In his latest book, “The Crisis of Democratic Capitalism” (Deusto), Martin Wolf explains the two reasons why he chose to be a pessimist: first, because most surprises turn out to be pleasant, and second, because he caused his biggest mistakes by excessive optimism, both due to the behavior of finance and the behavior of voters. A logic that could certainly be transferred to the development of the experts' forecasts for 2023.
While the horizon for this exercise appeared to be plagued by risks on the inflation side and some of the major economies were on the verge of recession, the reality is that growth has remained surprisingly robust, particularly in the case of the United States, during the The rest of the country has remained surprisingly robust. One could speak of growth stagnation in the national economies. Tiffany Wilding, economist at management company Pimco, explains in a report what elements contributed to this twist in the script. On the one hand, restrictive monetary policy increased borrowing costs, but did not trigger a tightening of general financing conditions. High household savings and support measures for the private sector, which in turn put pressure on public budgets, have strengthened the resilience of growth. Finally, better-than-expected supply developments have helped ease inflationary pressures.
In numbers – those from the IMF – this means that global growth for this year will fall to 3% from the 2.7% forecast in October a year ago; 2.1% for the United States, well above the estimated 1%; 5% in the case of China, rather than the expected 4.4% and 1.5% for all advanced economies, respectively, compared to the 1.1% calculated a year ago. However, the Eurozone performs worse (0.7% compared to the expected 1.1%), mainly weighed down by the deterioration of the German economy (a decline of 0.5% is estimated for this year, compared to more last year). calculated as 0.3%). ). On the side of positive surprises is Spain, which according to the IMF will end the year with growth of 2.5%, significantly higher than the 1.2% forecast a year ago.
In these conditions and in anticipation of the black swan of the year (something that has been common in recent years), analysts unanimously point to a slight slowdown in growth, supported by the fact that interest rate hikes appear to have come to an end empirical evidence shows that governments in an election year generally have no reservations about using fiscal policy to support their re-election. We are not talking about a minor factor here: next year, around 40 countries representing 60% of global GDP (including the European Union, India, Russia, Mexico or Indonesia) will go to the polls and their outcome, especially the US presidential election in November will shape the scenario for the coming years.
“Investors have reluctantly adapted to a new normal marked by great geopolitical and economic uncertainty. The 2023 election surprises, from Poland to Argentina, have reminded us of their ability to move markets and change political trends. In this way, the election will be one of the three big drivers of 2024, alongside recession risks and interest rate cuts,” noted Ben Laidler, global markets strategist at eToro, in a commentary.
There is no doubt that the rhythms of activity remain mediocre and very uneven, offering poor prospects in the medium term, since the IMF forecast for the end of the decade (with global economic growth of 3.1% in 2028) of a stagnation of potential out of growth. As Caixabank Research reminds, this is half a point less than the medium-term estimate before the pandemic and almost two points less than the potential growth before the great financial crisis of 2008.
Various threats
In this context of weakness, the risks become more important and if Martin Wolf's theory of pessimism is true, it is advisable to be aware of the threats that the economy faces. These risks can now come from one of the three Ds (that would be four if you include the slowdown): disinflation, debt and deglobalization. Two more could be added at some point: digitalization and demography.
The shortages in global supply chains caused by Covid-19 and the subsequent recovery in demand, as well as the energy crisis triggered by the war in Ukraine, led to inflation spiraling until prices reached levels not seen since the oil crisis of the 1970s more was given. In recent months, inflation has been corrected quickly, especially in the euro zone, but the hardest part, experts say, is always going the last mile.
“It remains to be seen whether inflation can be controlled at around 2.5% by the end of the year and whether interest rates will actually move to a more neutral level,” warns Carlos del Campo, member of the investment council of the investment firm Diaphanum. The IMF expects inflation to reach most central banks' target (2%) only in 2025, predicting high interest rates for a long period of time, especially if the price of inflation rises again. Oil in an environment of high geopolitical uncertainty. However, judging by recent statements from both the President of the US Federal Reserve, Jerome Powell, and one of the hawks on the Council of the European Central Bank (ECB), Isabel Schnabel, the time to declare victory over inflation is coming . So much so that the Fed is officially already planning three interest rate cuts in 2024 from the current 5.5%, which could begin as early as March. And although ECB President Christine Lagarde insists that “now is not the time to let our guard down,” the market is ignoring the fact that rate cuts on this side of the Atlantic will begin sometime between spring and summer.
