Macro – uncertainties

What could go wrong, or right?

04 December 2023

While the base-case scenario is for global growth to chug along and for inflation to weaken, what might be the main risks to the scenario in 2024?

By Julien Lafargue, London UK, Chief Market Strategist

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

  • With the cost of borrowing increasing, it would not be surprising if something, somewhere breaks
  • Inflation is retreating but another shock is possible, in particular with geopolitical tensions running high
  • ‘Unknown unknown’ risks can only be addressed through appropriate diversification and a strong commitment to one’s investment goals
  • Do not underestimate the ability of societies, companies and financial markets to innovate and adapt to changes in their environments.

The base case scenario is for the global economy to muddle through in 2024, with some regions only narrowly avoiding a recession. But an unprecedented interest rate hiking cycle, a tense geopolitical backdrop and the lagged effect of the COVID-19 pandemic make forecasting the next twelve months particularly challenging. This article explores what could go wrong compared with the baseline, but also what could go right.

Something breaks 

As highlighted by the banking stress of March 2023, which saw US bank runs and the demise of Credit Suisse, the rapid increase in interest rates around the developed world is unlikely to go unnoticed. So far, whether on the consumer or the corporate side, events have been encouraging. However, this may not last for much longer. 

Consumers are running out of excess savings, especially those in the lower income quartile. In fact, credit card delinquencies in the US have already started to pick up. Meanwhile, companies with upcoming refinancing needs might struggle to find the money they need to stay in business. As such, worsening credit quality is a major risk for 2024. 

Sovereign debt crisis redux

Business and consumer finances are not the only ones that could come under pressure in coming months. Governments are also being watched like hawks by financial markets after years of fiscal largesse. The global debt-to-GDP ratio currently stands at 99%, a sharp jump from the 91% recorded before the pandemic in 2020.  

With the cost of borrowing increasing, some countries could find it difficult, if not impossible, to roll down their debt. And this time around it’s not just the usual suspects, such as Greece or Italy, that are worth keeping an eye on. In fact, with an extremely polarised and divided government, the US might find itself in the eye of the storm.

Another inflationary shock 

It may be easy to blame central banks for getting inflation forecasts wrong in the last two years. The reality is that the Ukrainian war threw a spanner in the works of the “transitory” narrative. While this conflict was not the sole source of surging prices, its contribution has been real and reminds us that shocks can easily upend any forecast. 

With geopolitical tensions running high, another major conflict (Taiwan comes to mind) could erupt in 2024. Should it have global repercussions, all bets could be off. 

A curve ball

Most of the previously mentioned risks, as remote as they might be, can be anticipated by investors. The real danger comes in the form of a curve ball that nobody saw coming. Because it hasn’t been priced in, this surprise can be hugely disruptive. The COVID-19 pandemic, or the war in Ukraine, were two recent ‘unknown unknowns’ that weren’t on most investors’ radars even a week before they started.  

There is no reason to believe that 2024 won’t have its own shocks in store for us. Here are some “out of the box” hazards one may want to think about: a major US earthquake, an AI-generated securities sell-off, or worldwide cyber disruption. The only way to account for these risks is through appropriate diversification and a strong commitment to one’s investment goals. As we’ve learned from these two episodes of uncertainty and market stress, the recovery can be as unpredictable as the initial shock. 

It’s not all doom and gloom

While we’ve focused on negative shocks so far, positive surprises could pop up in 2024. Whether it’s in the form of a much resilient global economy, a faster-than-expected cooling of inflationary pressures, a geopolitical détente in the Middle East or another momentous technological leap, the coming year could be much stronger than expected.  

It’s also important not to underestimate the ability of societies, companies and financial markets to innovate and adapt to changes in their environments. This is why, despite all the risks discussed, staying invested in financial markets will likely be the most appropriate strategy for anyone who has a time horizon of longer than a few months.

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