2023 ended with a temporary victory for the US economy when: successfully curbing inflation and achieving a temporary soft-landing. Although there are still many difficulties in the financial system, commercial real estate market, the stagnation of the post-Covid Chinese economy, and the impact of geopolitical events, 2023 ended quite satisfactorily. Readers can read more about the summary of 10 notable economic-financial events in 2023 in last week's Macro Economy article by Viet Hustler.
As promised to readers, in the final 2023 Macro Economy article, Viet Hustler provides readers with a summary of the 2024 economic outlook through reports from major banks. Accompanied by that are some views and predictions from Viet Hustler.
Disclaimer: Some of the remarks below are the personal opinions of the author group, which may not be accurate, and especially not investment advice! Therefore, Viet Hustler is not responsible for any investment decisions of readers based on this article.
1. Core inflation will soon decrease - especially housing inflation in the US
Goldman Sachs forecasts core inflation will soon decrease in 2024 (down to about 3% for the US) and return to the 2% target in 2025-2026.
For the US, in 2024, housing cost inflation will drop sharply, positively impacting core inflation and service inflation.
Allianz, BNP Paribas, and Barclay also have equivalent forecasts.
2. The process of interest rate cuts by Central Banks
According to Goldman Sachs, even if the unemployment rate rises by an additional +1%, then Central Banks in major economies will only start cutting interest rates when inflation actually falls below 3% (with the highest probability of 70%).
Goldman Sachs believes developed countries will hesitate more in cutting interest rates compared to other emerging economies.
Viet Hustler completely agrees with this because businesses in emerging economies are more sensitive to interest rates due to heavy reliance on borrowed capital: for example, Brazil and Poland have already started cutting interest rates.
Therefore, Goldman Sachs makes predictions far different from market expectations:
Only 20% chance the Fed will cut interest rates from January 2024,
(only if the US economy recesses).
20% chance the Fed starts cutting interest rates from July 2024 - to hedge risks.
Up to 35% chance the Fed only starts cutting rates at the end of 2024.
Meanwhile, Allianz believes the Fed will cut interest rates about 5 times in 2024 gradually (-25bps each time)…
… corresponding to a -100bps cut and base rate at the end of 2024 at 4.5%.
Meanwhile, Allianz believes the ECB will cut interest rates with much lower frequency and intensity even though inflation in the Eurozone has dropped sharply.
From an economics perspective, Viet Hustler believes that for the Fed to cut -1% interest rates,
Inflation (PCE) must decrease -1%/1.5 ~ -0.66%.
Or the unemployment rate must rise to +1%.
Or a combination of declining inflation and rising unemployment…
3. Probability of economic recession in the US and Europe
While Bloomberg predicts around 55% chance the US will enter a recession in the next 12 months, Goldman Sachs believes this probability is only a minority at 15%.
Overall, Goldman Sachs has a quite positive view on the growth outlook of most major economies (especially the US).
GS growth forecasts for 2024 and 2025 are both higher than Bloomberg's (consensus) forecasts.
Barclay has a more modest view, predicting US economic growth in 2024 to be quite low at 1% (with unemployment rate rising to 4.2%).
However, Fidelity predicts the US will enter a cyclical recession in 2024 (GDP down -0.75%)..
Fidelity predicts this base case scenario will occur with 60% probability (in addition to a few other scenarios with lower probabilities):
This Fidelity view is based on observations of the accumulation of excess savings and the labor market:
Fidelity believes the strength of the US economy in 2023 was mainly driven by consumer strength.
Previous recession cycles: savings reserves bottom out at the start of the recession cycle and gradually recover (or flatten) after the recession passes;
But for the 2020 recession due to the Covid shock: excess savings continued to increase right after.
However, excess savings are gradually declining to their lowest point at the current time - gradually returning to the levels corresponding to previous recessions.
Meanwhile, Fidelity points out that labor market tightness is easing. Business demand for labor will soon decrease…
Fidelity also believes that currently, economic activity in the Eurozone is showing many signs of deteriorating faster than the US economy.
Compared to Goldman Sachs and Barclays, Viet Hustler's view leans more towards Fidelity for the same reason regarding the decline in consumers' spending capacity in 2024 (as per previous Macroeconomic articles).
4. Prolonged Commercial Real Estate (CRE) Crisis
According to Allianz, the value of office buildings in most major cities has plummeted severely over the past year - especially in the US.
A series of large office buildings in the US have been sold at prices lower than their previous purchase prices.
For example, last week, Aon Center (the third largest building in Los Angeles) was sold at 45% lower than the 2014 purchase price.
Fitch predicts that the 'vacancy' trend for office buildings will continue to rise and rents will continue to fall until 2027.
Viet Hustler had previously warned that US commercial banks may suffer heavy impacts when the CRE crisis erupts.
Related articles: How will the commercial real estate crisis … unfold?
However, not only banks, Fitch has pointed out that US life insurance companies (with quite diverse investment portfolios) are also at risk due to:
30% of their investments in multi-family housing and
20% invested in office buildings…
5. Bank of Japan (BOJ) may make major changes to interest rate policy in 2024
Goldman Sachs predicts Japan will maintain high inflation (>2%) in 2024, especially service inflation will continuously escalate over the next 2-3 years.
However, BoJ not only focuses on CPI but also closely monitors the results of labor unions' 'shunto' wage negotiation in March…
Wage growth in Japan has stagnated for the previous 3 decades.