Although slowing growth in the US and the Eurozone may suggest less restrictive monetary policy, this is clearly an expectation management risk. “Markets may be going too far with their rate cut forecasts, there are still components of inflation that refuse to come down. In addition, if an unexpected scare were to occur, for example leading to a rise in commodities, this combination would be very negative,” explains José Ramón Díez, director of international economies and markets at Caixabank Research.
Erik Nielsen, economic advisor at the Unicredit Group, also believes the recent optimism on the market is exaggerated. “The mix of a general strategy of scaling back production chains for national security reasons, growing geopolitical uncertainty and negative demographics that will put pressure on labor markets will lead to high structural inflation for a decade or more, which the central bank should enforce. “Banks’ inflation target must be raised to prevent monetary policy from slowing down the green transition and growth,” he stressed in an email.
Budget imbalances
If Nielsen is right and inflation expectations are less anchored than the monthly indices suggest, correcting fiscal imbalances would be more urgent than policymakers seem prepared to do. In the European case, the year 2024 represents, with more or less intensity, the return to public accounting after three years in which budget rules were suspended due to Covid-19, supply problems, the war in Ukraine and the energy crisis. According to experts However, it will be a transition year and the majority of the cuts will not be postponed until 2025 at the earliest. Italy and France are the countries with the worst position in this regard. In the case of the United States, it is difficult to imagine cutting public spending in the middle of an election year, but experts warn that this path is not sustainable: with economic growth of 3%, the national deficit has doubled this year and stands at 7.5% of GDP. Any other country would have to accept a serious reduction in its risk premium under these circumstances. Among emerging markets, analysts are particularly concerned about the finances of Brazil and South Africa.
Claudio Irigoyen, head of global economics at Bank of America, warns in a detailed report that fiscal policy has deteriorated worldwide after the pandemic and that the rise in interest rates is threatening debt sustainability, warning that “fiscal policy is losing.” Ability to fight the next recession.” The chances of correcting this trend are slim. “High levels of economic inequality, as well as political polarization and the rise of populism across the political spectrum, make reducing public spending extremely difficult. This leaves interest rate increases as the only measure to balance the budget, with the resulting negative consequences for potential growth,” says Irigoyen.
BMW vehicle factory in Munich, Germany.Leonhard Simon (Getty Images)
Given the crises of recent years – British historian Adam Tooze speaks of a polycrisis – the fact that China appears to have reached its point of maturity as an economy has not acquired the importance it deserves and growth will fall below 5%. “The lack of new fiscal stimulus in China suggests that the loss of growth momentum will accelerate, especially as the correction in the construction and real estate sectors does not appear to be over yet,” noted ING’s Carsten Brzeski in its annual outlook report. The deflationary spiral that the world's second-largest economy has been in since the second quarter reflects this weakness: inflation fell 0.5% in November, following a 0.2% fall in prices in October. A trend that UBS economists call China’s “new normal.” “In the longer term, a shrinking workforce, the structural limits to trade-driven growth and a fragile geopolitical balance mean that the era of annual growth of over 6% in China is behind us,” emphasize the bank's experts. Swiss.
Digitalization in the form of an artificial intelligence boom could play a role here and many analysts are including it in their scenarios this year. Economists at Capital Economics defended in a recent seminar that “AI has the potential to lead to large increases in productivity,” but that this will not happen immediately. The infrastructure and processes must be built to adapt to new technologies. “Much of the GDP growth boost from AI will come in the 1930s,” they noted in that debate. Nielsen from Unicredit is skeptical. “Other major discoveries in history took more than a decade to have an impact on productivity. And before that, artificial intelligence can be a disruptive element of our societies unless authorities take measures to protect consumers, creators and for national security reasons.”
