Outlook 2024: Global growth to slow but bonds geared-up for potentially strong gains

If this year was all about economic resilience in the face of tighter monetary policy, 2024 is set to be characterised by slowing growth – we expect the global economy to expand by 2.8% in 2024, down from the 2023 estimate of 3.0%.

The much-forecast recession hasn’t happened, and unless there are significant shocks, we don’t expect there will be one in the year ahead, but we will likely see central banks ease policy on the back of easing inflation. However, we believe that we are in a ‘high-for-longer’ interest rate environment and most policymakers are likely to reduce restrictive policy gradually, rather than add fresh accommodation.

As always there is no shortage of issues for investors to consider – still-high interest rates, geopolitical tensions and of course November’s US Presidential Election.

But for now, the backdrop is about economic recalibration; we are not set to witness an end-of-cycle crash but a mid-cycle easing, which we believe will ultimately put 2025 in position for reacceleration, when we forecast global growth will reach 3.0%.

Asset class overview

Two questions are likely to be on investors’ minds as we enter 2024 – can bonds shake off their losing streak and can equities maintain their momentum? We believe they both can. However, the prospect of better performance for bonds relative to equities is greater than in recent years.  

Despite the myriad of challenges facing investors, we believe there is good reason for optimism. Bond returns were far from covered in glory in 2023, but this meant yields soared to multi-year highs, priming them for potentially strong total returns moving forward. Equally, corporate bonds should benefit from a more benign interest rate outlook, with investment grade bonds presently offering especially attractive yields of between 4% in euros and 6% in US dollars.¹

We cannot discount the equity bull market continuing. If interest rates and yields taper back – and growth continues - investors could see the positive equity momentum that has characterised 2023 continue. However, slower growth in GDP and lower inflation does highlight the risk of disappointments in corporate earnings, which could limit returns from equities, especially in the US where valuations are expensive.

AXA IM CIO, Core Investments, and Chair of the AXA IM Investment Institute, Chris Iggo said: “Easier financial conditions coming from slightly lower interest rates and bond yields - and continued positive real growth - could sustain positive sentiment towards stocks.

“Add in the ongoing excitement around artificial intelligence and its potential to boost growth, and certain parts of the stock market could continue to deliver strong earnings growth and returns to investors. However, the macro environment does pose challenges to corporate earnings growth for large parts of the stock market.

“While bond performance was disappointing in 2023, a portfolio weighted to short-duration credit and long-duration technology stocks would have been a very good performer. Until the Federal Reserve pivots, such a barbell strategy could continue to be so.”

Modest investment returns based on a modest nominal growth outlook is our core forecast view. Our bias is skewed towards bonds, as here the risk premium has emerged; in equities it has eroded.

In addition, the relative implied volatility of interest rates versus equities is also an indicator supporting a positive view on bonds. And with rates peaking and inflation falling, uncertainty around rates should decline and, directionally, we expect yields to be lower.

Below we outline our summary outlooks for key countries and regions in 2024 and into 2025:

US

The much-forecast recession never troubled the US economy which now looks on track for above trend growth of 2.3% in 2023. However, the world’s largest economy looks set to slow in 2024 - although still avoiding recession – with GDP growth of 1.1% in 2024, before picking up to 1.6% in 2025. We forecast inflation averaging 4.2% in 2023, falling to 3.2% in 2024, and 2.7% in 2025, aided by labour market easing and structural improvements. We believe interest rates have peaked at the current level of 5.25%-5.50% and forecast 75 basis points of cuts from June 2024 and two further cuts the following year, taking the Fed Funds Rate to 4.25% by end-2025. Globally, 2024 will be a big year for elections, but the US presidential race will be the most consequential.

Eurozone

Lacklustre growth looks set to persist. We expect the Eurozone economy to grow by 0.5% in 2023, falling to 0.3% in 2024, before edging up to 0.8% in 2025, against a backdrop of weaker demand and a mild rise in unemployment. As inflationary pressures ease, purchasing power gains should drive consumption and mitigate recession risks. We forecast that inflation will average 2.7% in 2024 and 2.2% in 2025, reaching the European Central Bank’s 2% target in 2025. We believe its benchmark deposit rate has peaked at 4% and will remain unchanged until at least June 2024, before reaching 2.75% by end-2025.  

