Inflation, the risk of recession, China, and geopolitical risks are the “big worries” for investors heading into 2024, according to AMP chief economist Shane Oliver.
While evaluating that 2023 has turned out “far better than feared”, Dr Oliver warned in a recent note that the worry list remains long as the new year approaches.
The first of the big worries highlighted by Dr Oliver is inflation, which he pointed out is still too high in most major economies and may force global central banks to turn hawkish again if it proves to be sticky and holds about their targets.
Second, Dr Oliver suggested that the risk of recession remains high, reflecting the lagged impact of interest rate hikes handed down to date.
“It’s hard to see how the biggest rate hiking cycle won’t have a major impact and the risks are already evident in tighter lending standards in the US, falling lending in Europe, and stalling consumer spending in Australia,” he said.
“Unlike a year ago, many are no longer worried about a recession which is negative from a contrarian perspective.”
For the third of the big worries, Dr Oliver pointed to the high risks around China’s economy and property sector, with growth in the country now having “well and truly lost its lustre”.
Finally, the AMP chief economist noted that geopolitical risk is still high, particularly as half of the world’s population is set to head to the polls in 2024, including the US, the European Union, India, Russia, and South Africa.
“The US government could have a shutdown starting 19 January and could have another divisive Biden versus Trump presidential election, with a Trump victory running the risk of weakening US democracy and US alliances and another trade war,” Dr Oliver said.
“The result of Taiwan’s 13 January election could see an easing or an escalation of tensions with China depending who wins; the war in Ukraine is continuing; and there is a high risk that the Israel-Hamas war could spread, e.g. to Iran, threatening oil supplies.”
However, Dr Oliver also identified a number of reasons to be optimistic about the year ahead, including ongoing progress in the battle against inflation.
“Inflation has eased sharply to around 3 per cent in major industrial countries and around 5 per cent in Australia and is likely to continue to fall,” he stated.
“Supply chain pressures have reversed; demand is cooling; and labour markets are easing with sharp falls in job vacancies. This includes in Australia which lagged US inflation on the way up and is just doing so again on the way down with our inflation indicator pointing to a further sharp fall.”
Another reason for optimism, Dr Oliver said, is that AMP has forecast that central banks in the US, Canada, and Europe will begin cutting rates by mid next year.
“While there is still a high risk of one more hike in Australia in February, falling inflation should head this off so our base case is that the RBA has peaked ahead of rate cuts in the September quarter, taking the cash rate down to 3.6 per cent by year end,” he said.
Dr Oliver also predicted that, if a recession were to occur in 2024, signs currently suggest it will likely be mild. While acknowledging that a lot of geopolitical risks continue to loom, he said these may also not turn out as bad as expected.
“The US has a strong incentive to avoid an escalation in the Israel-Hamas war; the stalemate in Ukraine could turn into a frozen conflict – not good for Ukraine but no problem for investment markets; and elections won’t necessarily go in an adverse direction for markets,” Dr Oliver explained.
In Dr Oliver’s view, easing inflation pressures, rate cuts from global central banks, and prospects for stronger growth in 2025 should result in “okay” returns during 2024.
“However, with growth still slowing, shares historically tending to fall during the initial phase of rate cuts, a very high risk of recession and investors and share market valuations no longer positioned for recession, it’s likely to be a rougher and more constrained ride than in 2023,” he added.
AMP has forecast that global shares will return 7 per cent in 2024, down from 18.5 per cent in the first 11 months of 2023. The firm expects that Australian shares will outperform in 2024 with a 9 per cent return, up from 5.1 per cent in the first 11 months of this year.