However, artificial intelligence, perhaps like no other threat, makes it clear that the assurances of the political and economic “consensus” forged in the 1990s in favor of the market and globalization policies have given way to an era of great uncertainty, to put it in words Neil Shearing, chief economist at Capital Economics. The best example is the fragmentation of the global economy resulting from the collapse of relations between China and the United States, which may worsen further in 2024 due to possible tensions related to the elections that Taiwan will hold on the 13th. January or the race for the US elections on November 5th.
These shifts in political alliances are changing the way countries trade and invest with each other. Chinese exports are moving away from the West, Mexico is gaining weight in US imports and Vietnam is experiencing an export boom as an alternative to trade with Beijing. These growing political divisions between the two blocs have important implications for the macroeconomic and investment prospects of both developed and emerging economies. According to Bank of America calculations, only a third of the global economy is connected to neither China nor the USA, mostly large emerging economies that are economically and financially dependent on both sides and want to keep their options open. However, it cannot be ruled out that if the situation between the two powers worsens, these countries will be forced to side with one of the two powers. That would undoubtedly be a major structural change and the end of yesterday's world.
The “miracle” behind the Spanish economy
The Spanish economy was one of those that surprised most positively in 2023. GDP growth was gradually revised upwards, from the 2.1% expected in the budget project to the 2.4% expected at the end of the year or the 2.5% expected by the IMF. In an environment where the activity of our main partners slowed down during the year, tourism and domestic demand replaced the foreign sector as the engine of growth, which in turn was supported by the sector, which continued to act as additional support to the activity,” notes Almudena Benedit of Julius Bear.
The rapid weakening of energy prices allowed consumption to improve, but this slowed over the year, according to analysis by Oriol Carreras of CaixaBank Research. He admits that the impact of the interest rate hikes will reach the Spanish economy late and will not be fully felt until 2024.
So how is good Spanish economic performance possible in an environment as unfavorable as the current one?
“This is explained by the migration boom that the Spanish economy has experienced in the last year and a half,” says Rafael Doménech, head of economic analysis at BBVA. In fact, data from the INE population statistics show an increase in the resident population in Spain by more than one million people (1,025,122) in the last two years, reaching a historic record of 48,446,594 inhabitants. “A population growth that was almost entirely due to the increase in the number of people born abroad,” notes the INE. “Under these circumstances, growth is more extensive – more people working and consuming – rather than intensive. This explains why the labor market, consumption, housing… are becoming more dynamic, but we are not able to reduce the difference in GDP per capita,” explains Doménech. INE statistics also show that around 257,000 homes are created every year, a rate higher than the construction of new houses, predicting that tensions in the real estate sector will continue in 2024. Population increases have a long-term spillover effect on GDP.
More information
Real-time data on credit card usage shows that private consumption remains strong in the last half of the year, “which is linked to the increase in household gross disposable income due to relatively good employment and salary developments,” explains José Ramón Díez, from CaixaBank Research. The impact of European funds on the economy will also be most clearly felt in 2024. They will contribute about four-tenths of GDP, says CaixaBank Research. “Although the lack of transparency about the execution of these funds makes it difficult to make realistic calculations. So far, it has not been observed that European funds have led to a turnaround in public or private investment indicators or an increase in potential growth,” adds Rafael Doménech.
“Political instability must be added to this scenario,” says Carlos del Campo from the investment firm Diaphanum. “The legal uncertainty that this context brings in the medium and long term does not help attract investment. Nor is the fact that the unemployment rate remains in the double digits. “Investors don't like that these imbalances appear in an economy that theoretically works, it makes them suspicious,” explains Del Campo. Doménech agrees with this analysis. “Spain should strive to reduce its public deficit by half a point of GDP per year in order to gain fiscal space in the event of unexpected events.” The policies taken out in these years are not free, they have to be paid for. But on top of the political challenge there is also the economic challenge, because no one wants to make adjustments, especially when so many parties are willing to do so.”
“Spain still has significant imbalances that could slow the economy in the long term,” adds Benedit. “The unemployment rate remains much higher than in the EU and the main reason for this is that GDP growth is heavily concentrated in the tourism sector and construction, two sectors that increasingly require more hours of work but have limited productivity,” says the leader of portfolio management at Julius Baer for Iberia. “European funds should be aimed at promoting high added value economic activities,” he concludes.
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