Paul Diggle

Hello and welcome to Macro Bytes the economics and politics podcast from abrdn. My name is Paul Diggle, Chief Economist at abrdn, and for the final episode of Macro Bytes for 2023, also our 100th episode in total, we're doing something slightly different. I've asked each of our economists here at Aberdeen, what their crucial question or theme or market debate looking ahead to 2024 is, and we want to provide you with a quick answer to all those as well. The past year has been another fascinating one in global macro markets. So let's hear what 2024 might have in store.

James McCann

Hello, everybody. My name is James McCann. I'm Deputy Chief Economist at abrdn, and one of the key issues that I'm looking at going into 2024 is the same that I would have been looking at this time last year. It is will the US economy go into recession - or are we headed for the soft landing that the Fed is aiming for? And thinking back over the last 12 months and what that has taught us is that the US economy is much, much better with higher interest rates than we would have anticipated. Over the first three quarters of the year, the US has delivered annualised growth just a bit above 3%, which would be really good in even normal times. And it's done so well managing to half the annual inflation rate from around 6.4% coming into this year, to just over 3% at present. So we've had a really benign combination of robust growth and easing inflation pressures. I think the key to that has been a number of supply-side developments. And in particular, a recovery from some of those pandemic supply era shocks. The labour market participation rate has increased. Population growth has rebounded. Global supply chains have recovered. Productivity has been increasing. And really that's unlocked this period of stronger growth and weaker price pressures for the US. The key question for me going forward is can those dynamics continue to hold? And I think there's no doubt that they have widened the path towards a soft landing, we have to be cognizant of that. But we do think there are more challenging periods ahead coming in 2024. When we look at consumers, which have really helped underpin that strong growth, we notice that their savings that they've been using heavily to finance spending, and they built up significantly during the pandemic, they are starting to look much narrower, much thinner. We don't think there's much firepower there to support activity. We also think that rising interest rates are providing an increasing burden on household balance sheets. And that's something we're concerned about from a corporate sector perspective, too. We think corporates increasingly having to refinance their debt onto higher interest rates, that's a drag on their margins. And we think that'll hold back some of their hiring, and investments intentions, as well. So when we look at 2024, and indeed, I think there's already signs of this, we do think growth will absolutely slow. The key question is that will that slow into a tipping point and push us into recession? On balance, we think probably - over the second half of next year. That's a that's a close call. But we do think some of those cyclical turning points will start to gather some momentum and a combination of weaker hiring, weaker investment and weaker spending will see the US probably enter a mild recession over the second half of next year.

Luke Bartholomew

My name is Luke Bartholomew, Senior Economist at abrdn, and one of the key questions I'll be thinking about for 2024 is the likely path of interest rates. Now we think across much of the developed world,with the notable exception of Japan, that interest rates have already peakedAnd so the main debates for 2024 will be about when the cuts start, and how low interest rates eventually get when they do start to fall. Indeed, those debates have very much started in earnest in the last few weeks of 2023, with markets increasingly speculating about interest rates being cut earlier next year than had previously been anticipated. I think many policymakers are unlikely to be particularly comfortable with this speculation as the prospect of lower rates in the future leads to easier financial conditions today, and so may make the fight against inflation right now more difficult. As such, I think central bank rhetoric is likely to continue to emphasise keeping rates elevated for an extended period of time. I think that's the message we should be expecting to hear from central banks for the time being. And in the US, we agree that the Federal Reserve is unlikely to deliver the kind of Q1 earlier precautionary cuts that many in the market are talking about. Instead, we think the first cut is only likely to occur in June next year once there is very clear evidence that underlying inflation is back at target consistent rates, and the economy has weakened significantly. However, were the Fed to deliver such precautionary earlier cuts, this is a plausible path to a soft landing. It may very well be the way in which a soft landing  occurs - with the Fed taking its foot off the brake before it fully tips the economy into recession. Similarly, in the UK, we think the Bank of England will not be cutting rates until at least the middle of next year. While the UK no longer looks like such an international outlier on inflation, wage growth is still strong, and the Bank of England will not want to give the impression it is easing policy before the job on inflation is fully done. By contrast, in the Eurozone, we think ongoing economic weakness and the sharp fall in inflation will see the European Central Bank cutting rates by early Q2 next year. In many ways, the European Central Bank appears to have made an over-tightening policy error and so that easing would be a way to partly undo that earlier mistake. In any case, once interest rates do start to fall, we expect rates to eventually fall to a lower level than is currently priced by markets consistent with our view that low equilibrium rates are likely to predominate in the future.

