What should we keep an eye on in terms of geopolitics?

In 2024, it's the US elections that will dominate global geopolitics. If Donald Trump is elected, it would be a real game changer. American elections are always a major global issue, but they'll be even more so next year.

As far as Ukraine is concerned, most of the impact of the conflict is behind us, and the markets have taken it on board. All impacted sectors (such as logistics, gas transport, agricultural commodities) have adapted to the constraints of war. It should be noted, however, that in 2024, it is likely to be more complicated for countries supporting Ukraine to spend money, as financial support will be less popular.

In the Middle East, I think the conflict will last. The countries neighboring the conflict have done their utmost to limit the flare-up, as it is in nobody's interest for the conflict to escalate, so the risk is contained. But there remains one key point: the agreement on normalizing relations between Saudi Arabia and Israel, steered by the United States. Saudi Arabia has made it clear that if the Israeli-Palestinian conflict is resolved, it will return to the negotiating table. Here again, I think the evolution of the situation will depend on the next president of the United States, which adds a lot of stakes to the American presidential election of 2024.

What is the economic situation in the US?

Well, Q3 2023 was very good, with growth of 5.2% at an annualized quarterly rate. This rebound was driven by temporary factors such as the weather (summer heat boosted consumption) and accelerating spending.

The impact of the entertainment industry is not negligible. Take, for example, the impact of Beyoncé and Taylor Swift's tours on the US economy. Filling stadiums with 50,000 people at $1,500 a seat every 2 days has a noticeable effect. Major box-office successes (Barbie, Oppenheimer, The Equalizer 3) also boosted the indicators.

The hospitality sector (hotels and restaurants) was very resilient. Government spending also made a positive contribution to GDP. Finally, the "restocking" phenomenon by retailers in the run-up to the end-of-year festivities, which was much faster than in Q2, was favorable.

This good period is now behind us, and growth will automatically slow in Q4.

Consumption seems to be running out of steam, and the Covid savings surplus has all but disappeared. Credit conditions (for credit cards) have tightened significantly for households, due to rising defaults. The rates associated with revolving credit are extremely high, in excess of 20%, and are also holding back consumption.

Added to this is the normalization of the job market. All related statistics (wage growth, job creation) are slowing down. Support for consumption is therefore set to slow from the fourth quarter of this year.

In addition, the repayment of federal student loans restarted on October 1, with almost 27 million consumers set to repay an average of $200 a month.

On the real estate side, residential investment made a positive contribution in Q3, for the first time in 10 quarters. It should make a negative contribution in Q4. Demand is weak, as 30-year interest rates have soared (to over 8% in some cases, although they have since fallen back to around 7.5%), and the normalization of the job market will weigh on the sector. Transactions have fallen drastically, and sentiment among real estate promoters plummeted in November (index at 34, whereas the neutrality threshold is 50).

Finally, credit conditions are also tightening for companies. Business lending, already negative on an annualized basis in Q2-Q3, is expected to post negative growth again in Q4. Investment is therefore likely to remain sluggish.

Numerous obstacles are appearing, confirming a slowdown in consumption growth in the last quarter compared with Q3.

U.S. growth is expected to come in at 2.4% this year, dipping to 1.3% in 2024.

There is some good news in this landscape: inflation has eased more rapidly than expected. It will continue to normalize, falling below 3% annualized in Q1 2024, and converging towards 2% - 2.5% by the end of Q3 2024.

We can anticipate this because rental price growth will slow and food prices will normalize: the latter are 12 months behind agricultural commodity prices, which have fallen by almost 15% year-on-year. Fertilizer prices, an excellent leading indicator, have also fallen by 30%.

For goods other than automobiles, food and energy, price growth is slowing as inventories are high. Retailers are applying deep discounts (Black Friday and Cyber Monday), helping to normalize the situation.

In the short term, oil and gasoline prices are favorable. Existing and new vehicle prices are also falling, despite the strike in the US auto industry this year, triggered by a downturn in demand.

