The global economy is starting its final descent toward a soft landing, with a steady decline in inflation. Kavan Choksi Professional Investor mentions that even so the pace of expansion remains slow, and there might be turbulence ahead. Global activity was resilient in the second half of 2023, as supply and demand factors supported key economies. In terms of the demand side, stronger government and private spending sustained activity, even with the tight monetary conditions. On the supply side, one could witness mended supply chains and increased labor force participation, even with the renewed geopolitical uncertainties.
Kavan Choksi Professional Investorbriefly discusses the state of the global economy
Global growth is likely to steady at around 3.1% in 2024. A slower growth is expected in the United States, where tightened monetary policy is still working through the economy. Even China is expected to experience slow growth, as its weak investment and consumption continue to weigh on activity. In the Euro area, on the other hand, activity is expected to rebound a bit subsequent to a challenging 2023, when tight monetary policy and high energy prices restricted demand. Several other economies continue to show a good level of resilience as well, with growth accelerating in India, Brazil and several major economies of Southeast Asia. New disruptions in commodity and supply chains might arise, driven by renewed geopolitical tensions, especially in the Middle East. The redirection of cargoes around Africa due to attacks in the Red Sea has notably increased shipping costs between Asia and Europe. Although disruptions have been limited thus far, the situation remains uncertain.
Inflation will continue to ease in 2024. With the exclusion of Argentina, global headline inflation is expected to decrease to 4.9 % in 2024. Core inflation, which excludes the impact of volatile food and energy prices, is also showing a downward trend. In advanced economies, both headline and core inflation are projected to average around 2.6 % in 2024, aligning closely with the inflation targets set by central banks.
As Kavan Choksi Professional Investor mentions that the deceleration of inflation might occur more swiftly than expected, particularly if there is a further relaxation in labor market tightness and a continued decline in short-term inflation expectations, enabling central banks to implement easing measures sooner. The fiscal consolidation plans outlined by governments for 2024-25 might encounter delays, given the mounting demands for augmented public spending in the largest global election year on record. While this could stimulate economic activity, it also carries the potential to escalate inflation and heighten the likelihood of future disruptions. One must remember that core inflation could exhibit greater persistence, with the cost of goods remaining historically elevated in comparison to services. This adjustment may result in more enduring inflation in both services and overall prices. Wage developments, particularly in the euro area, where negotiated wages are still increasing, could contribute to sustained price pressures.
Looking into the future, substantial advancements in Artificial Intelligence have the potential to stimulate investment and drive rapid productivity growth, although this may pose considerable challenges for the workforce. Market optimism regarding early rate cuts appears excessive. If investors reassess their perspective, long-term interest rates could rise, placing renewed pressure on governments to swiftly implement fiscal consolidation measures that may have an impact on economic growth.