Investment Strategies

Soft Landing Expected In 2024, No Recession Likely – Northern Trust

Amanda Cheesley Deputy Editor March 19, 2024

Soft Landing Expected In 2024, No Recession Likely – Northern Trust

The world economy has defied predictions of a post-pandemic recession, despite high interest rates, war in Ukraine and in the Middle East, and bouts of financial instability.

A soft landing rather than a rather bumpier one is what Northern Trust expects for 2024, while inflation should start to ease by the end of this year, the Chicago-headquartered bank reckons.

At a recent media briefing, Carl Tannenbaum, the group's chief economist, highlighted how activity beat expectations last year, with the US and the UK outperforming most significantly. However, China fell short of expectations.

“Household consumption and government spending were the main engines of growth. The consensus call for recession in 2023 proved overly pessimistic,” Tannenbaum said.

The outlook for 2024 rests on a few key questions: When will interest rates begin to ease? Are national debts sustainable? Will China have a financial crisis? And how will global politics affect commerce?

Tannenbaum expects a very soft landing, but no recession in 2024. He also predicts a move away from peak tightening. He anticipates inflation approaching targeted levels by the end of 2024.

In the US, he has the first interest rate cut placed in June. Tannenbaum said a soft landing is at hand in the US. Strong labor and asset markets have sustained household spending. The structure of debt in the economy has limited the impact of higher interest rates.

He thinks labor markets remain exceptionally strong. Fiscal policy has been very stimulative, with spend out on Federal programs still ahead. But this year’s election outcomes are highly uncertain, and the campaign does not place the US in the best possible light, he continued.

Tannenbaum thinks that the economic landing is likely to be harder in Europe than in the US: “Both the UK and the euro area are essentially at an economic standstill. There is significant variation between countries, making central policy-setting difficult.”

Inflation, largely driven by wage increases, has proven more persistent, he added. As a result, monetary policy has remained very restrictive. Sluggish economic conditions may lead the European Central Bank (ECB) being the first major central bank to ease interest rates.

As opposed to America, fiscal policy has been a headwind for growth in Europe. Elections in the UK and parliamentary elections in the European Union are likely to create changes of tone, Tannenbaum continued. War on the Eastern frontier and the potential change of tone from Washington are high on the list of concerns for the region. 

Tannenbaum highlighted how the Labour party is favored to win the UK general election. Tax cuts will be less likely. He expects interest rate cuts by the Bank of England in the second half of the year. A closer relationship with the EU may also lie ahead, he said.

The vestiges of Brexit continue to limit the UK economy, with a desire to reduce friction on cross-border flow of agricultural, food, veterinary, and medical products. But he believes that re-entry to the EU is a very remote possibility.

Tannenbaum highlighted how China is facing a challenging interval. “Pandemic policy was difficult for households and China hasn’t experienced the same re-opening surge that other countries did,” he said. Consumers are dealing with investment losses and elevated uncertainty. Re-shoring and friend-shoring have also limited export growth. Chinese manufacturers are over producing, prompting consideration of additional trade restrictions by its counterparties, he added.

“The property market remains under duress, straining the finances of households, regional governments and banks,” Tannenbaum said. Markets are struggling and capital outflows are accelerating. Deflation risk prompts comparisons with Japan in the 1990s. China’s demographic problems [i.e. falling birth rates, an aging population] are also among the worst in the world, and heavy debt burdens limit policy options to stimulate activity. He believes that Hong Kong shares many of the headwinds that the mainland does. A Taiwan invasion is meanwhile unlikely, but tensions will remain high, he continued.

Tannenbaum stressed how equity markets in China and Hong Kong have underperformed, and investor sentiment has turned negative. Capital outflows were very heavy last year, from both foreign and domestic investors. Questions have arisen about whether China is “investible,” with substantial interest in emerging market products without Chinese exposure.

Tannenbaum thinks that China’s options for stimulating its economy could be limited. A drive to deleverage diminishes the benefit of interest rate cuts. Very high levels of debt across society also constrains fiscal stimulus. “The currency has weakened, despite the sale of US Treasury securities; further declines could attract claims of manipulation. Financial worries also suggest caution in relaxing bank standards,” Tannenbaum said.

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