Will 2024 ‘Trump’ 2023?

When setting the scene for 2024, we do so based on our view that whilst anything is possible, our forward scenario models (of how things might play out from here) look to fall within 3 central possibilities. Which scenario plays out will depend on how the cast perform. The starring roles again this year will be played by inflation and interest rates. Add to that wage inflation and the rate of economic growth, and we will begin to see which one of our scenarios will likely steal the show. The shape of the story as it unfolds, will dictate how we change our portfolios to develop the next scene.

What we are clear about is that inflation is trending downwards. Yes, there was a blip in UK inflation data this week, (always expect bumps in the road), though we are confident that prices will in the main, continue to rise at a slower pace than in recent years. Assuming pricing pressure slows, we will be looking to gauge the effects that the sharp increases to interest rates will have on the global economy.  Whilst the increases have stopped, (at least for the near term), the effects from the rises can take up to 18 months to filter through into the economy. This morning’s dreadful UK sales data for December being a very current example that the rate hikes are starting to bite.

This time last year, recessions throughout the Western world were expected to arrive by late summer 2023. That didn’t materialise. However, that doesn’t mean the economy is out of the woods, despite being resilient thus far. The problem with resilient is that it doesn’t necessarily mean strong, and it can also mean persistent, or benign. In addition, resilience could lead into improvement or even crash and burn. The final scene in the resilience story is yet to be cast so we must be alive to all options.

However, crash and burn, (otherwise known as a hard landing or deep recession), is not something that looks likely in the US in the next six months. Europe and the UK in contrast, are slightly closer to the edge. Equally, economic resurgence doesn’t look that likely in any geography just yet, as the data is slowing, not improving. At present then, slowing economic growth without a recession will likely mean that interest rates are not cut as quickly as markets anticipated at the close of 2023. Central banks are likely to hold off reducing rates until into the summer, keeping them where they are now until inflation settles down towards something starting with a 2. If economies can slow inflation whilst avoiding a recession, then with inflation entrenched at lower levels, then interest rates can start to be cut to stimulate a resilient, albeit benign, economy. This remains our base case. Of course, we are alive to variations on this theme.

If we are wrong, and central banks cut interest rates in early spring, before inflation is subdued further, they run the risk of stoking the inflationary fire too soon, tempting the consumer with cheaper borrowing and igniting economic growth. Inflation could soon rise again, and interest rates would have to take a u turn. Surely this scenario is too farfetched to gain traction. It would smack of naivety on one level , or political engineering on another, after all there are no elections round the corner are there?