Global Economic Growth Set to Slow in 2024, Banks’ Warning
Several leading banks are sounding the alarm that global economic growth is poised to decelerate even further in 2024; this outlook is attributed to a combination of factors, including high-interest rates, escalating energy prices, and a slowdown in the world’s two largest economies.
The banks also highlight the additional threats posed by geopolitical risks, particularly the ongoing conflicts in Ukraine and the Middle East, which could aggravate the already challenging global financial sector.
According to a Reuters poll forecast, global growth is anticipated to drop from 2.9% this year to 2.6% in the upcoming year. While economists generally believe that a full-scale recession can be avoided, there are concerns about the potential emergence of “mild recessions” in key European economies, as well as in the UK.
The World Economic Forum’s Chief Economists Outlook underlines these concerns, revealing that six out of ten respondents view global economic prospects as “anaemic,” predicting an overall weakening of conditions in the coming year.
Despite hopes for a “soft landing” in the United States, uncertainties surrounding the Federal Reserve’s decisions on interest rates add an element of unpredictability to the future; also, the prognosis for China’s growth is one of contraction, as companies seek more cost-effective manufacturing locations.
BofA Global Research Dubs 2024 “The Year of the Landing”
Contrary to some pessimistic forecasts, BofA Global Research labels 2024 as “The Year of the Landing.” In a reflection on the unexpected turns of 2023, the research notes the absence of anticipated recessions and rate cuts, coupled with rising equities that caught many investors off guard.
Looking ahead to 2024, BofA Global Research economists and strategists express the expectation of continued disinflation and predict rate cuts beginning midway through the year, initiated by both the Federal Reserve and the European Central Bank.
At the same time, acknowledging the potential for higher unemployment rates and weakened growth due to previous rate hikes, the forecast remains optimistic, calling for a “soft landing” instead of a recession.
Candace Browning, head of BofA Global Research, reflects on the surprises of 2023, stating, “We expect 2024 to be the year when central banks can successfully orchestrate a soft landing, though recognize that downside risks may outnumber the upside ones.”
What is Soft Landing?
In economics and finance, a “soft landing” refers to a situation in which an economy gradually slows down its rate of growth without entering into a recession.
It is characterized by a controlled deceleration of economic activity, typically following a period of expansion or rapid growth. A soft landing aims to avoid the negative consequences associated with a more abrupt and severe economic downturn.
During a soft landing, key economic indicators, such as GDP growth, employment levels, and inflation, slow down to a more sustainable and stable pace.
Central banks and policymakers often strive for a soft landing when they implement monetary or fiscal policies to cool down an overheating economy. The objective is to achieve a smooth transition from a period of rapid growth, which may be accompanied by inflationary pressures, to a more moderate and sustainable growth trajectory.
The concept of a soft landing is contrasted with a “hard landing,” which is a more abrupt and severe economic downturn, often leading to a recession.
Hard landings are typically associated with sharp contractions in economic output, rising unemployment, and financial instability.
Key Macroeconomic Calls for 2024
BofA Global Research outlines several key macroeconomic predictions for the year ahead –
1. Global Shift to Rate Cuts: Claudio Irigoyen, head of Global Economics, anticipates a global shift toward rate cuts in the second half of 2024, facilitated by a gradual decrease in inflation worldwide.
2. The 3Ps = the 3Bs: Chief Investment Strategist Michael Hartnett identifies the “3Bs” – Bonds, Bullion, and Breadth – as potential winners in 2024, emphasizing the risk of a hard landing for the economy.
3. S&P 500 Forecast: Savita Subramanian, Head of US Equity and Quantitative Strategy, remains bullish on equities, projecting the S&P 500 to reach an all-time high of 5000 by the end of 2024.
4. Commodities Outlook: Francisco Blanch, head of Commodities and Derivatives Research, expects Brent crude to average $90, with a positive impact on commodities as OPEC+ continues to cut supply.
5. Japan Inflation and Emerging Markets: Japan’s inflation is predicted to persist, and emerging markets are expected to benefit from rate cuts and a peaking US Dollar.