Robert Gilhooly

Hi, this is Bob Gilhooly, senior emerging markets economist and one cornerstone in the global economy that I'll be monitoring is China's growth outlook and the risk that it slides into something akin to Japan's lost decade, when the wheels really fell off for Japan's economy. Given some struggles in China's property sector, currently negative headline inflation, an ageing and declining population, slowing growth, and tensions with the US, is perhaps no surprise that the spectre of ‘Japanification’ and balance sheet recession risks have come to the fore. A conclusive bursting of China's property bubble and deflation becoming ingrained would be very damaging for China and could even knock out a key engine of global growth. Property comprises both a large share of gross domestic product and also household wealth. And moreover, there are deep links to local government finances, and the financial sector as a whole, which could amplify any slowdown, or in the extreme a full-blown crisis. Deflation could set the stage for a balance sheet recession in which the state struggles to offset private sector retrenchment. And since the authorities continue to prioritise de-risking, and a supply side focus policy response, low inflation or even continued deflation could risk raising real rates that would be hard to counter. That said, I very much view this as more of a plausible downside rather than being the most likely outcome. Japan was an advanced economy not an emerging market when its bubble burst in the 1980s. So China still has a lot of room for catch-up growth. Even if we estimate the potential growth has slowed notably, since the pandemic struck and further negative impacts on growth and geopolitical tensions will be front and centre as we head towards the US election. And other key difference is that state-owned banks remain as a very powerful policy lever to shore up lending and bad loans can be carved out by asset management companies as has been done in the past. This suggests I think the authorities at least have learned some lessons from Japan's experience and will be wary or certainly keen to avoid it. So overall, for me, Japanification is one to watch, but I think this risk is going to stay in the shadows. 

Felix Feather

I'm Felix Feather. I'm an economic analyst here at abrdn and a key question for me in 2024 is how long the current Eurozone recession will last, and how deep it will be. So Eurozone activity data has been soft for some time now and we saw GDP contract by 0.1% over Q3. Despite the fact this is a quite small contraction, key indicators remain weak and our assessment is that the Eurozone is currently experiencing something we might describe as recession-like conditions. And on a technical definition, we can probably expect a second consecutive quarter of negative growth to be confirmed when Q4 accounts are released early next year. So the Eurozone starts off 2024 in recession under our base case forecasts and our assessment is that the balance of factors favours continued weakness through 2024. One headwind is likely to be the policy environment. Consider the monetary component. The ECB have moved interest rates into very restrictive territory and the economy is already feeling the effects of this. We do expect a cutting cycle to come in 2024 and we do expect it to be quite a large cutting cycle. But with the depot rate starting at 4%, which we think is quite restrictive, it is likely to be some time before monetary policy is outright accommodative. Indeed, we did not expect this to occur under our base case forecast in 2024. Likewise, no fiscal support in any meaningful way is forthcoming  either. We also might consider the global backdrop, which could well prove quite challenging. But let me point you to one factor that will help limit the downturn, and that's positive real wage growth. So disinflation in the Eurozone has been quite sharp and now, in the headline inflation rates it's at 2.4%, following a rapid period of disinflation. But wages have been much slower to normalize and the result of that is you get a boost to consumer spending power, which will help support consumers during a period which might otherwise be quite challenging, with a policy quite restrictive. Overall, I expect quite a short, shallow downturn with a very muted recovery in 2024.

