The recovery of purchasing power will be slow amid an environment of sticky inflation and high interest rates
Recent developments in the global economy, notably higher food and energy prices, threaten the recovery of consumer purchasing power following nearly three years of high inflation. Multinationals should expect price sensitivity to remain elevated throughout much of 2024. This will complicate pricing decisions, and executives will need to be creative in order to ensure continued top-line growth given expectations of underwhelming growth in demand volumes.
The picture remains uneven across sectoral and geographic lines: the service sector, notably tourism, will continue to enjoy relatively stronger growth, while rate-sensitive industries such as real estate, autos, and durable goods are likely to face a subdued 2024. Geographically, India, Mexico, and commodity-exporting markets will present strong growth opportunities, while Western Europe will underperform.
Geopolitical risks and policy action also complicate planning for next year. Companies may need to account for as much flexibility as possible when thinking about pending policy decisions and political and security risks that their businesses will need to adjust to over the coming months and into 2024.
Overview
- Since the publication of our Global Outlook report in August, the global economy has seen a slight deterioration in its 2024 growth picture.
- While a recession remains highly unlikely, the growth picture continues to be dampened by the lingering effects of elevated inflation and aggressive interest rate increases.
- Global growth is likely to stall in 2024 (2.8% YOY), compared with 2023 (2.9% YOY).
Our View
For multinationals that put together budget assumptions in late summer, some changes to the 2024 global outlook are worth keeping an eye on:
- Oil prices have risen by nearly 20% since July, off the back of aggressive and sustained production cuts by the world’s major exporters, notably Saudi Arabia and Russia. These cuts are likely to remain in place for most of 2024, as both countries seek to fund their respective spending priorities. This has led FrontierView to revise its forecast for the 2024 oil price to US$ 89/barrel (Brent crude). In turn, higher oil prices will complicate the fight against inflation and delay the recovery of consumer purchasing power, while also improving growth prospects and fiscal revenues in oil-exporting nations.
- Extreme climate conditions have exacerbated global food insecurity: Food commodity markets have also seen several key developments. In India, a poor harvest due to extreme weather conditions has fueled domestic inflation. In turn, the Modi administration has placed a total export ban on rice and a partial one on sugar, placing pressure on global supply and providing upward pressure on prices. This will be partially offset by lower wheat prices: despite the collapse of the Ukraine grain deal, they have reached their lowest level in nearly three years, following a record harvest in Russia. Still, disruptions to global food supply will continue to provide a risk to inflation in 2024, notably in emerging markets in Southeast Asia, the Middle East, and Africa.
- FrontierView has downgraded its growth expectations for China to 4.2% YOY: Uncertainty clouds the outlook for China’s economy in 2024, with the main question concerning the eventual stimulus brought in by the Chinese government. While the introduction of small-scale stimulus measures is part of our base case, the economy requires a much larger-scale and demand-oriented stimulus to strongly accelerate. Given high levels of debt, notably at the local government level, it is unlikely to match the 2008 one in scale. It is also unclear the extent to which it would be able to restore consumer confidence (and therefore spending).
- The growth outlook for 2024 for Europe has also deteriorated: FrontierView has revised down its GDP growth forecasts for several major European economies, including Germany, the UK, and Italy. To blame are sluggish external demand, which is putting pressure on major exporters such as Germany, as well as increases in unemployment and a slight uptick in energy inflation across the continent.
- The Hamas-Israel conflict threatens to destabilize the Middle East: The current conflict between Hamas and Israel, while contained within the Palestinian-Israeli borders at present, threatens to spill over into neighboring countries, notably Lebanon. The most immediate impact on the global economy would come from Iranian involvement in the conflict; in recent months, informal negotiations between the US and Iran have led to a more relaxed approach to sanctions enforcement on Iranian oil exports, helping relieve some pressure off markets. Any flare-up involving Iran would likely take Iranian oil exports off global markets and result in temporary price spikes stemming from investor panic.
- Political instability in the US threatens domestic growth prospects and funding for Ukraine: The unprecedented ousting of House Speaker Kevin McCarthy by members of the Freedom Caucus, a right-wing faction of the Republican Party, comes at a crucial time for the US. As it stands, a government shutdown starting in mid-November is our base case, with relatively limited consequences on growth. However, a downside scenario involving a prolonged shutdown would represent a strong obstacle to growth in late 2023 and early 2024. Critically, US funding to Ukraine is also at risk: a bill introduced by the Biden administration will be unable to pass while Congress is paralyzed. A prolonged reduction in US funding to Ukraine would drastically reduce the country’s ability to fund its war effort against Russia—and mark a turning point in Russia’s favor.
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