Q1: Soft landing or full recession? What’s your outlook for 2024 and why?

We believe the chance of a soft landing in the U.S. economy has increased materially over the last quarter. We now assign it a 60% chance, which makes it the single most likely outcome. And just for those who don't know, soft landing refers to the idea that a recession can be avoided.

It doesn't necessarily mean especially fast growth, but it does mean that growth can be sustained across what otherwise was expected to be a challenging year. And there are a number of reasons why we think that some is simply observational in nature. We can see that the quarterly trajectory of growth in the U.S. isn't slowing. In fact, if anything, it's been accelerating.

It's holding together in a way that frankly is defying theory. But at some point, you have to recognize that there is this remarkable resilience to the U.S. economy that isn't captured in models but is ultimately very real. That's part of the reason why we're feeling a little bit more optimistic. Other smaller reasons would include just the fact that inflation has come down.

It has less of a corrosive effect than before. We can talk about central banks and the Fed now being in a position perhaps to lend a helping hand as opposed to being solely focused on inflation. And lastly, just some of the traditional recession signals we've been watching have turned, not all of them, but some have turned. And as an example, profit margins had been falling in the U.S.

It was a classic recession signal. Profit margins are starting to rise again. We've seen lending standards tighten in an aggressive way over 2023. Lending standards are starting to ease and so the odds of a soft landing have gone up. We think it's a little bit more likely than not. I just don't want to completely lose sight of the idea that a recession is still a possibility.

We think there's a 40% chance of that. That's not down to zero. It is still a chance. It is simply less likely than before.

Q2: What will a ‘soft landing’ mean for the next business cycle?

If we get a soft landing, there are a number of implications that come with that. And some are good and some aren't so good. Obviously, the central bit of good news is that the economy gets to keep growing. It doesn't have to fall into a recession. That's certainly desirable. And I think the most important takeaway. But there are other complications.

As an example, inflation will likely have a somewhat more challenging time returning to 2% in a soft landing world. With a hard landing, you would get some help with a higher unemployment rate and slower wage growth and diminished corporate pricing power and that sort of thing. And we're just not going to get that kind of help if a soft landing plays out.

It's a longer journey downward. When we talk about central banks, well, by extension, central banks aren't in as good of a position to cut interest rates if inflation is taking its time coming down and if the economy is holding together. It's an interest rate world that's a little bit higher for longer. There are some negatives or some twists at least that come with a soft landing.

And then the other half of the question really is the extent to which. How does that change the next economic cycle? I think the best single guess is that maybe the next cycle is a bit shorter because here we are in a soft landing scenario, starting a new cycle with an already low unemployment rate and with already economies running at or near their potential, if not even slightly through it.

There's less room for that classic fast growth in which you're catching up to the economy's potential. it could be a shorter period of time. But I should say that's not actually the only possible interpretation, because the other complication is if a soft landing were to be achieved, it does raise some fundamental questions about recessions and whether recessions are just less likely for some reason in this modern age, having seen all these recession signals unfulfilled.

Maybe that pushes against the idea the cycle could be shorter. I think the answer is this is the early going. Let's see if we get a soft landing. Maybe it's a little bit of a shorter cycle, but that's not assured.

Q3: What’s the outlook for inflation in 2024? Will it decline further any time soon?  

Inflation has come down pretty amazingly since the middle of 2022. Inflation numbers were eight and nine and 10%, depending on the country. And we're now broadly operating in a world of about 2.75% to 3.5% inflation, which is certainly still too high.

And victory cannot yet be declared. But it is a lot of improvement and I think that should be flagged at a minimum. In all likelihood, it is a more difficult or at least slow journey from here toward normal inflation and really for a number of reasons. One is just in a soft landing scenario, which we think is the most likely just harder for inflation to come down without a helping hand from weaker wages and higher unemployment and diminished corporate pricing power and that sort of thing.

We can see the goods inflation is already fully cooperating, but service inflation is proving a little bit sticky and it's going to take some time to write that we can see that inflation expectations have come off their peak, but they do seem to be getting a little bit stuck in the 3% range, which again makes it a bit harder to restore inflation to normal.

inflation expectations are often destiny when it comes to this sort of thing. So that that is a more difficult and maybe jumpy journey downward from here. All the same, we are still, I would say, cautious optimists. We still think there is some room for inflation to come down. We can see the breadth of inflation narrowing in a very helpful way.