If this scenario actually occurs (sustained high inflation + high wage growth), BoJ is highly likely to abandon negative short-term interest rates and Yield Curve Control (YCC) policy next year.
BoJ may start raising interest rates right after the March 2024 'shunto'.
This could lead to JPY appreciation. However, Yen Carry Trade will only unwind gradually.
Additionally, during the period of negative interest rates and deflation, many Japanese company stocks have always been valued below fundamental value (below book value = company assets/shares).
Therefore, if BoJ raises interest rates in the coming period amid sustained high inflation, a revival scenario for the Tokyo stock market is entirely possible.
6. Chinese economy continues to stagnate: market awaits government economic stimulus policies
Goldman Sachs predicts China's GDP growth will slow in 2024:
Mainly due to lack of recovery upon post-Covid economic reopening as expected (although financial market constraints on growth will be more positive than last year).
The market is closely watching Chinese government economic stimulus policies next year to revive demand and consumer confidence:
Regarding interest rate policy: Allianz believes deep rate cuts are what PBOC needs as borrowing rates in China remain high (~3% for short-term loans, ~4% for 5-year loans).
However, Viet Hustler believes interest rate policy may not have much impact…
due to China's credit utilization efficiency (% additional GDP per +1% credit growth) declining below the average threshold.
Regarding fiscal policy: stimulating consumption via income subsidies for residents is necessary, but the key to declining consumer sentiment in China lies in the real estate (RE) market.
According to Lazard, RE accounts for 60-70% of typical Chinese household asset value - RE value greatly influences their consumer sentiment.
China's RE market will still not recover in 2024, marking the 4th consecutive year of stagnation in China's RE market.
Goldman Sachs has a quite negative view on China's long-term economic growth due to this reason.
Not to mention, fiscal policy will exacerbate China's public debt problem.
Currently, the Chinese government is funding fiscal policy through non-financial 'debt' leverage (including local government LGFV loans).
7. Predictions on fiscal deficits in major economies and impact on growth
Allianz forecasts fiscal deficits will improve slightly overall in 2024:
However, Europe's fiscal deficits remain much worse than pre-Covid levels.
Meanwhile, the pace of US fiscal deficit improvement remains very slow…
(not to mention the US government's cumulative debt is growing larger).
Goldman Sachs believes fiscal policy and financial market tensions will also have a mild negative impact on US economic growth, but not significant.
For Europe and UK: fiscal spending deficits + financial pressures could drag growth down by -0.8% to -1.3% from potential levels.
8. Oil prices likely to rise high
UBS believes crude oil prices will rebound in 2024 due to:
demand potentially rising,
geopolitical tensions, e.g., Red Sea conflicts and Western sanctions on Russia…
Viet Hustler will not comment further on oil prices due to too many variables affecting this market.
9. Impact of the 2024 election year on the US economy
The 2024 US election process and basic predictions from JP Morgan
2024 US election process:
From 01/15, the US will hold caucuses and primaries to select presidential candidates in the states (as of now, the two contenders are still Biden and Trump).
On 03/12, the final nominations will be made.
On 11/05, US voters will go to the polls to elect the 47th president, along with electing 435 representatives in the House, 34 out of 100 senators, and 11 state governors.
According to JP Morgan: Since 1912, the incumbent (currently Biden) has won about 3/4 of the time…
… unless an economic recession occurs within two years before the election causing the incumbent to lose support.
In 2020, a recession occurred, but due to the external Covid factor, if the US falls into recession in early 2024, will Biden still maintain the upper hand?
Campaign policies proposed by candidates can have a significant impact on the economy and society
Although US GDP has always been on an upward trend regardless of which party is in power … throughout 46 US presidential terms…
… the impact of policies from the ruling party on the economy and people's lives is still very important, for example:
Obama's 2010 Patient Protection and Affordable Care Act shook up the public health sector.
Biden's 2021 Infrastructure Investment and Jobs Act (IIJA), and 2022 CHIPS and Science Act (CHIPS) have led to a boom in the semiconductor and artificial intelligence (AI) industries.
The North American Free Trade Agreement (NAFTA), proposed by Reagan in his 1980 campaign, promoted globalization, economic growth, and lower prices for American consumers.
…
However, major macroeconomic trends will still have the main impact on the market more than who will be the US president for the next 4 years
Macroeconomic storm waves are still more important than the ideologies of presidential candidates - when talking about market trends. For example:
In 2020, the economy being locked down due to Covid and then reopening was more important to the market than whether Trump or Biden won.
The 2008 global financial crisis shocked the market, making it irrelevant whether Barack Obama or John McCain won.
CONCLUSION
As of now, the 3 clearest points Viet Hustler can see are:
The US commercial real estate crisis has begun.
The Fed will cut interest rates in 2024 (however, the cutting process still depends on the direction of inflation and the labor market).
Core inflation will fall below 3% if there is no other supply shock.
The remaining variables are likely to develop in the direction analyzed above, however, any other unexpected variables can occur. Therefore, events that readers can look forward to or closely follow in 2024 include:
Banks with deep exposure to the commercial real estate market.
Labor and inflation data: impact on the interest rate cutting process…
US: Campaign policies of US presidential candidates.
Japan: the “shunto” wage negotiations in March, BOJ meetings, and “repatriation” capital flows from Japanese investors.
China: Economic stimulus policies from the government and the People's Bank of China.
Finally, Viet Hustler sends to readers the financial investment return outlook through Vanguard's predictions for the upcoming 2024.
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