2024 Economic outlook: Slow economy, unexpected geopolitical events

The economic outlook for 2024 sees the global economy slowing substantially due to the lingering effects of the past year’s sharp monetary policy tightening, as well as limited fiscal space and inflation that is still above target, while unexpected geopolitical events will remain wild cards that could shape the political, economic and financial landscape in 2024.

While there was a global drive in 2023 to get inflation under control, the global economy surprised investors with its resilience.

This according to Herman van Papendorp, head of investment research and asset allocation, and Sanisha Packirisamy, economist at Momentum Investments.

Economic outlook for 2024

Investors generally agree the world will avoid falling into a deep and protracted recession in 2024, but Van Papendorp and Packirisamy point out that economic gravity will play catch-up, growth prospects will be divergent, inflation descent will slow, monetary and fiscal interaction can help to slow inflation and the darker geopolitical climate wi8ll add more negative risk to the global economy.

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Economy, elections and load shedding

In 2024, they will also keep an eye on the outcome of the elections and believe that South Africa’s logistical challenges will outlive the shadow of load shedding, that the country’s debt challenges will endure, that there will be a respite from inflationary pressures and that, although the repo rate hikes will ease, the South African Reserve Bank (Sarb) will watch inflation like a hawk.

10 Macro trends

They identified these 10 macro trends for 2024:

Trend #1: Economic gravity to play catch-up: Although economic growth seemed resilient in 2023, the underpinnings of the growth remained precarious. Th expect interest rates to start biting and that economic hardship can follow if interest rates remain high for longer, as corporate bankruptcies already started to rise in the US and Europe, although it was from low levels.

Trend #2: Divergent growth prospects: The pandemic, war in Ukraine and climate crises all contributed to reversing trends in poverty reduction, especially in lower-income economies, where reduced fiscal space and increased debt will add to a slower convergence towards the living standards of higher-income nations.

Trend #3: Inflation increases will slow down: The next leg down in inflation could take longer as food and energy base effects do not work in favour of reducing inflation sharply anymore, they say. However, a recovery in real wages can drive an uptick in demand and political pressure is also rising to ease policy in response to rate hikes starting to affect the economy.

Trend #4: Monetary and fiscal interaction: Fiscal responsibility can help to lower inflation through a more credible and better-targeted fiscal framework, while reducing debt by tempering aggregate demand. Van Papendorp and Packirisamy say this prevents central banks from increasing interest rates by as much and creates a fiscal buffer that can be used in the event of the next shock.

Trend #5: Darker geopolitical climate: Geopolitical tensions present additional downside risks to the global economy, which is already under strain, they point out. Political tensions are expected to remain heightened globally, with a report from The Economist indicating that more than half of the world’s population will experience an election in 2024, including South Africa.

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Trend #6: South Africa’s coalition future: Decreasing voter turnout and substantial advances for fringe parties at both ends of the political spectrum can be interpreted as indications of the country’s evolving democracy, although it may also signal a more divided society. The ruling party has persevered with a diminished majority, but it faces declining popularity, they warn.

Trend #7: South Africa’s logistical challenges to outlive loadshedding’s shadow: Eskom’s generation turnaround plan and the private sector’s appetite for renewables points to 2023 as the worst year of the energy crisis, Van Papendorp and Packirisamy say. South Africa’s logistics crisis is worsening, with National Treasury estimating that rail inefficiencies cost the country around 6.5% of gross domestic product (GDP) in 2022 and an expected 5.5% of GDP in 2023.

Trend #8: South Africa’s debt challenges will remain: The country’s precarious public finance position lies in the significant increase of South Africa’s government debt in relation to the economy since 2008, with stagnant real per capita growth. “Consequently, South Africa’s interest burden soared, crowding out more useful forms of expenditure.”

Trend #9: A respite from inflationary pressures: Although we see renewed inflation risks stemming from food and energy prices driven by geopolitical pressure, passthrough from currency weakness and administered prices, demand-pull price pressures and wage inflation are expected to remain contained, limiting second round or persistent inflation pressures, Van Papendorp says.

Trend #10: Rate pause, rhetoric roars: Although no more interest rate hikes are forecast in the current cycle, the Sarb is likely to keep a close watch on inflation. Guiding inflation back towards the midpoint of the target range of between 3% and 6% on a more sustainable basis can help to reduce the economic costs of high inflation, Packirisamy says.

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Global winter is coming in 2024

Meanwhile, Maarten Ackerman, chief economist at Citadel, predicts that the global and local economy is heading into a proverbial winter season in 2024, although it should be milder than the economic downturn during the Covid-19 pandemic, followed by a rebound in economic growth from 2025 onwards.

South Africa can return to trend growth by 2025 if the private sector remains invested in the country and government avoids a debt spiral, he said at Citadel’s annual client presentation.

“Most economic indicators suggest that the global economy should slow down further going into 2024 – moving into a winter cycle before spring arrives in 2025.”

He says Germany is already in a recession and the United States is heading that way.

South Africa is no different and given the local structural issues, our economy should experience a “colder economic winter” compared to many other parts of the world.

South Africa’s economy is underperforming due to structural factors such as unreliable electricity supply and the dysfunction of the country’s rail systems and ports, which hampered exports.

“How do we turn winter back into spring? We need the private sector to invest in the economy. Fixed capital formation as a percentage of gross domestic product declined from almost 20% in 2012 to less than 13% in 2021. Since then, we have seen seven positive quarters, showing that the willingness of companies to invest is returning. This is the first step to rebuilding capacity in the economy.”

It is critical for the private sector to remain financially as well as emotionally invested and not lose faith in the country to help the country enter an economic spring by 2025.

Ackerman also points out that South Africa is lagging its peer group and will continue to do so until government fixed the country’s structural issues.