Sree Kochugovindan

Hello, my name is three Sree Kochugovindan and for me, the big macro question for Japan next year, is whether or not Japan will be entering a new inflation regime, and what will be the outlook for monetary policy as a result of that. Now, over the past 18 months or so there has been intense market speculation and that's really been reflected in bond and currency markets. And this provides a very challenging backdrop for the Bank of Japan (or the BOJ) a challenging backdrop for them to navigate. So the BOJ over the past year or so has made very gradual adjustments around yield curve control settings. Now, this has provided somewhat of a revealed preference from the BOJ that despite some of the macro backdrop that the BOJ are happy to start pulling back from the current policy settings, given what's happening with the currency sell off and broader market distortions. However, the exit path is set to be extremely cautious and further communication challenges are likely to lie ahead. So if we start by looking at the macro backdrop and inflation, the pandemic and energy-related drivers of Japan's inflation overshoot, and now steadily unwinding. But the true test of whether Japan has transitioned to a new inflation or higher inflation regime will really lie around inflation expectations and wage growth. Now, wage negotiations have been stronger this year. And Japan's largest labour union has already announced that it is targeting increases of more than 5% in the 2024 set of wage negotiations. Now, given the current elevated rate of inflation and decent corporate earnings growth, there is a chance that next year we should see much stronger wage negotiations actually being agreed. Meanwhile, inflation expectations have picked up but they may be weakly entrenched, given the historical experience. The disinflation mindset within Japan can make it difficult for firms to pass through price increases. So we think another decent Shunto wage round could be the catalyst for the BOJ to drop yield curve control settings and raise the policy rate from - 0.1% to 0% around the middle of the year. Now, what to watch for next year, there's a policy review meeting in May. We need to keep an eye on inflation trends, wage trends, and realised wages not just wage negotiations. So by the middle of next year, we should have a clearer steer over the sustainability of wage and price growth. That said, we don't envisage further rate hikes over our forecast horizon. So Japan may only be replacing negative rates with zero rates. 

Lizzy Galbraith

Hi, I'm Lizzy Galbraith, political economist with arbdn and the key issue I'm going to be looking at in 2024 is the outcome of the US presidential election on the fifth of November. Now, Donald Trump is currently winning the Republican primary by a really commanding margin. He's extremely likely to be the Republican nominee for President and he will face Joe Biden in the general election. Crucially, at the moment, Donald Trump is winning in head-to-head polling against Joe Biden, and he is winning many of the states that he would need to flip in order to secure victory. So the key swing states that we're looking at for that election are the three Midwest states of Pennsylvania, Michigan, and Wisconsin, and the states in the south, Arizona, Nevada, and Georgia. Biden won all six of these very crucial states in 2020, but by margins of less than 3% in each and polling indicates that Trump is currently beating Biden in four or five of those states, depending on which poll you look at. If that trend continues, then Trump is likely to win the election. Now this election is likely to be incredibly volatile. Both candidates are facing really significant headwinds against their re-election campaigns. Biden is struggling to convince voters that his handling of the economy is sufficient enough for a second term, and his age is also proving to be a concern to voters. Meanwhile, Trump is facing multiple serious legal cases and will remain on trial for the duration of the election campaign. Should Trump win the election in 2024, we are likely to see a resumption of policies that we saw during his first term. So a return to a more tariff focused trade policy that becomes fairly transactional, as the US seeks to gain trade concessions from its trade partners. We would also see the US potentially try and curtail spending on the Inflation Reduction Act, a major piece of legislation passed by Joe Biden, as well as focus on border security and the tax cuts that Trump passed in his first term are up for renewal in 2025. So we would see a likely extension of the tax cuts he introduced in his first term. Fiscal policy is also going to be something that we would be watching under a Trump administration. He tends to differ from the rest of his party on this. He is not particularly interested in lowering the deficits, but the rest of his party is so the debate between Republicans on that issue is going to be something that we will be keeping a very close eye on in the event of a Trump presidency.

