ACCA Insights: 2024 Global economic outlook – Slow growth, high uncertainty

The global economy performed better than expected in 2023, avoiding the major downturn that many feared. It benefited from the fall in commodity prices from their 2022 peaks and the continued recovery of global supply chains and normalisation of service sectors, while economies proved more resilient than expected to the aggressive increases in central bank interest rates.

That said, estimates by the major international organisations, suggest that global growth is still likely to have come in materially below its annual average of recent decades (see table below for World Bank estimates).

Business-related surveys typically pointed to slowing global economic momentum as 2023 progressed. In our Global Economic Conditions Survey (GECS), confidence among accountants and financial professionals globally has fallen gradually for three successive quarters since Q1 2023 (see chart below), while the closely watched J.P. Morgan Global Composite Purchasing Managers’ Index (PMI) fell quite markedly from its peak in the spring, although it has improved somewhat in recent months. Despite the declines, the surveys are not indicative of a major global downturn at the present time.

Headline inflation has fallen back sharply in most countries across the globe, and core inflation has also come down materially in many. Amid the improving inflation backdrop, financial markets are now pricing-in interest rate cuts this year in the major advanced economies such as the U.S, euro area and UK.

Nevertheless, amid rather stubborn service sector inflation (see chart below), and an elevated risk of supply shocks given the current geopolitical backdrop, it could be risky for central banks to declare imminent victory in their battles against inflation. Indeed, without a more material easing in job markets, there remains a significant risk that the last mile for central banks in getting inflation sustainably back to their targets, could prove to be the hardest.

Focusing on the prospects for 2024, global growth is likely to come in materially below its average once again, with a broadly similar pace of expansion as last year. The World Bank forecasts an increase of 2.9% in global GDP (see table below), similar to the OECD’s latest estimate, while the IMF forecasts an expansion of 3.1%.

Growth is likely to be well below its average in advanced economies as, despite the likelihood of some monetary easing – probably beginning in the summer, central banks maintain restrictive monetary policies to ensure victory in their battles against inflation.

Meanwhile, fiscal policies also look set to be contractionary in the major advanced economies, while political uncertainty, amid major elections this year, as well as elevated geopolitical tensions, could weigh on confidence and spending. The U.S. now looks to have a better than even chance of pulling off a soft landing though and is likely to be the best performing of the major developed economies.

Growth in emerging economies is also generally expected to be below its average, although a key factor behind this is the slower growth in the Chinese economy than the heady pace of previous decades. Growth in emerging economies excluding China is actually expected to improve modestly in 2024, with the World Bank forecasting growth of 3.5% in 2024 versus 3.2% in 2023 (see table above).

Indeed, a number of important countries are likely to register a pretty solid performance in 2024. For example, the World Bank forecasts growth of 6.4%, 4.9%, 4.1%, 2.6% and 2.6% in India, Indonesia, Saudi Arabia, Poland and Mexico, respectively.

Risk to global growth

These include the risk that the lagged impact of global monetary tightening could lead to a harder landing in the advanced economies, and/or major financial stresses. This risk is perhaps not quite as heightened as looked likely in late autumn, amid the subsequent somewhat loosening in global financial conditions, a rising chance of a soft landing for the U.S. economy, and given what looks like a pivot towards monetary easing by advanced economies’ central banks this year.

Meanwhile, geopolitical risks are very elevated, with a rising risk of a broader escalation of the conflict in the Middle East. The attacks by Houthi rebels have fuelled a sharp decline in shipping passing through the Suez Canal (see chart below), and events in the region clearly have the potential to cause a large increase in energy prices and shipping costs. Elsewhere, the conflict between Russia and Ukraine continues to exacerbate the geopolitical situation.

Political risk will also be heightened in 2024 amid an extremely busy year for elections. A key focus for businesses globally and financial markets will be the U.S. election, with a re-run of President Biden versus former President Trump seeming likely.

The result will likely be close, with opinion polls in swing states currently suggesting that the former president has a slight advantage. A victory for Donald Trump could have major implications for global trade, geopolitics, and the green transition.

Not all the risks are on the downside in 2024, however. Upside risks to the global economy could come from continuing rapid improvements in inflation, paving the way for quite an early and significant easing of monetary policy by central banks. Of course, that could also risk sowing the seeds of higher inflation in 2025 and beyond.

Looking at the UK, restrictive monetary policy and contractionary fiscal policy, amid the freeze in income tax and national insurance thresholds, will weigh on growth. That said, the government will use whatever room is deemed available in its upcoming Budget to try and reduce the magnitude of the fiscal drag. Further tax cuts seem likely.

Overall, growth will likely be moderately positive in 2024, improving gradually as the year progresses amid positive real income growth and the likelihood of some monetary easing. In November, The Office for Budget Responsibility forecast growth of 0.7% in 2024, while on February 1st the Bank of England forecast growth of 0.25%. Both are well below the average of recent decades.

All in all, 2024 is likely to represent another challenging year for UK businesses amid tight policy and subdued growth, although falling inflation and the beginning of the rate cutting cycle should provide some relief. Businesses should pay close attention to developments around the world.

Global growth is likely to be sluggish, and downside risks come from the difficult geopolitical backdrop. Political risk will also be very elevated amid elections across the world, with the U.S. Presidential election being particularly key for the global economy. Of course, closer to home the UK election will be very important too.