Wen/Zhu Haibin, Chief Economist of JPMorgan Chase China
There is a significant difference in the evolution and prediction of the global economy in 2023. The good news is that the global economy has not fallen into recession. Will there be a soft landing in the global economic performance in 2024, or will it be a frog cooked in warm water?
I will start by offering a brief introduction to the global economy this year. Many investors now view 2024 as a soft landing, and there are also different voices who believe it may be a frog cooked in warm water. I will explain the concept of boiling frogs in warm water later.
Firstly, looking back at the situation in 2023, there is a significant difference between the evolution of the global economy in 2023 and the predictions made at the beginning of the year. The first is that the global economy has not fallen into recession. This year, both developed and developing countries have entered an environment of rapid interest rate hikes globally, with financial conditions rapidly tightening globally, from the surge in short-term interest rates by the Federal Reserve to the edge of 10 year US Treasury bonds reaching 5%. The macroeconomic environment has shown a significant downward trend to some extent as interest rates rise, including the real estate market, which is heavily affected by interest rates. In the United States, the United Kingdom, and most countries in Europe, there has been a significant decline in real estate investment. After the recovery of industrial production activities after the COVID-19 pandemic in 2022, there has also been a slowdown this year. The industrial production decline in emerging Asian markets in 2023 is even greater, which is affected by the downward trend of the electronic product cycle.
However, there was no risk of a global economic recession in 2023, as feared at the beginning of the year. From the perspective of global economic growth rate, it remains above trend and slightly above trend levels. The global service industry still performs very steadily. Avoiding a global recession is the first difference from the forecast at the beginning of the year. This has also led to China's export performance being better than what was feared at the beginning of the year.
The second difference is that from the performance of various countries/regions, there has been a significant divergence in the predictions for the first three quarters of this year and the beginning of the year. Economists have been very busy this year, constantly revising their forecasts. Our forecast for China has been adjusting almost every month this year: significantly increased in the first quarter, significantly decreased after April, and increased twice in the past two months. Other countries have also experienced this situation, with the United States consistently outperforming expectations in its theme this year, while the eurozone is worse than expected.
The month on month growth rate of the United States in the first half of this year exceeded 2%, and the JPMorgan Chase US team has just further raised its forecast for the third quarter of the United States to 4.3%, which is a very bright data. From the perspective of the United States, there is no risk of recession in the indicators of service industry, consumption, and industrial production under the violent interest rate hikes of the Federal Reserve.
The eurozone and China have experienced lower than expected scenarios compared to the early years, and the eurozone and the United States are not quite the same. We have seen a significant decline in investment activities in industrial production in the eurozone, and the performance of the eurozone in terms of consumption is also not as good as that of the United States. The savings rate of the household sector in the eurozone is far lower than the level before the 2019 pandemic, leading to not only unsatisfactory performance in the manufacturing industry, but also significant deviations in the performance of the service industry in the United States and Europe.
China has shown a positive economic trend in the past two months (August September), slightly exceeding the expected 5% for the entire year. Compared to the market's generally conservative response of 5% when the two sessions announced the 5% target in March at the beginning of the year, our economic recovery for the whole year was less than expected. Although the economy has shown a positive trend, the trend is not very solid, and there are still short-term or medium to long-term structural problems. For example, private investment is still in the negative growth range, and real estate has entered a deep adjustment and oversold range this year after the sharp decline in 2022. Although residents' consumption has recently rebounded, overall it is still not satisfactory. In terms of foreign investment, we can see the BOP released by the State Administration of Foreign Exchange this year. We say that the number of FDI has shown a very significant decline, and the transfer of global supply chains after the Russia Ukraine War has brought significant challenges to China's economic structure.
In the second part, I would like to take this opportunity to share with you the current market views on 2024, as JPMorgan Chase also held an investor conference and conducted a survey on economic and financial issues in 2024, alongside the annual meetings of the International Monetary Fund and the World Bank that ended last week.
Regarding the future trend of the US economy in the next six months, it can be seen that more than 50% of investors believe it is a soft landing situation. About 20% of people still hold the view of recession, while 17% believe that the future of the United States is stagflation.
Where is the inflation heading in the United States? Will the core inflation in the United States return to 2% by the end of next year? Most people believe it will go down, but nearly 90% of investors believe it will still be between 2.5% and 3% or above, and less than 5% of investors believe it will return to 2% or below. Inflation remains a persistent challenge.
The third issue is the labor market in the United States, where the unemployment rate has been very low this year and has recently rebounded, but it is still between 3.7 and 3.8%. What level will the unemployment rate in the United States rise next year? One third of investors believe that it will reach around 4% -4.5%, which is still a very mild increase in the unemployment rate. When the United States is usually in an economic recession, the unemployment rate increases by an average of about 3 percentage points from low to high. The lowest point in this round is 3.3%, which means it will only increase by 1 percentage point next year.
When will the Federal Reserve start cutting interest rates in 2024? In the first half of the year, many investors were considering whether there would be a rate cut this year. Now, most investors believe that it will be after the third quarter of next year, and even 24% of people believe that there will be no rate cut by the Federal Reserve in 2024.
Next are several issues related to investment. The first is the extent of the 10-year interest rate of US treasury bond bonds in the next 12 months. At present, people are worried about 5%. Most investors think that the interest rate of US 10-year treasury bond will go down in the next 12 months, and about 38% people think that it will return to 4-4.5%.