6. Credit Markets: Credit strategists emphasize seeking quality yield, with investment grade offering the best relative value. The preference for loans over high yield is noted.
7. US Economic Growth: The impact of fiscal investment programs on US economic growth is expected to dissipate, with consumption slowing down but not crashing. Headwinds in capex are acknowledged.
8. US 10-year Treasury Yield: The US Rates Strategist, Mark Cabana, maintains a less bullish stance on 10-year bond prices due to deteriorating fiscal conditions, a riskier duration/inflation outlook, and a challenging international investment position.
9. Policy Uncertainty: The Research team anticipates rising policy uncertainty globally, driven by increasing political polarization and elections in countries representing over 60% of global GDP. Fiscal consolidation difficulties are expected, impacting rates.
Indian And Indonesian Banks On A ‘High’
Navigating the crest of global interest rates and the specter of slower growth, investors are placing their bets on Indian and Indonesian banks as having the most robust loan and profitability profiles for the coming year in Asia.
Over the last 18 months, Asian central banks, mirroring the U.S. Federal Reserve’s policy to combat inflation, implemented smaller and slower interest rate hikes, resulting in enhanced interest income for the region’s banks without sacrificing loan growth.
Banking indexes in India, Indonesia, and Thailand have consistently outperformed broader benchmarks such as the MSCI Asia ex-Japan index and the S&P banks index since March 2022 when the Federal Reserve initiated rate increases.
Now, with a global rates cycle reaching its zenith and recession concerns on the horizon, investors are becoming more selective, honing in on banks that effectively managed funding costs while expanding their loan portfolios.
Frederic Neumann, Chief Asia Economist at HSBC, anticipates a potential mild rate-cutting cycle in the next year, which could stimulate loan growth, especially in India, where banks have shown double-digit loan growth in response to increased credit demand.
LSEG data indicates an estimated rise in loan growth from 4.5% this year to 10% next year, with Indian and Indonesian banks leading the way with 15% and 11% growth, respectively.
J.P. Morgan analysts note that Asian banks, excluding those in China, have been at the forefront of the global demand for aggregate loans, with interest margins already at pre-pandemic levels.
Xin-Yao Ng, Investment Manager of Asian Equities at abrdn, believes the era of easy gains from rising borrowing costs for banks is concluding, prompting a more selective approach. Ng favors banks in India and Indonesia due to their stronger economic growth and the ability to sustain margins.
According to LSEG data, profits at banks in India and Indonesia are projected to grow by 13% and 11%, respectively, in 2024, nearly double the 6% average rise across Asia-Pacific banks.
Despite the optimistic outlook, investors face the challenge of rich valuations for these banks, with some trading at high price-to-book ratios compared to the broader index for all-country Asian banks.
While the risk of elections in India and Indonesia may introduce volatility to these markets, mature financial sectors and low-interest rates in Singapore, Hong Kong, and South Korea result in reduced maneuverability for banks, leading to lower profit growth expectations.
In contrast, Chinese banks, still in the process of loosening monetary policy, face continued net interest margin pressure, as per analysts at Morgan Stanley, who maintain an underweight stance on the market.
The Last Bit, As the global financial stage witnesses a confluence of factors shaping the trajectory of Asian banks in 2024, the strategic choices made by investors highlight a nuanced understanding of the challenges and opportunities at hand.
The anticipation of a potential mild rate-cutting cycle and its implications on loan growth forms a pivotal theme, with India and Indonesia emerging as focal points for optimistic projections.
However, the richness of valuations and the impending elections in both countries introduce elements of caution. In contrast, more mature financial sectors in Singapore, Hong Kong, and South Korea face limited maneuverability, reflecting in subdued profit growth expectations.
In contrast, Global growth is anticipated to drop from 2.9% this year to 2.6% in the upcoming year. While economists generally believe that a full-scale recession can be avoided, there are concerns about the potential emergence of “mild recessions” in key European economies and the UK.