We can see that shelter inflation has been coming down and plausibly given some of the legs involved can come down somewhat further. I think the takeaway here is we can expect inflation to decline. There are certainly risks to that. And oil prices are a risk. And transportation costs to the Red Sea are a risk. There are absolutely upside risks to this.

But in all likelihood, we can see some improvement. It will unlikely be fast. We may not make our way all the way to 2% in the next year, but we think some further improvement is possible.

Q4: With China’s economic growth slowing this year, what developments are you watching?

So the Chinese economy isn't the Chinese economy of old. China used to be capable of growing at 6% and 8% and 10% per year, and it's likely on track for about 4.5% growth this year. We think its new long term normal might be more like 3% to 4% growth.

This is a diminished China. Certainly the housing market has been a drag recently. From a structural perspective, China's demographics are very challenging and China's relationship with the U.S. and the geopolitical environment is a drag and for that matter, China's preference for the state over the private sector is also probably weighing on productivity growth. So it is a diminished China.

Nevertheless, I think people are losing sight of the fact that we are still seeing an expanding China. The Chinese economy is growing not at a horrible growth rate. Industrial production is rising fairly nicely. Exports are rebounding to some extent, particularly facing the rest of the developing world. Chinese retail sales are going up not as quickly as they might if housing had been stronger.

So much household wealth is tied up in housing, but nevertheless we are seeing rising retail sales. The thing that is profoundly weak is the housing market. Home prices are falling, and home sales are falling. And a number of Chinese home builders are functionally insolvent, for that matter. This is a real challenge and it's a big chunk of the Chinese economy.

I won't promise wonderful outcomes and this is likely to remain challenging for some time. But I will say Chinese policymakers are now looking at this quite closely. They removed the line houses are for living in. Of course they are for living in. But they're also maybe tolerating a bit more speculation and investment, which was a source of strength before.

China has now been cutting rates. They've also cut mortgage rates specifically. We think there's probably some additional help or some additional resolution for builders coming. Local governments, probably get some extra help. China does want to stabilize this housing market. And if they can pull that off, the economy can be an important contributor to global growth, if not the way that it used to.

Q5: What are the key factors contributing to the global economic outlook for the next year?

So when we look at the global economy, we see a fair amount of synchronization around the world. Broadly speaking, most countries are dealing with too much inflation that's now coming down, interest rates that are unusually high, that are now perhaps in a position to decline.

Concerns about economic weakness in the context of those high interest rates still in some cases recovering from a pandemic effect a number of years ago. There's probably more synchronization and more similarities than differences. And just to summarize, at the grandest scale, I would say we're expecting modest to moderate growth in 2024 in our base case soft landing scenario, with the caveat that a hard landing can't quite be ruled out.

Looking forward to 2025, we can then talk about potentially a little bit more growth and a recovery taking hold and the risk of a downturn being diminished in a way that could amount to somewhat better growth. That's, broadly speaking, the global growth outlook over the next few years. But of course, beneath the surface are some pretty important themes that are maybe worth teasing out for a moment.

One, for example, would be that a lot of governments are running large fiscal deficits. We're going to have to see some fiscal austerity over the next 2 or 3 or 4 or 5 years. That is likely to impose some drag on some of the less well-behaved countries. Certainly, demographics aren't changing quickly, but they are a challenge.

And we see fertility rates falling and longevity rising. And all of those trends in and of themselves aren't aren't unambiguously good or bad. But we can say that there is a population or demographic drag on growth for the foreseeable future, and that applies to almost every country, if to varying degrees. We see deglobalization taking hold. That's a bit of a drag on growth as well as countries are realigning who they trade with and in some cases trading a little bit less.

Climate change, slow moving, to be sure, but ultimately a bit of a drag on growth as well. Adds a little bit to inflation. And maybe the last one of these big themes to mention and each deserves much more time. But broadly speaking, we're tracking them and most unfortunately skew in a negative direction, taking away from growth instead of adding to it.

The one big exception is technology. We are optimists and we think we can see somewhat faster technological change in the future, somewhat faster productivity growth. It's pretty unclear exactly how much faster and whether generative AI is a general purpose technology of the sort that can unlock years or decades of fast growth and change the world. That potential exists, but I would say it's not certain yet.

But the bottom line is we do think that faster productivity growth can provide at least a partial offset to some of those other thematic challenges that exist in the coming years.