The trend of the US dollar and its strength this year have also disrupted China's monetary policy and emerging market central banks' monetary policy. In the next 12 months, most investors believe that the US dollar will remain within the plus or minus 2% range.
Regarding investment, it can be seen that the asset classes with the best and worst performance in the next 12 months are the most interesting. From the perspective of the best performing asset classes, a clear signal is that the market is currently in a very chaotic and ambiguous state. The top five asset classes, such as stocks and high-grade US dollar corporate bonds, have a maximum of 17% and a minimum of around 13%. So from this perspective, the market does not have a particularly clear sense of direction for investing in the next 12 months, and is still in a wait-and-see state.
The next question is the asset class that may perform the worst in the next 12 months. The relative consensus is relatively high, and a considerable number of investors are concerned about the global stock market, especially the current valuation.
In the final part, let me talk about the perspective of JPMorgan Chase's global team on what issues may need to be considered when considering the US economy in 2024. I will start by offering insights and believe that the Chief Economist will have a clearer perspective during the roundtable meeting.
JPMorgan Chase has several different scenarios for the US economy in 2024.
The first scenario is that the Federal Reserve's interest rate hike will terminate at the current level of 5.25-5.5 and begin to lower interest rates in the third quarter of next year. During this process, the US economy will gradually slow down and may fall into a relatively shallow economic recession, which is our 33% probability.
The second scenario is that although inflation is currently declining, there will be a recurrence in the future, and inflation may return. This will force the Federal Reserve to further raise interest rates at the current level, and financial conditions will further tighten. This will not only lead to economic recession, but also the extent of the recession will be greater than everyone thinks.
The third scenario is that the US economy will gradually decline but avoid a recession, which is the most likely scenario (40%). The first two different types of decline are collectively referred to as' warm boiled frogs'. Overall, looking at these scenarios, it should be said that the US economy will still face many uncertain factors next year. Let me list them for you.
The first factor is that the US economy is better off in terms of capital expenditure or investment in 2023 than previously thought, which is largely due to the fact that the US fiscal policy this year did not show further contraction, but rather provided relatively stable support for the economy. Especially the US version of industrial policies has provided some support for important investment areas. But the problem this brings is the fiscal policy of the United States in the following years. In the past few years, the deficit rate of the US government has been consistently high. How long can this situation last, including debt discussions that come up every once in a while, whether future US fiscal policy will gradually be limited, and what impact will it have on the US economy if fiscal policy enters a contraction phase.
The second factor is that the balance sheet of the corporate sector in the United States is still relatively healthy, both in terms of balance sheet structure and corporate profits, although there has been a decline, it is still in a relatively good range. Of course, the issue raised in this regard is how much impact the continued rise in interest rates will have on the further contraction of corporate profits.
The third factor is a very unexpected factor in the US economic growth this year. The US has seen a very significant increase in productivity this year, and it can be seen that there has been no similar change in Europe. The current explanation is that AI and high-tech have brought productivity improvements to the US economy, and further observation is needed on how long the productivity improvement will last.
The fourth factor, regarding consumption in the United States, is that the overall consumption of the household sector in the United States exceeded expectations. On the one hand, American households are willing to consume. Due to the fiscal transfer payments, American households have accumulated a considerable amount of high savings, with a peak of between 2.3 and 2.4 trillion US dollars, supporting the strength of American consumption. On the other hand, asset prices in the United States, especially stocks, continue to rise. The graph in the lower right corner shows that the overall wealth of American households has been continuously increasing since the pandemic, with an overall increase of 7-8 trillion yuan in wealth. The graph in the upper right corner shows that the growth of wealth is highly consistent with the growth of household consumption in the United States. But the problem this brings is how much excess savings there are, and there have been two different results in recent algorithms.
The previous algorithm believed that the high point of 230 million has now dropped to around 400 billion, and the use of excess savings has basically reached its end. The blue line indicates that excess savings are still around 1 trillion yuan. Furthermore, the wealth effect is the main factor supporting consumption in the US household sector. If US assets decline from their current high levels, will the reduction in wealth effect affect the sustainability of consumption.
From a macro perspective, these are the four questions I would like to raise about the United States. The core issues from next year are how the Federal Reserve will take the next step, which depends on two crucial factors: the first is the employment situation in the labor market, especially how much the unemployment rate will rise. The mainstream view in the market is that next year will be around 4 to 4.5. If the unemployment rate rise has been relatively mild, the Federal Reserve's willingness to maintain the current high interest rates will be stronger.
The second issue is where the core inflation rate and overall inflation rate will return. From the current perspective, consumer goods and energy prices have played a very important role in the decline of inflation this year. Currently, the rise in the service industry and wage income is still the main reason for maintaining the stickiness of core CPI. I won't provide an answer, treat it as an open-ended question. If inflation and unemployment rates deviate significantly from current expectations, which direction will the Federal Reserve take in 2024? I think this is the most concerning issue for everyone.
This article is a speech by Zhu Haibin at the 2023 China Chief Economist Forum Hong Kong Summit
Article source: Chief Economist Forum
Editor of this article | Wang Mao
Proofreading | Lan Yinfan
Preliminary Trial | Xu Lanying
Final Review | Zhang Wei
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