2023 ended on a promising note as we saw a rapid downward movement in inflation in many economies. This was helped by energy base effects as the big spike at the start of Russia’s invasion of Ukraine dropped out of the year-over-year comparison. Global goods inflation also fell dramatically last year as supply chains continued to normalize after the pandemic.

The outlook on inflation

But with these “easy gains” now in the past, central banks are pushing back on market expectations for sharp interest rate cuts. They are arguing that “the last mile” of the inflation fight will be the hardest. But will it?

Several major economies, including the US, Canada, the UK, and some emerging markets, continue to run uncomfortably high rates of wage growth and core inflation. And the current situation in the Middle East could yet put upward pressure on oil prices and shipping costs.

We're also seeing a remarkable moderation in underlying inflation in many economies, which is showing no signs of slowing down. In fact, the median month-over-month rate of core inflation across both emerging and developed markets is now around target-consistent levels. And if we look back over the last 30 years, there’s been little tendency for core inflation to reaccelerate, which is encouraging. Therefore, we suspect many central banks and forecasters will be surprised by how low inflation falls in 2024.

How does this impact interest rates?

We believe interest rates have peaked across much of the developed world, apart from Japan. Central banks are, however, likely to dampen expectations for rapid rate cuts, at least in the near term. Markets may have gotten ahead of themselves in expecting imminent rate cuts. Instead, we predict rate cuts will begin around the middle of the year. In the US, this will likely coincide with the beginning of its recessionary period – although the chance of earlier precautionary cuts is rising. While in the UK and Eurozone, this would represent a relatively long period to keep rates on hold given economic weakness.

As and when interest rate cuts do get underway, we expect them to be deep. A return to something like 2–3% interest rates over the next couple of years is plausible, given how estimates of where equilibrium interest rates sit.

Busy year in the political sphere

We can expect to see many big, important economies having incredibly consequential elections this year. Possibly the most globally influential of these is the US election taking place in November.

Donald Trump is currently leading the Republican primary with a 50% lead* over his nearest rival. However, the general election itself is expected to be highly competitive, with the electoral college vote likely to be decided by voters across the six principal swing states in the Midwest and South. As things stand, polls indicate Trump would flip enough of these states to win the 2024 presidential election.

High inflation during Joe Biden's presidency has hurt his approval ratings, together with growing concern about his age. The recession that we expect the US to enter this year is also likely to compound these headwinds. But Trump also has his own electability issues. He will remain on trial for the duration of the race and may have received verdicts in some of the cases. Any guilty verdicts are likely to harm his standing with independent voters who are concerned about his fitness for office.

With both Biden and Trump suffering from negative approval ratings and facing unusually significant competency questions, the US presidential election is likely to remain on a knife edge. Its outcome could also impact the course of globalization and global geopolitics.

If Biden were to win a second-term presidency, we expect he would continue to encourage the friendshoring of strategic supply chains, maintaining the “small yard, high fence” strategy focused on restricting China’s access to high-end technology. On the other hand, if Trump were to win, he would more likely use across-the-board tariffs, impacting a wider range of countries. Security questions around Russia and Ukraine, and China and Taiwan, would also be front-and-center.

More broadly, our globalization index points to a stagnation in the traditional engines of globalization: trade and capital flows. A mixture of politicians' increased focus on national security and firms' desire to improve their own resilience and shield themselves from geopolitical fallout, have the potential to throw globalization into reverse this year.

The growth of artificial intelligence

As we continue to see the growth of artificial intelligence (AI), will 2024 be the year of an AI-driven productivity boom? Developed countries have been stuck in a period of low productivity growth since the global financial crisis of 2007–2008. While technological changes over the past few decades, such as smart phones, ecommerce, and cloud computing, have had little impact on productivity growth, we would caution against extrapolating this to suggest a productivity boost from AI isn’t coming.

The productivity paradox, also known as the Solow paradox, refers to the lack of US productivity growth in the 1970s and 1980s, despite a spike in technological advancement. However, in the 1990s productivity growth accelerated, with a boost worth around an additional 1% of productivity growth each year for almost two decades.

This delayed, but eventually transformative, impact is a hallmark of general purpose technology. AI could share many of the same features – pervasiveness, continuous improvement, and innovation spawning. As a result, we're cautiously optimistic about the eventual positive productivity impact that AI poses. We also believe worries about aggregate job destruction fail to take account of the productivity enhancement and job creation channels that technological change introduces.

* Article written prior to the New Hampshire Republican primary on January 23, 2024.

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