In the hopeful year of the soft landing and anticipated interest-rate cuts worldwide, many believe the global economy is on a positive path in 2024. However, after enduring years of war, pandemic, and bank collapses, it is crucial to acknowledge the potential challenges ahead.
Despite the optimistic outlook, various uncertainties may pose risks to the global economy.
Middle East Conflict Raises Global Concerns Over Oil and Stability
In the past three months, Israel’s conflict in Gaza has brought the region dangerously close to a broader war. This situation could potentially disrupt oil supplies, dent global growth, and fuel inflation. While markets currently express confidence that such an energy supply disruption won’t occur, the mounting risk suggests otherwise.
Escalating tensions in the Red Sea, following US and UK airstrikes in Yemen, add to the complexities, with daily clashes on the Israel-Lebanon border and the assassination of a Hamas leader in Beirut, posing the risk of drawing Hezbollah and Iran deeper into the conflict. Iraq and Syria also emerge as potential flashpoints.
Despite our belief that a direct war between Iran and Israel is improbable, the potential consequences are severe. In the unlikely event of such a scenario, about one-fifth of the world’s crude supply and vital trade routes could be in jeopardy. This could lead to a surge in crude prices, reaching $150 per barrel, resulting in a 1% reduction in global GDP and a 1.2% increase in global inflation.
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Such a situation would spell trouble for both the Federal Reserve and investors who are counting on a swift and forceful shift toward rate cuts.
Early Fed Pivot in 2024 Risks Inflation and Supply Shock
Drawing parallels with the 1970s, if the Federal Reserve pivots too early in 2024, it could lead to a repeat scenario. A supply shock, such as an escalation in the Middle East affecting oil prices and shipping lanes, or looser financial conditions, marked by a significant drop in the five-year Treasury yield, poses potential risks similar to the inflation challenges faced in the past.
If we incorporate a one-percentage-point drop in yields into Bloomberg Economics’ US economic model, it slightly pushes inflation for the upcoming year up by half a percentage point, nearing 3% rather than the 2% target.
In such a scenario, the Federal Reserve might need to halt its pivot, potentially disappointing market expectations for a more accommodative policy stance.
Europe Faces Contraction Risks
While the US faces the risk of an overheated economy, Europe is experiencing the opposite scenario. The European Central Bank and the Bank of England are concluding their most robust tightening cycles in decades, which, according to Bloomberg Economics’ model, could lead to a substantial economic downturn.
The model suggests a potential 2.5% hit to Euro-area GDP and a 4.7% impact for the UK. However, current data indicate a slowdown in both economies without a contraction thus far.
Germany, Europe’s stalled economic powerhouse, is at risk of experiencing another year of contraction in 2024 with even slight adverse developments.
Asian Economic Downturn Adds Up to the Pessimism
As the world’s second-largest economy China, enters 2024, its growth trajectory is already on a downward trend. The anticipated post-pandemic recovery has lost momentum, and continuous stimulus efforts have been ineffective in addressing the significant impact of a declining property sector.
In Japan, 2024 marks the year when the newly managed central bank plans to abandon yield curve control, a policy that maintained long-term interest rates at exceptionally low levels.
Originally aimed at revitalizing Japan’s contracting economy, the global repercussions were felt through the carry trade. Investors leveraged the yen’s zero-cost guarantee to purchase US Treasuries yielding 4% or higher-yielding emerging-market bonds. The depreciation of the yen further amplified the profits from this trade.
Setbacks Faced in the Russia-Ukraine Conflict
Following the setback of Ukraine’s counteroffensive, Western supporters caution that the country faces the imminent threat of defeat. This risk would be particularly pronounced if the flow of US military aid were to diminish, providing Russia with a crucial advantage on the battlefield.
Ukraine’s potential defeat poses challenges for Washington in persuading other nations of its strength and reliability as an ally.
Taiwan’s Election Connects to Major Impact
In Taiwan, Vice President Lai Ching-te secured a narrow victory in the recent presidential vote, securing an unprecedented third term for the ruling Democratic Progressive Party (DPP). Mainland China’s initial response was restrained, avoiding significant military exercises or economic measures.
The global economy faces significant risks, given Taiwan’s crucial position in semiconductor production. While the likelihood of a war in the Taiwan Strait is low, if it were to happen, Bloomberg Economics projects substantial consequences.
The potential disruptions, including constrained chip supplies, blocked trade routes, and economic sanctions, could result in a staggering 10% loss in global GDP—surpassing the impact of major shocks like the global financial crisis and the pandemic on the global economy.
Game-Changing Election in US is Also Coming
The upcoming November 2024 US presidential election, a potential rematch between Joe Biden and Donald Trump, has significant global implications.
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Trump, currently leading in early polls in swing states, could bring about substantial policy reversals in 2025, influencing market dynamics beforehand. His commitment to imposing a 10% tariff on all imports raises concerns, with potential retaliatory actions from trade partners that might result in a 0.4% reduction in US GDP.
Energy and Oil Market Optimism
In 2024, the best news could be if potential risks remain unrealized. Energy markets may see positive growth surprises, particularly if a broader Middle East war is avoided. Despite strong demand and OPEC+ supply cuts in 2023, oil prices fell. If the Gaza conflict stays contained, 2024 conditions might lead to further declines.
Slower demand growth and potential OPEC+ struggles could trigger a price war, benefiting the global economy; a 10% drop in oil prices might boost world GDP by nearly 0.1 percentage point (Bloomberg Economics estimate).
Emerging Favorable Trends
Favorable trends for emerging markets in 2024 include falling interest rates and companies shifting supply chains closer to home country. Countries benefiting from both trends include Mexico, Peru, and Poland.
These nations, positioned to cut rates (Peru and Poland already initiated), have favorable trade arrangements making them attractive for nearshoring.
Substantial Concerns for the Global Economy
In 2024, while some things could go right, there are substantial concerns for potential downsides. Bloomberg Economics’ base case projects global growth at just 2.7%, significantly below the pre-pandemic average of 3.4% and the lowest in a non-crisis year since 2001. With an economy already showing signs of instability, it becomes more susceptible to external shocks.