“It’s been a year which has demonstrated how hard it is to forecast economies,” said Karen Ward, chief market strategist EMEA for J.P. Morgan Asset Management, looking back on 2023. Ward had a conversation with Luxembourg for Finance CEO during a livestream organised by Luxembourg for Finance on 7 December 2023, which covered events this past year and expectations for 2024.
“We came into the beginning of the year with most forecasters expecting US recession. And it simply hasn’t happened,” she said. We’ve just seen one of the most dramatic synchronised rate hiking cycles in the last four decades, with the European Central Bank raising rates by 450 basis points since July 2022. Rate hikes usually lead to recession, but this hasn’t occurred.
A year of humility, a year of head-scratching
“So it’s created all of these interesting theories: is it just delayed? Does it mean we have problems still coming? Or is actually the health of our economies just fundamentally improved from what we experienced over the last decade? Is it that the private sector isn’t hurt by interest rates anymore? Are we just more resilient across the western world to higher interest rates, is that a possibility? Is it because fiscal policy is much more expansive today than it was five or six years ago?”
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“It’s been a year of humility for forecasting, a year of head-scratching,” said Ward. “And certainly, I think it’s really important understanding some of those questions and those theories that I was just highlighting when thinking about what happens next year and, in particular, whether all of that weakness that was expected is still yet to come.”
“Cautious” about 2024
Given these questions--and in particular the last point--are you optimistic for 2024, asked Mackel. Will economies still be resilient?
“I’m a little cautious, I would say,” replied Ward. “You often hear central bankers around the world say that monetary policy works with long and variable lags. Every cycle is different, and consumers change their behaviour and react to higher interest rates--and corporates also--at different times in each cycle.”
Part of the “resilience” is due to the fact that consumers had a lot of pent-up savings due to the covid-19 pandemic, said Ward. So this year, despite increased interest rates, consumers had savings “to run down.” This supported consumer spending, particularly in the United States, where the strength of consumer spending has been “surprising.”
But “I think the interest rate impact is delayed this cycle, rather than completely diminished,” noted Ward. Consumers are now running out of their savings, and they--as well as companies--are facing higher interest rates. We’re starting to see moderation in spending and “knuckling down,” which “does lead us to a weaker trajectory for next year. I certainly don’t think we’ve been through the worst.”
Highly focused on elections
Ward, therefore, is not totally optimistic, noted Mackel. What are the issues that she considers to be of most concern: interest rates, recession risks, geopolitics, the return of debt crises?
“The latter is actually one that I’m not terribly concerned about,” said Ward. “I do think the eurozone really thrives in periods of adversity. And in the pandemic, and Russia’s invasion of Ukraine, Europe has come together, and, I would say, really improved the institutional architecture of the region. And establishing the EU Recovery Fund [editor’s note: a financial instrument meant to repair economic and social damage caused by the covid-19 pandemic], in my view, was an enormous step forward in fixing what was the fundamental flaw of the eurozone project, which was a monetary union without a fiscal union.”
Having leaders that will be working together and colluding on providing solutions to those problems is absolutely essential
There are, she pointed out, quite a few political events on the agenda for 2024. “We’ve got elections in four of the five biggest population economies in the world next year. And it is really important that we see outcomes from those elections with leaders who are working together collectively with other leaders.”
“That is something I’ll be highly focused on,” said Ward. “We have some big structural problems in the world that we need to overcome--not least climate change--and therefore, having leaders that will be working together and colluding on providing solutions to those problems is absolutely essential.” Isolationist and protectionist policies will make achieving timely outcomes more difficult.
Possible “upswing” for Europe
In the US, Ward expects to see “more moderate growth next year.” Consumers have had their “last hurrah,” and “I think the consumer is going to weaken in the US, and you’ll have this degree of reconvergence. Whether that means the US actually goes into an outright recession isn’t entirely clear.”
“Here in Europe, I think we’ve had a great deal of our weakness already,” she argued. “The manufacturing sector has been in recession all year, consumer spending here has been much weaker than in the US, so I think we’ve already experienced a great deal of the slowdown that was expected this year.”
In fact, there are arguments to say that Europe could even have a little bit of an upswing into 2024
“I don’t expect things to materially weaken,” added Ward. “In fact, there are arguments to say that Europe could even have a little bit of an upswing into 2024, and that comes from a few sources.” Consumers have had a “tremendous” real wage squeeze, inflation has been high, energy costs have skyrocketed--but now those pressures are easing.
“Wage growth is still relatively elevated and now inflation is falling back, so real wages start to improve for the consumer.” Moreover, European consumers haven’t spent their pandemic savings--as opposed to US consumers, they’ve been accumulating more savings. “So if confidence returns to the consumer sector--because the labour market is still very strong--then we could actually see consumer spending pick up.”
Forecasts for China “area of humility”
Looking towards Asia, “China has been another area of humility that forecasters have had to experience this year,” said Ward. “China was expected to have this big post-pandemic bounceback this year, and it didn’t happen. I think the problems in the Chinese economy that stemmed from the property market have become more apparent.”
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Following periods of export-driven growth and investment growth, particularly in physical infrastructure and property, “Beijing is essentially, I would argue, struggling to work out what their new engine of growth is,” said Ward.
“I think we’ve already seen a very de-synchronised global cycle. And I think that will continue in 2024,” she noted. “There will be areas that were formerly quite strong--like the US--who are maybe moderating, but then also maybe some areas that are actually accelerating.”
Most interesting sectors are those not talked about
For Ward, the most interesting parts of the market are the ones people aren’t talking about. “Everybody’s talking about AI, everybody’s talking about technology, and that’s why their valuations are what they are.”
Sectors where there’s “more pessimism” merit attention instead. “I think there’s too much pessimism in European equities. If we look at every single sector, it trades at an above normal discount to the US. European equities always trade cheaper to the US. But we’re at sort of record discounts on many European sectors. And I’m not sure that’s justified, I think there’s too much pessimism about the European economy. And as some of that reconvergence happens, you can see a little bit more appetite for European stocks.”
The financial sector is another “appealing” part of the market, she noted. Negative interest rates are over and yield curves are sloping upwards--“it makes banks a much more compelling prospect that they’ve been for much of the last decade.”
Sustainable investing more important than ever
On the topic of sustainable finance, not only do we have the “climate objective,” we now also have an “energy security objective,” noted Ward. “Our need to totally transition how we source and how we use energy is greater than ever. We--and our industry--have to make sure that capital finds those solutions, finds those sources as quickly as possible.”
Data and transparency are absolutely critical
And to make sure that funding gets to the right projects, “data and transparency are absolutely critical.” Greenwashing is an “enemy” that causes people to lose trust, so more transparency around data and corporate disclosures will be crucial to ensure credibility.
Global coordination on financing the climate transition will also be key. “We here in Europe can’t do this on our own,” said Ward. “Making sure we’ve got partners working with us is going to be absolutely critical to not only reaching those final objectives, but for our own domestic economy.”
“It’s a monumental task ahead,” she concluded. “But I am optimistic, because we have no choice to reach this transition as fast as possible.”
Find the replay of the Luxembourg for Finance: Focus on 2024 livestream .