Michael Langham

So hi, I'm Michael Langham an emerging markets analyst on the team. And a key macro theme I'll be watching for 2024 is whether the world continues to globalise or whether that goes into reverse. Emerging markets were big beneficiaries of the rising globalisation gaining from the increase in trade and capital flows. So one of the key questions we saw rise during the Trump presidency, and then, you know, one of the key topics during the pandemic, was the issue of globalisation and the fragility of global supply chains and security issues around that. So with the US presidential election next year, again, that's going to be a big topic. We'd expect with a Biden presidency, more of the same, this continuation of the ‘friend shoring’ theme that we've been seeing, the issue of national security in supply chains and trade with like-minded countries, you know, a  thinking Mexico or even India could benefit from that, and restricting access to high-end technologies for China. So we'd expect more of the same under a Biden presidency. Trump, on the other hand, you would expect a rise in tariffs, and that to create more uncertainty in global trade. So potentially, that issue of whether globalisation is reversing could become more apparent. We've been doing a bit of work on tracking the globalisation trend, using trade and capital flows, and we have found that globalisation has stagnated. But one of the challenges with tracking global trade shifts is the cyclical dynamics. So that's a thing to consider. But as an EM economist, I've got to think of winners, potential winners in this, and the notable one would be Mexico  I think I’d point to, given its place in USMCA and just the data is pointing to a pickup in manufacturing on the ground. So while it's still quite early to say, on the topic of globalisation, and whether it's reversed, I think that's something that's going to be particularly on our minds in 2024.

Paul Diggle

And you're back with me, Paul Diggle chief economist at abrdn for the final question of the year ahead. Are economies on the cusp of an AI-driven productivity boom? Developed market economies have been stuck in a period of low productivity growth since at least the global financial crisis over 15-years ago, and the drivers of this seem to include exhausting the low-hanging fruits of past innovations, fewer spillovers from globalization, deficient aggregate demand, perhaps just simple statistical 
mismeasurement, and all this is despite the remarkable technological changes of the past few decades, including smartphones, e-commerce, cloud computing, and now of course the artificial intelligence revolution. And moreover, equity markets, at least in the US have been powered forward by a small number of perceived AI winners, the so called ‘magnificent seven’ tech stocks. So where on earth is the AI productivity boost? And is it coming in 2024? Well, there is historical precedent for this sort of situation, a precedent that I think should leave us relatively optimistic. The ‘Solow Paradox’ referred to the absence of a productivity boost from the computer revolution in the 1970s and 80s, which then showed up in the 1990s, and the eventual boost was worth perhaps an additional 1% of productivity growth per annum over nearly two decades. And while financial markets were at times prone to ICT and internet accesses, the eventual transformative effect of the computer revolution on firms and economies was inarguable. And this delayed but eventually transformative impact is a hallmark of a so called ‘general purpose technology’. And I think AI could share many of those same features. Things like pervasiveness, widespread applications, the ability to continuously improve, to drive forward further innovation in a positive feedback loop. So I'm therefore cautiously optimistic about the eventual productivity boost that could come from AI but I think it will take time to show up in aggregate macro statistics. Enablers like chip manufacturers, scalers such as tech platforms, innovative early adopters can certainly reap some of those rewards earlier, but it may be later in this decade when whole economy productivity growth rises more notably, thanks to AI. Meanwhile, I suspect that worries about job disruption fails to take account of the productivity enhancement and the job creation channels of technological change. There is after all, limited historical evidence of long-term technological unemployment, but there are definitely winners and losers along the way. And that requires things like social safety nets, education, training, to some smooth sectoral readjustments, and of course appropriate regulation of AI itself. 

So that's it from Macro bytes by abrdn for 2023. I hope you've enjoyed the podcast over the past year and indeed over the past 100 episodes. We've certainly enjoyed making it. Have a rest, have a break and we'll speak to you again in the new year. Goodbye and good luck out there.


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