China

Following a sluggish start to the year - the first post-pandemic - firm action from China’s authorities should deliver the country’s 2023 growth target of “around 5%”. The economy appears to hinge critically on the central government going forward but stimulus should up the quarterly growth pace in 2024, even if this equates to lower annual growth of 4.5%, before slowing in 2025 to 4.2%. China’s reliance on fiscal/infrastructure boosts is delivering an unbalanced economy – the longer-term remedy requires structural, market-led reforms. The economic upswing from announced stimulus looks set to fade into 2025 and could lead to future imbalances.

UK

The past year has been tough for the UK, and we expect it to be on the cusp of recession in 2024. We forecast GDP growth of 0.5% this year, 0.0% in 2024 before a modest rise to 0.5% in 2025. Interest rates have likely peaked at 5.25% and we see the Bank of England easing in 2024, reaching 3.75% by mid-2025 - a sharper reduction than markets currently expect. However, the lagged impact of earlier rate rises, including higher mortgage rates, will continue to tighten monetary conditions throughout 2024. The past 12 months have seen inflation fall to 4.6% from 11.1% - and we forecast inflation averaging 7.5% in 2023, 3.1% in 2024 and 1.8% in 2025, with weak consumer spending likely to dominate the outlook.

Japan

After decades of battling deflation, Japan is edging towards a turning point. With wages showing sustained signs of rising, we expect inflation to average 2.2% in 2024 and 1.6% in 2025. Economic growth is likely to slow but it should do well relative to other developed economies. Supported by generous government stimulus, we forecast GDP growth of 1.9%, 1.2% and 1.0% in 2023, 2024 and 2025. We expect the Bank of Japan to end eight years of negative interest rates with a 10-basis-point hike to 0.0% around April 2024, alongside an end to its yield curve control policy. But it is likely to remain cautious, bringing the policy rate to 0.25% by the end of 2025.

Emerging Markets

Emerging markets (EM) are on a structurally sounder footing and showed their resilience in 2023, although softer global growth and tight financial conditions are likely to prove headwinds next year. Overall, we expect GDP growth of 4.0% in 2024 and 4.1% in 2025. However, much of this acceleration will come from smaller countries, while larger countries are likely to see growth ease in 2024 before stabilising in 2025. Headline inflation is expected to reach central bank targets at various speeds during the next two years with central banks easing monetary policy, albeit cautiously. Many countries will go to the polls in 2024 in a heavy election year, though the US election may be the most influential in terms of its potential impact on trade and investment.

Canada

Canada did better than we anticipated in 2023. But growth has stagnated since the second quarter and the country is on the brink of recession. The lagged impact of rising interest rates is the key risk and Canadians are set to bear the brunt of policy tightening. Inflation fell broadly in line with expectations, but core measures remain elevated, and we expect it to average 4.0% in 2023, then 3.2% in 2024 and 2.6% in 2025. Elevated unit labour costs will make reaching the 2% target a challenge. We forecast GDP growth of 1.1%, 0.5% and 1.7% in 2023, 2024, and 2025 respectively. Rates have likely peaked at 5.00%; we see a delayed easing cycle from July 2024 to 3.50% by July 2025.

Market recuperation

In many ways 2024 will be about recovery – from the aftershock of the pandemic, and subsequent inflation spike. For investors it is about acclimatising to the so-called new normal of ‘higher for longer’ interest rates. But this readjustment should hopefully see the global economy gear up for greater success and more robust growth in 2025 and beyond.

As always, uncertainty is ubiquitous especially given the geopolitical environment and election battles set to take place – most notably in the US. But opportunities are present – across equities, and especially fixed income markets; however, in 2024 we believe investor agility and active management will be vital.

Higher interest rates provide greater income opportunities, especially in fixed income markets, while eventual monetary easing should improve the conditions for capital growth, particularly in equity markets. How inflation behaves in the first part of the year and the reaction of central banks to that will be key to the volatility and ultimate strength of investment returns.