The OECD predicts a slowdown in global output as high interest rates and fiscal hangovers persist, but three key factors will shape the direction of the global economy in 2024.
The global economy has shown remarkable resilience in 2023, defying initial expectations of a downturn. However, policymakers are still navigating challenges as they strive for a “soft landing” and sustainable economic growth. The Organisation for Economic Co-operation and Development (OECD) forecasts a slowdown in global output in 2024 due to high interest rates and the aftermath of the COVID-19 pandemic. Nevertheless, the interplay between US interest rates, oil prices, and the Chinese economy will play a crucial role in shaping the global economic landscape in the coming year.
US Federal Funds Rate: A Determining Factor
The US Federal Reserve’s efforts to combat inflation have led to a gradual increase in the benchmark interest rate from near-zero to 5.25-5.5 percent. Surprisingly, the US economy has weathered these rate hikes, with unemployment reaching multi-decade lows and inflation edging down. This has inspired confidence among analysts that the Fed’s strategy could lead to a “soft landing.” However, rising unemployment and reduced pandemic-era savings pose risks to economic stability. The timing of rate reductions will largely depend on the balance between falling inflation and weakening growth. While some predict rate cuts in 2024, others believe they are more likely to occur in the second half of the year.
Brent Crude: Impact on Global Growth
Tensions in the Middle East, particularly the recent conflict between Israel and Palestine, have raised concerns about the impact on oil prices. The World Bank warned that a wider conflict could lead to a significant reduction in global oil supply, potentially causing prices to spike. However, oil markets have thus far remained resilient, with Brent crude trading at relatively low levels. This can be attributed to factors such as increased global energy supplies, improved fuel efficiency, and the availability of renewable energy sources. Even if prices were to rise due to supply disruptions, the overall impact on global growth is expected to be minimal.
Chinese Credit Growth: A Key Indicator
China’s economic performance has a significant impact on the global economy, given its size and interconnectedness. After a period of strict COVID-19 controls, China’s economy was expected to rebound strongly. However, a slowdown in the property sector has constrained growth. The government’s efforts to curb debt financing for property developers have led to a slump in the real estate market. This, in turn, has affected consumer sentiment and local government finances. The reliance on government financing and the structure of credit in China’s economy raise concerns about its long-term sustainability. While credit growth is expected to slow, its impact on GDP and global growth is likely to be limited.
Conclusion:
As we look ahead to 2024, the global economy faces a complex and uncertain landscape. While the OECD predicts a slowdown in global output, the interplay between US interest rates, oil prices, and the Chinese economy will shape the direction of the global economy. The US Federal Reserve’s monetary policy decisions, the stability of oil prices, and the sustainability of China’s credit growth are key factors to monitor. However, economic forecasting remains an imperfect science, and unexpected events can disrupt even the most carefully crafted predictions. As such, the global economy must remain adaptable and resilient in the face of evolving challenges.
