could: The US economy is racing ahead, putting recession forecasts in the background
-Mohamed A. El-Erian
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02/24/03 1239ET
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