Last year was the most widely anticipated recession in history because tight monetary policy, slower government spending and higher oil prices normally spell doom. Yet total economic output (GDP) in both America and Australia kept growing in real (after inflation) terms. So, what can we expect in 2024? Will economists get it right this year or miss the mark again? Here is the outlook for leading economies based on what most forecasters are saying.
Let’s look back before we consider how professional economists view 2024.
2020 experienced a short recession following the onset of the Covid-19 pandemic.
During 2021, economies strongly recovered as vaccinations enabled social restrictions to ease and governments spent billions to stimulate demand aided by central bank money creation
In 2022, central banks started the most aggressive interest rate rise in decades to fight runaway price inflation which peaked at 9.1% in the USA and 8.4% in Australia. This arose from excessive demand outstripping scare goods and services from pandemic induced shortfalls of labour, materials, and imports.
2023 saw cash rates rise further to 5.5% in the USA and 4.35% in Australia. Long term government bond yields hit 5.0% in both countries. By the September quarter the American economy was still defying gravity, but Australia’s economy was slowing. Indeed, Australia was already in a “per capita recession” (two quarters of falling economic output per person).
Last year was the most widely anticipated recession in history because tight monetary policy, slower government spending and higher oil prices normally spell doom. Yet total economic output (GDP) in both America and Australia kept growing in real (after inflation) terms.
The accepted explanation is that excess savings built up during pandemic lockdowns and restrictions enabled consumers to keep spending. These savings are now exhausted in America but still high in Australia, though largely concentrated with retirees.
So, what can we expect in 2024? Will economists get it right this year or miss the mark again? Here is the outlook for leading economies based on what most forecasters are saying.
The current consensus is for a Goldilocks outcome for America. Its inflation looks beaten so its central bank will start cutting its maximum cash rate in May from 5.5% now to under 4.0% by December 2024. The 10-year Treasury bond yield has already fallen from 5.0% three months ago to 4.0% now. Unemployment will pick up slightly in 2024 but America will not have a technical recession (two quarters of negative GDP growth).
The prospects for Europe, UK and Japan are bleaker, though not disastrous. They are likely to have a mild recession and may cut rates faster and more aggressively than the USA as their inflation plummets, and their unemployment spikes.
In Australia, the general view is that the first half of 2024 will see a further contraction in Australian living standards as real wages continue to fall, the RBA’s cash rate stays high to beat inflation (which is proving stickier than in other advanced economies) and tax bracket creep keeps reducing take home pay.
However, consumer spending should improve in the second half of the year as $18 billion of stage 3 tax cuts take effect from 1st July. That should see real GDP recover quickly. By then the RBA will be under pressure to join other central banks in cutting its cash rate to under 4.0%, helped by inflation quickly falling in response to a recessed economy in the first half.
As for China, our biggest trading partner, general opinion is that it needs to undertake bolder recovery measures to avoid slumping into a deflationary trap. For moral hazard reasons, China’s national government is reluctant to rescue overindebted property developers and local governments which are on the verge of insolvency.
With dwelling prices down, Chinese consumers are on strike and industry overcapacity is forcing producers to dump goods overseas. Online mass retailers such as Temu.com are selling wares below cost. Both local and foreign investment is flat. Recent fiscal and monetary measures are proving too weak to restore public confidence. As a result, the first half of 2024 could see a rise in social tensions prompting President Xi’s administration to hit the economic accelerator at the National People’s Congress in March.
The rosiest scenario is for America where the stock market is priced to perfection. But many things could go wrong. For instance, current loose financial conditions could precipitate a new round of inflation and higher interest rates. Or the lagged effects of past monetary tightening could cause jobs and profits to collapse requiring new government spending funded by Federal Reserve bond buying (i.e. money creation).
Wars in Europe and the Middle East and America’s stand-off with China could also cause market ructions. Finally, the prospect of Donald Trump becoming America’s “dictator, only on day one” in November fills many analysts with dread. But that is for 2025 to worry about.
Percy Allan AM was Chair, Evidence Based Policy Research Project (2018-2022). He is also a Visiting Professor at the Institute for Public Policy and Governance, University of Technology Sydney. (Former Secretary, NSW Treasury and Chair, NSW T-Corp 1985-1994 and Chair, NSW Premier’s Council on the Cost & Quality of Government, 1999-2007)
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