India has been growing faster than just about any other major economy.
The global economy was tested in 2023 as it rarely has been before: inflation and the most aggressive monetary tightening campaign in decades, wars in Europe and the Middle East, a festering real estate crisis in China and the deepening rivalry between Washington and Beijing, which is forcing companies to rethink supply chains and security.
Despite these pain points, the post-pandemic global recovery managed to roll on. In the US consumers defied expectations and kept spending, prompting many economists to ditch their downside scenarios and forecast a rare soft landing. In China the booming electric-vehicle industry-along with a healthy dose of fiscal stimulus-helped leaders stick close to their growth target. And the world economy’s great new hope, India, took up some of the slack.
The International Monetary Fund forecasts global growth of 2.9% in 2024, a whisker below last year. With two wars raging and some 40 national elections on the calendar, political developments will shape the year, especially as Donald Trump makes a go at winning back the presidency. But crucial economic stress points could upend the benign outlook.
Will the American Consumer Capitulate?
After a blockbuster 2023, the US economy is expected to come back to earth in the coming 12 months. Whether that’s a recession or a soft landing will depend in good part on how the job market holds up. So far it’s shrugged off the Federal Reserve’s barrage of interest-rate increases, but this year could see an inflection point even though policymakers have signaled they’re done hiking. An uptick in unemployment would hit consumer spending, which in the US accounts for almost two-thirds of economic output. The Fed’s latest projections see the jobless rate climbing to 4.1% by the end of the year. Unemployment claims, published weekly, are a leading indicator of labor market softness and therefore merit watching.
Can Beijing Keep a Lid on the Housing Crisis?
The world’s second-biggest economy is in the midst of a multiyear slowdown, triggered in part by President Xi Jinping’s crackdown on real estate speculation. Developers are saddled with vast portfolios of “rotten tails”-apartments that were bought but never built. Nomura Securities Co. estimates that some 20 million units were presold for which construction has been delayed or hasn’t started. Those waiting for their new apartments are becoming increasingly impatient, turning the issue into a potential threat to social stability. Top officials have pledged to prevent a cascade of debt defaults by developers-a disaster that would engulf the banking sector and potentially doom China to a Japan-like lost decade of anemic growth. This may be the year that the slow drip of government measures gives way to a full-blown bailout.
European Laggard
Germany was the worst performer among major economies in 2023. High energy prices and tight monetary policy, coupled with weaker global demand for its exports, caused a slight contraction in gross domestic product for the year. There’s no shortage of problems going into 2024, including the ongoing war in Ukraine, an auto industry facing intense competition from Chinese-made EVs and tighter controls on government spending. The country’s world-beating manufacturing sector must contend with a costly and politically fraught transition to alternate forms of energy after losing access to cheap gas piped in from Russia, as well as a reshuffling of supply chains in response to a US-led effort to contain China. For a read on whether the malaise is easing or deepening, watch the Ifo Institute’s index of business expectations.
Japan’s Risky Exit From Negative Rates
The country’s decades-long experiment with unorthodox monetary policies is nearing its final chapter. The yawning gap between yields of Japanese and US government bonds in November helped drive the yen to its lowest level since the early 1990s, pushing up the cost of imported fuel and food and eating into purchasing power. With inflation hovering above the Bank of Japan’s 2% target for more than a year and a half, Governor Kazuo Ueda is widely expected to abandon the world’s last remaining negative interest rate as he inches away from the yield curve control framework he inherited from his predecessor.
He’ll have to tread carefully. For a generation, pension funds, insurers, banks and even mom and pop investors have parked their money in assets overseas to earn some interest, making Japan the world’s top creditor nation. If Japanese government bonds start to offer better returns, trillions of yen could rush back home, causing immense disruption to global financial markets. For Ueda, moving too quickly risks snuffing out the long-sought return of sustainable price rises. Too slow, and the markets may be emboldened to test the BOJ’s resolve to maintain yield levels-risking an even sharper dive for the yen.
Can India Live Up to Its Promise?
As China settles into a slower growth track, economists are looking to India to eventually take over as the new global growth engine. It’s a lot to live up to, and with Prime Minister Narendra Modi facing an election sometime in April or May, politics will add to the challenge. Goldman Sachs Group Inc. economists expect increased government spending to be the main growth driver going into the vote, with private-sector investment taking over in the second half of the year. Yet while India has been growing faster than just about any other major economy, the unemployment rate climbed above 10% in October, the highest in two years, according to the Centre for Monitoring Indian Economy. What’s more, the labor participation rate for women is stuck below 60%. Economists at HSBC Holdings Plc say that even if economic growth can accelerate to 7.5% per year over the next decade, only about 45 million of the 70 million jobs needed to match India’s growing population will be created, leaving 25 million people behind.
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