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Macro Monthly: Reasons for optimism

8 Dec 2023

Key takeaways

  • Growth has proved resilient, and inflation has dropped…

  • …with markets looking for easing to come earlier

  • The downside risks for growth may be building, but there are some possible reasons for upside surprises, too

All things considered, the global economy has had a decent 2023. Growth has largely outperformed gloomy expectations at the beginning of the year, inflation has come down more quickly than many feared and labour markets are yet to show any significant cracks.

Subdued consumer confidence

However, it’s not been the case for everyone, and pessimism remains rife. News flow continues to highlight recession risks, consumer confidence remains subdued (see Charts 2 and 3), and some households and businesses are clearly struggling.

Consumer sentiment remains subdued in developed markets

Why is this? It’s a story of the haves and have nots – some households have faced a brutal cost of living squeeze in recent years, with higher food, energy and rental costs taking up a greater share of take-home pay. And despite inflation coming down towards central bank targets, these prices are not dropping – they’re just not rising as quickly. That makes people feel worse off, especially when the cost increases have been most evident in the essentials: food, fuel, and housing. For others, with elevated savings, stronger income growth or higher levels of wealth, the squeeze has been much smaller.

Source: Macrobond
Source: Macrobond

The global economy faces a number of challenges…

Cautious outlook

Where does that leave us going into 2024? The global economy still faces many challenges. With sentiment low, any shocks – particularly to the labour market – could see households tighten belts more quickly. The full impact of higher rates may hit more households and fiscal support could be withdrawn, meaning a broadening out of those who feel like the resilient economy has left them behind. The last leg down in inflation could be held up by negative supply shocks, including on food and energy prices.

…pushing interest rate expectations lower

Some of these risks are being processed in the recent move lower in interest rates markets. Rate cuts in the first half of 2024 are being priced into many economies given these downside recession risks and some more promising data on inflation. We disagree, and think that stickiness in inflation will keep central banks on hold for longer.

Potential upside

A trade recovery and China demand are upside risks

This view also reflects some comfort on the growth side. Real wage growth may allow more people to feel better off, especially if food bills drop in the near term, supporting consumer spending. A recovery in global trade in H2 2024 seems likely, even if it’s largely a rebuild of inventories rather than stronger goods demand, and there are some potential upsides from a better recovery in mainland China (see Charts 3 and 4). A year ago, the world was full of doom and gloom – going into 2024, the data look a bit more balanced.

Source: Macrobond
Source: Macrobond

Volatility in markets and economic data may continue

That doesn’t mean that uncertainty is any lower. The wide range of outcomes in 2024 on the growth and inflation sides gives plenty of room for volatility in markets and the economic data. After three very busy years on the macro front, 2024 may be just as eventful.

Source: Bloomberg, HSBC ⬆ Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus
Source: Refinitiv Eikon, HSBC

Related Insights

  • Major central banks may be done with tightening, but they are likely to keep rates at an…[15 Nov]

  • Most central banks hope they can finally take a breather…[16 Oct]

  • Global demand is slowing as tighter policy takes effect…[15 Sep]

  • Central banks hope they are near the end of their interest rate hiking cycles...[14 Jul]

Disclosure appendix

Additional disclosures

1. This report is dated as at 06 December 2023.

2. All market data included in this report are dated as at close 05 December 2023, unless a different date and/or a specific time of day is indicated in the report.

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