All these factors, together with a normalization of wages, should help to bring inflation back down to pre-pandemic levels.

How is Europe faring?

On the Old Continent, things are more complicated. The second estimate of Q3 GDP was negative. The PMIs for October and November are in contraction, which suggests that without a revision in Q3, we could be entering a phase of minor technical recession.

The problems are many. The manufacturing sector is stricken and services are levelling off, not least because the hospital sector has begun to slip back slightly, with occupancy rates in the hotel sector falling (year-on-year) since this summer. It should pick up again next year, with the effect of the Paris Olympics, but will run out of steam in the short term.

The big black spot remains construction and real estate. The situation is difficult throughout the continent, but especially in Germany. In the statistics, cancellations and no-shows are at record levels since the IFO indicator was first published (1991). House prices continue to fall by 10% year-on-year, and this situation could spread to Europe.

On the consumption side, the savings accumulated during the Covid are greater in Europe (between 3% and 5% of GDP surplus). This is because consumption patterns are different, credit use is lower and Europeans are more cautious. On the other hand, the labor market is tightening, and the employment PMI has contracted (below 50).

Inflation, due to base effects, should rebound slightly in December and January, but should then converge towards 2%-2.5% at the beginning of Q3 2024 (and perhaps even at the end of Q2 2024), i.e. a little earlier than in the United States. As for the inflationary effect of the Olympic Games, it should be limited.

Growth in the Eurozone is expected to rise to 0.5% this year, and to fall back to 0.4% in 2024. It should be remembered that the United States has a highly expansionary fiscal policy, allowing itself a deficit of 6% of GDP, compared with 3.5% in Europe, which also explains the divergence in growth.

What's the situation in China?

The latest statistics confirm that the economic situation is still difficult. Hospitality is the only sector that is holding up, with hotel occupancy rates and air traffic recovering with each vacation.

China's main short-term problem remains the real estate market. Transactions are down on an annual basis, and prices are still under pressure. As a result, developers are finding it difficult to raise financing. All these factors indirectly weigh on household confidence, which is highly exposed to real estate, and this trend is set to continue into 2024.

There are also persistent structural difficulties in China, such as demographics. In 2022, the population will have fallen for the first time in several decades.

China suffers from a serious problem of attractiveness. More and more companies are investing outside China, or deciding to leave the country. For the first time since 1998, foreign direct investment in Q3 2023 was lower than capital outflows. This is a real problem for China.

The authorities are fully aware of this problem and have raised their deficit ceiling for 2023 accordingly, from 3% to 3.8%. The funds should be used to support developers and infrastructure spending between now and the end of the year and over the first part of 2024.

Monetary policy remains accommodative, not least because China is not suffering from inflation. According to the latest data, it was even in deflation. Core inflation has been less than or equal to 1% for 20 consecutive months.

The country should exceed its growth target of 5% in 2023, but Chinese growth is likely to slow in 2024, to around 4.6%.

Against this backdrop, what can we expect from central banks?

In the US, there will be no further rate hikes, as Ianticipated in August. I expect the Fed to cut rates as early as Q2 2024. They'll be watching developments in the labor market before making a decision, but I wouldn't be surprised by a rate cut as early as May. It's in their interest to act ahead of the November elections, so that their decision is not attacked.

In Europe, I'm expecting a rate cut in April, before the Fed's rate cut. Economic momentum is much weaker in Europe, the job market is already deteriorating, and inflation is now lower in Europe than in the United States. Finally, we'll be keeping a close eye on the real estate and construction sectors in Germany. On both sides of the Atlantic, economic and real estate difficulties (particularly in the commercial sector) should prompt central banks to be more accommodating.

In China, the liquidity injection phase is set to continue until the end of the year. We may see a cut in bank reserve requirements by the end of the year and a rate cut in early 2024. Chinese monetary policy will depend on the November statistics. The government has deployed numerous support measures, and will probably wait to see the effects on the economy before taking action or reinjecting liquidity.

 

(Interview by Roxane Nojac)