2024 MAY BE A YEAR OF TRANSITION
This year may hold surprises as the world adjusts to an era where money is not cheap
INVESTORS appear convinced that major Western central banks are close to a much awaited pivot, from raising interest rates to cutting them. Markets rallied as a result, but 2024 could hold surprises as the world adjusts to an economic order where money is not cheap.
Global stocks rallied and top government bond yields fell in recent weeks, despite central bankers cautioning against pivot bets. In the United States, investors are effectively positioned for the Federal Reserve (Fed) guiding the economy to a perfect landing, bringing down inflation without triggering a recession.
The market’s conviction comes after the US economy surprised people with its resilience. That was cushioned in part by consumers’ pandemic savings and America’s attractiveness as a safe port for investments. They could be right — a well-known economist and former Fed official earlier this year argued the Fed had managed soft landings more often than was generally believed.
But many investors and executives think the probability is low. The pandemic-era savings are depleting and storm clouds are gathering, especially with what’s shaping to be contentious US elections.
Investors are betting that the Fed could cut rates by as much as 1.5 per cent by year end, but that would leave policy rates at close to 4.0 per cent, higher than where it has been for most of the past two decades. At that level, monetary policy will be a drag on growth, as it will be above the “neutral rate” at which the economy neither expands nor contracts.
Add to that a host of other risks to the outlook in 2024 — two wars, heightened geopolitical tensions that have put globalisation in reverse, and polls in several countries that could change the world order.
Interest rates underpin everything, from economic growth to the price of financial assets and how much it costs to borrow to buy a car or a house.
Higher rates make riskier assets, such as technology stocks and cryptocurrencies less attractive, as investors can earn a decent return without having to take on much risk.
With money harder to come by, riskier bets can fail and bubbles burst, leading to events like the US regional banking crisis last
March. As businesses struggle, they retrench. People lose jobs and new ones get scarce.
While the Fed and other banks have been raising rates for well over a year, the world is yet to complete the transition from the time when money was free to a period when it no longer is. The year 2024 is likely to be one when the effects of that transition manifest more clearly.
That means companies — and in some cases, entire countries — will have to restructure their debt liabilities, as they can no longer afford to pay interest. Some of that is already visible in emerging market debt negotiations and rising bankruptcies of companies.