The most notable feature of the world economy in 2023 was surely the large pack of dogs that didn’t bark. Despite 5 full percentage points of Federal Reserve interest rate hikes over 24 months, the US economy didn’t slip into recession. While a soft landing—where inflation comes down and growth decelerates only slightly—is by no means a done deal, the glide path towards it has remained on track. The Bank of England has made less progress on inflation, and UK growth is tepid, but to all appearances (data revisions pending) the British economy similarly skirted recession, if barely.
Meanwhile, emerging markets (excluding China), which historically have been especially susceptible to destabilisation by US interest rate hikes, proved striking resilient, growing by more than 3 per cent. That resilience is all the more remarkable given the growth slowdown in China itself, which for many emerging countries is their major export market. Yet despite the collapse of the Chinese property bubble, which bequeathed an awful financial mess, economic growth in China has continued to run close to the government’s newly modest 5 per cent target.
In the US, UK and elsewhere, while political polarisation has continued to course through society, even high levels of political noise failed to throw economies off track. And though geopolitics have returned with a vengeance over the past two years, neither wars in Ukraine and the Middle East, nor US-China tensions, nor the financial sanctions and export controls associated with these events, have been capable of interrupting global growth.
The odds are low that we will be so lucky again in 2024. When tightening monetary policy, central banks had to thread the needle: they had to tighten enough to damp down inflation but not so much as to interrupt growth. It is not clear that they will be equally adept needle threaders when it comes time to loosen policy. If they loosen too quickly, inflation may heat up again, forcing another round of painful interest rate hikes. But if they do so too slowly, the dreaded recession may finally materialise.
2023 saw good luck as well as good policies. Life was made easier for central bankers by energy and commodity prices settling at moderate levels. Semiconductor prices fell, conveniently for businesses in sectors dependent on the technology. Will the same be true in 2024? Countries like Saudi Arabia are yet to respond to events in the Middle East by raising oil prices. But history, from the 1973 Opec embargo to the 1979 Iran oil workers’ strike, cautions us not to take this for granted amid geopolitical strife. Nor is there any guarantee that Taiwan, the principal source of leading-edge semiconductors, will remain safe from Chinese aggression.
The central bankers’ job was also made easier by the tailwinds from the earlier passage of fiscal stimulus programmes: in the United States, for example, the American Rescue Plan, the Inflation Reduction Act and the CHIPS Act. It’s easier to tighten monetary policy when fiscal policy is expansionary. But those tailwinds are now over. Scope for fiscal stimulus is played out, in the US and more generally. This is so for economic reasons, given high debt levels, but also political reasons, as politicians—rightly or wrongly—grow critical of that earlier spending for having underdelivered.
Moreover, such new government spending as occurs will be on armaments, not infrastructure, given geopolitical circumstances. Restocking the military stores may be necessary, but making and exporting weapons adds less to potential GDP than constructing high-speed rail.
Chinese authorities may also find it more difficult to keep growth at target in 2024. Officially, public debt ratios are lower than in the west. But the central government also has massive contingent, or hidden, liabilities. It will come under pressure to bail out local and regional governments, which will come under pressure to bail out their local government financing vehicles, which will come under pressure to bail out connected property companies. The arrows all point in the same direction, namely towards Beijing. The central government will have limited ability to finance additional spending unless it is prepared to force-feed debt to the banks. And we know where that leads (nowhere good).
The question of what will happen in 2024 is naturally framed in terms of “up-and-down economics”, encouraging us to predict whether there will be a soft landing, a hard landing or no landing. But whatever the landing, it will be transitory. Even if an economy falls into recession, it eventually will resume growing—on average, history suggests, after 10 to 18 months. Much more important for economic welfare in the medium term is the trend—or potential—rate of growth. A small change in that trend can have an enormous impact on living standards, owing to what we all know as the miracle of compound interest.
On the measure of trend growth, outcomes have disappointed since roughly the time of the 2008 Global Financial Crisis. 2024 may give us an early reading on whether actions taken recently by governments and market actors ameliorate or exacerbate this problem. The CHIPS Act in the US and analogous industrial policies in other countries provide lavish subsidies for research and development and the construction of new manufacturing facilities. Will these tax breaks and subsidies stimulate productivity growth, or merely augment profits for incumbents while diverting activity to less suitable locations than the market would have decided for itself?
Likewise, the Chinese government under President Xi is intervening more heavily in the allocation of resources while clamping down on private enterprise. Will a more politically centralised and less market-oriented Chinese economy be more productive, or less?
Globally, big outstanding questions loom over the rise of artificial intelligence. Does AI in fact augur a significant acceleration in productivity growth? Will there be a productivity “J Curve”, where efficiency first falls, as established ways of business are disrupted, before firms adjust and it begins to rise? What is the length of the J? Since not everyone will benefit from AI, will governments adequately compensate the losers so as to avoid a Luddite-like reaction?
These issues, and not whether there is a hard or soft landing, will ultimately determine the economic prospects of our grandchildren. It pays to keep our eyes on the issues that matter, even in as turbulent a year as 2024.
